Transcript
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Speaker: it is the year of the ox in asia we're expecting a snap back the year of the ox which certainly bring stronger growth across asia uh... we seeing vaccine rollouts we seeing uh... domestic activity rebounding trade is already quite strong now there are some nuances though and is very bright picture and i will talk about this uh... but overall will remain fairly positive on the economic outlook for asia
Speaker: But to start with, let me put things in perspective and just talk about the impact of the COVID outbreak and how it really differs across the world.
Speaker: So you find here the cumulative infection rate per millions of population across different economies in the world.
Speaker: You have, for example, in the United States currently
Speaker: per million inhabitants, over 70,000 people who have infection rates, the highest rate in the world.
Speaker: And you can see most of the high infection economies are really in the West.
Speaker: They include the UK, France, Brazil, Italy, and Germany.
Speaker: When it comes to Asia, we have been quite successful in containing the virus.
Speaker: India, even with very high infection rates, still has a share of population.
Speaker: Nowhere near Western economies.
Speaker: Then you have places like Japan, where there has been a resurgence, but still overall infection rates are low.
Speaker: And of course, China, where despite the recent outbreaks, really the infection rates remain broadly well contained.
Speaker: What this meant was that last year, Asia could outperform on the domestic side.
Speaker: But it also means that this year, the Western economies will likely reach herd immunity
Speaker: before Asian economies because they have these high infection rates.
Speaker: In addition to that, they also have faster vaccine rollout.
Speaker: And that means actually this year that some of the economic momentum will swing back to the Western world because they achieve this herd immunity
Speaker: earlier than some of the Asian parts.
Speaker: Having said that, we also want to look at the impact on mobility of current restrictions that are still being imposed across Asia and what this means for economic activity.
Speaker: What you find here is really based on Google data.
Speaker: With Google tracks, see how much you use your phone and how much you move about.
Speaker: We can really measure how much mobility has declined relative to pandemic levels.
Speaker: In the United States, for example, current mobility is about 27% below what was a year ago.
Speaker: And that gives you a sense of the economic disruptions.
Speaker: Now, in some Asian economies, notably in Malaysia, mobility is even lower
Speaker: than the United States because we have a lockdown at the beginning of this year because of rising infection rates.
Speaker: That will dissipate over the course of this year, but it still highlights how challenging it is for some Asian economies at the beginning of this year, given we have resurgent infection rates.
Speaker: But there are also other economies like Vietnam, for example, that are almost normalized already.
Speaker: Yes, mobility is still down, but broadly speaking, it's nowhere near as disrupted as it is in some of the Western economies of other parts of Asia.
Speaker: So this is where we stand in terms of COVID-19, the rollout of vaccines, which may take a little bit longer in Asia than elsewhere.
Speaker: But broadly speaking, it's really been a success story for Asia.
Speaker: The other success story has really been the resilience of exports across the region.
Speaker: And just to put this into context,
Speaker: What you see right here is export volumes across emerging Asia.
Speaker: If you just look at the red line here, it's the volume growth of shipments across the region.
Speaker: And you see the sharp acceleration of late.
Speaker: And compare that to advanced economies, the black line, you can see actually that Asia really outperforms the developed markets in terms of exports in recent months.
Speaker: and that is because the world has shifted its demand from some of the services that were demanded pre-pandemic to the types of goods that really Asia is good at producing from electronics to furniture to household items all of that is driving Asia's exports and that will likely
Speaker: continue in 2021.
Speaker: In fact, a very important sector here is electronics.
Speaker: And here we show you the new orders being placed with the consumer electronics businesses across the world.
Speaker: A reading above 50 means an expansion of orders.
Speaker: And just look at the sharp pickup in new orders for
Speaker: consumer electronics at the beginning of 2021.
Speaker: And even when we look at industrial orders, industrial electronics orders, there too you see a very sharp acceleration again of late in new orders.
Speaker: And all that suggests that trade still has enormous momentum going through 2021.
Speaker: There are admittedly some signs that things are cooling at the margin.
Speaker: If we look at new orders placed with Asian manufacturers or total new export orders, there's a bit of a cooling.
Speaker: What you see here, the black line is new orders.
Speaker: You see just a bit of a cooling off towards the end there.
Speaker: And that's partly because we already had such a strong rebound in recent months.
Speaker: that now there's a time for a bit of a breather.
Speaker: When we look at new export orders, it's the same.
Speaker: So electronics are doing well, but broadly speaking, new export orders have also started to ease back a little bit.
Speaker: Now it's not too alarming, but we would suggest that some of the strength that we've seen in trade numbers will start to dissipate over the course of this year.
Speaker: Export will continue to grow, but not quite at the same pace as over the last six months.
Speaker: Now another important aspect to consider here is mainland China.
Speaker: It has been the growth engine over the past year.
Speaker: Its rebound has really dragged the rest of the region with it as well.
Speaker: And one particular sector that was important for Asia's rebound has been investment spending.
Speaker: Here you see, for example, property investment in China.
Speaker: It's collapsed at the beginning of 2020.
Speaker: but then really rebounded on the back of these containment measures on the mainland and the stimulus that was administered.
