Asia 2021 outlook: Fast technical rebound but with lingering financial and geopolitical risks

Growth in the Asia Pacific region is likely to be lower than during the Asian Financial Crisis, with GDP expected to fall by -3.4% in 2020 vs -1.2% in 1998; That said, there was a wide divergence with Vietnam, Taiwan and Mainland China regarding growth, North Asia contracting mildly while the Philippines and India by almost 10% in the first three quarters of 2020. Beyond the extent of lockdowns and the size of the policy response, whether fiscal or monetary, the underlying characteristics of Asian economies also explain differences in growth trends such as effective containment policies, larger fiscal and monetary response, and sectoral specialization, whether tech, electronic or medical supplies.

The good news is that aggressive easing in developed markets has driven rates and the USD lower, China is recovering well, and the roll-out of new vaccines is coming. 2021 will come with much better - even if cyclical - economic performance which should help keep positive sentiment and support investment, whether portfolio or FDI. The rotation away from Covid-19 sectors into the real economy will help old sectors, especially transportation and energy, as well as countries most dependent on them. Challenges of Covid-19 have also facilitated progress of a number of reforms in India, Indonesia and the Philippines. Central banks are to stay on hold and fiscal takes a step back.

That said, there is an obvious overhang from Covid-19 pushing down long term growth such as higher debt and accelerated demographic challenges. There is a silver lining, though, from regional trade integration through RCEP. Most immediate risks to our scenarios are (i) vaccine-related delays and new lockdowns; (ii) an inflation shock from supply constraints; (iii) further tensions between the US and China; and (iv) decoupling and deglobalization trends leading to supply chain reshuffling among others.

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