Speaker: When you look at manufacturing investment, the story is similar.
Speaker: This manufacturing investment has collapsed, but it's now growing again very strongly.
Speaker: And when we look at infrastructure spending, the red line, it is a similar story as well.
Speaker: So overall investment continues to be fairly strong in mainland China, but there is a bit of a change here in terms of the underlying drivers.
Speaker: You see, for example, infrastructure spending and property spending that is broader construction easing back.
Speaker: And that means that the global demand for commodities that feed into China's vast construction sector may also begin to cool in 2021.
Speaker: At the same time, you still see an acceleration in manufacturing investment, and that is demand for machinery in China.
Speaker: Imported machinery will likely continue to rise this year as manufacturing plants really execute expansion plants, and that drives this manufacturing investment that we're seeing.
Speaker: But having said that, there is also really signs that we shouldn't get too excited about a further acceleration in China's growth.
Speaker: And that's because policymakers are pulling back a little bit on the stimulus that they have administered.
Speaker: Here you see the credit impulse for mainland China, the red line here.
Speaker: The credit impulse really measures the amount of new credit that is being pumped into the economy, new lending relative to GDP.
Speaker: And you can see over time we go through several cycles here.
Speaker: You have, for example, during the global financial crisis, you have this enormous spike in new lending that was pumped into the economy.
Speaker: And then you get a normalization.
Speaker: Since then, you had two more credit cycles.
Speaker: And what really happened in 2020 is that the government allowed a further acceleration in lending to come through.
Speaker: However, since October, at the very end, you see the credit impulse starting to roll over.
Speaker: And that's because policymakers are pulling back a little bit on the reins because they want to make sure that debt levels don't rise too far further.
Speaker: Now, this doesn't mean that the Chinese economy itself will decelerate, but it does mean that a further acceleration seems unlikely at this point.
Speaker: One way to think about this is to think about China as a maturing cycle in the sense that we've accelerated sharply and are now starting to level out.
Speaker: Why is this important?
Speaker: Well, it does help to explain volatility in financial markets.
Speaker: You will have noticed, for example,
Speaker: that interest rates in China, particularly short-term interest rates, were extraordinarily volatile over the first few weeks of this year.
Speaker: And that is whenever you get an inflection point from easy monetary policy to slightly tighter monetary policy, you get that volatility in interest rates, and that's something that's really occurred in China.
Speaker: Now this will steady out over the course of this year, but this is really what explains the context for this.
Speaker: Now by and large we are optimistic about China.
Speaker: One thing I didn't mention about China, for example, is that consumer spending will also help to revive the recovery.
Speaker: And on the external side, China will also see stronger export growth well into 2021.
Speaker: And one aspect of the stronger export growth from China is really the regionalization
Speaker: that will kick into high gear in 2021.
Speaker: Last year, if you remember, Asian economy signed the Regional Comprehensive Economic Partnership, which is actually the biggest free trade area in the world.
Speaker: And while they signed it last year, the implementation really only kicks in in 2021.
Speaker: So it's this year that you'll see the first tariff reductions and thereby
Speaker: the acceleration in trade.
Speaker: You can see here three big squares.
Speaker: The green square is actually the RCEP, which is the Regional Comprehensive Partnership.
Speaker: It comprises 26 trillion US dollars in GDP.
Speaker: That's much bigger in fact than the CPTPP area, which only comprise about 11 trillion.
Speaker: And the North American Free Trade Agreement, which is called the USMCA,
Speaker: which comprises about 24 trillion or so.
Speaker: So you can see in the making here is the world's largest free trade area which is being implemented this year and which will accelerate trade across the region, benefiting interestingly, particularly Japan and Korea in particular.
Speaker: But there's a second aspect about the RRCEP, this creation of the
Speaker: a regional comprehensive partnership, and that is that it will drive intra-regional trade in particular, particularly between China and ASEAN.
Speaker: If you look on the left-hand side here, you see a chart that shows China's total trade, imports and exports with ASEAN, the EU, and the United States.
Speaker: Now the red line is trade with ASEAN, bilateral trade.
Speaker: You can see the sharp acceleration already in recent years, and you would expect this to accelerate further as the RCEP is being implemented.
Speaker: Now interestingly, if you compare that trade relationship,
Speaker: with the size of the EU trade relationship between China and the EU, you can see that trade with ASEAN just surpassed trade with the European Union.
Speaker: So from China's perspective, ASEAN is now more important than the EU as a trade partner.
Speaker: And in fact, trade between China and ASEAN is also bigger
Speaker: than trade between China and the United States.
Speaker: So the most important trade relationship now in the world is actually that between China and ASEAN.
Speaker: Now that benefits the ASEAN economies, more integration with the Chinese economy, but there's something else, and that is that RCEP will drive investment flows over the coming years.
Speaker: It will really help to incentivize multinational corporations, even from outside the region,
Speaker: to invest more within RCEP and particularly in the ASEAN economies.
Speaker: And already on the right hand side here you can see foreign direct investment trends continuing to rise.
Speaker: In fact China has gone up even despite the US-China trade tensions.
Speaker: You saw increased investment into China.
Speaker: In fact last year China overtook
Speaker: the United States is the biggest recipient in terms of foreign direct investment.
Speaker: But if you take ASEAN as a whole, ASEAN is actually starting to exceed China in terms of the amount of foreign direct investment it is receiving.
Speaker: So what does this highlight?
Speaker: It really highlights increasing regionalization and connectivity across the region that will help to catalyze more growth, not just in trade terms, but also investment within the region.
Speaker: and particularly investment side will benefit the ASEAN economies.
Speaker: Now, we should also acknowledge that despite the relatively rosy economic outlook, there are risks of volatility.
Speaker: We have seen quite a bit of volatility at the beginning of the year.
Speaker: And that may be something that will continue to intensify over the next couple of quarters or so.
Speaker: And one big risk here is the return of inflation.
Speaker: One particular aspect from the recovery from the pandemic is that price pressures are coming back
Speaker: surprisingly quickly.
Speaker: Now this chart here shows you the red line, or the black line rather, output prices as reported by manufacturers.
Speaker: And you can already see that over the last two months or so there's been an increase in reported output price pressures by manufacturers.
Speaker: Not usually so, but given the depth of the current recession it's remarkable that prices are already increasing.
Speaker: But when you look at the input price side, you see even a sharper acceleration in input prices as reported by manufacturers.
Speaker: Look at this enormous jump in the input price pressures.
Speaker: What does this tell us?
Speaker: It does suggest that over the next two quarters, you might see accelerated inflation volatility, not just in Asia, but in Western markets as well.
Speaker: And that can change expectations about interest rates, about central bank policy, and just introduces an enormous amount of uncertainty into financial markets, including foreign exchange markets.
Speaker: And we have to also acknowledge that at the same time debt levels have increased across Asia quite sharply.
Speaker: Just to put this in perspective, what you have here, the red line shows you the bank credit to GDP ratio across emerging Asia.
Speaker: And even when we include China, it's roughly a similar pattern.
Speaker: Now what does this chart show us?
Speaker: It shows us
Speaker: the total macro leverage relative to GDP, the amount of debt relative to GDP that is present in economies.
Speaker: You start in the early 1990s, and what you find is that debt climbed all the way up to the Asian financial crisis in 1997.
Speaker: Then the bubble burst, and we got a deleveraging period for quite some time, all the way up until the global financial crisis kicked in in 2008.
Speaker: In fact, the advantage for Asia was that we entered the global financial crisis with relatively low debt levels, allowing us to leverage up over subsequent years and really drive economic growth.
Speaker: Now, in recent years, that increase in leverage has actually steadied out.
Speaker: However, at the very end here, you see that again the acceleration in debt that has occurred over the past year.
Speaker: Now when you combine inflation volatility and financial market volatility with the fact that debt has increased quite a bit, that sets us up really for very accentuated financial market risk.
Speaker: Now none of this is to suggest that we might see a systemic financial crisis in Asia, but it does suggest that we need to be cautious when we think about the FX risk, the interest rate risk over the coming year, because higher debt levels tend to accentuate
Speaker: financial market risks.
Speaker: And it's not just a broader economy.
Speaker: Just to provide you with one example, if you look at household debt in Asia, this is the household debt to GDP ratio across the region.
Speaker: And just to give you a comparison, this is roughly
Speaker: the averages we have for developed markets, the average we have for global emerging markets.
Speaker: And you can see that most economies in Asia actually have household debt levels that are well above the emerging market average for Asia.
Speaker: So we can no longer talk about this region being a low-debt region.
Speaker: In fact, some sectors of economies have high debt.
Speaker: China included.
Speaker: China's debt now is well above emerging market levels.
Speaker: There are, of course, other examples like India where it's well below.
Speaker: But broadly speaking, the elevated level of household debt does pose some risks in terms of accentuating financial market volatility.
Speaker: Now, having said all that, what really does this mean for economic growth?
Speaker: As we said at the beginning, we are very bullish on economic growth.
Speaker: This will be a year where things snap back.
Speaker: And certainly, the vaccine rollout, the government stimulus, all will help for Asia to kind of continue to prosper.
Speaker: But we shouldn't lose sight of the fact that really the road towards a full recovery is still very long.
Speaker: In fact, even if growth rates look very stellar this year because of annual comparisons in China, for example, we're looking at 8.5% growth
Speaker: this year compared to 2.3 in 2020.
Speaker: The question is really, to what extent have Asian economies recouped all the losses of output last year?
Speaker: When will they fully recoup those output losses and get back to the level of output they saw previously before the pandemic struck?
Speaker: And here we have one chart that really highlights by the end of 2021 where GDP will stand relative to its pre-pandemic level.
Speaker: If you look, for example, in the Philippines, Thailand, Japan, Hong Kong, actually even with the rebound at the end of this year, output will not quite be back where it was.
Speaker: and the vast majority of the Asian economies are ever led by China and Vietnam, we're going to exceed well the levels of output we saw in 2019.
Speaker: So for most of the region, still, this is a genuine recovery, even if for some economies the full, full mending of the economic losses will take some time indeed.
Speaker: And with that, we want to thank you and wish you all the best for the year of the ox.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
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