Asia Outlook 2022: As the Tide Turns
We are cautious on Asia’s economic outlook in 2022 as the emergence of the Omicron variant reminds us that the pandemic is far from over.
- Supply constraints will likely morph into an export-led demand downturn from mid-2022
- US Fed policy will be the focus of Asia FX markets into Q1 and we expect the USD to strengthen
- Despite near-term volatility, we are constructive on Asian equities as we head into the new year
We are cautious on Asia’s economic outlook in 2022 as the emergence of the Omicron variant reminds us that the pandemic is far from over.
While uncertainty is high, we expect Asia’s bumpy upcycle to extend into the first half of 2022, aided by domestic mobility which is supporting a catch-up in consumption and contact-intensive services, easing supply bottlenecks as factory operations in Southeast Asia resume, inventory restocking demand and steady exports.
We expect an export growth downturn to begin in mid-2022, reflecting three factors: first, spillover effects from a slowing China – Asia’s exports to China are equal to its total exports to the US and Europe combined; second, pent-up demand for goods from developed markets will likely fade; and third, a moderation in the tech cycle.
In 2022, headline CPI inflation across Asia is expected to rise to 3.0% y-o-y from 2.1% in 2021, but this is still within central bank targets or historical averages. Lower inflationary pressures, reflecting a weaker demand recovery in Asia, should support gradualism on monetary policy normalization.
We are above consensus on GDP growth in countries such as Singapore, Malaysia and Australia, where high vaccination rates should enable a catch-up in consumption, below consensus on South Korea and the Philippines, due to the risks of Japanification and low vaccination rates, respectively, and see macro risks such as high inflation in India and policy credibility in Indonesia.
Economic growth is expected to slow sharply in China to a below-consensus 2.9% y-o-y in Q1 2022 and 3.8% in Q2, before Beijing’s pain threshold is triggered. Policy easing around spring 2022 could reverse the slowdown and support a recovery in the second half of the year.
In Asia FX strategy, the main themes into the first quarter of 2022 include an acceleration in US Fed tapering, the European Central Bank maintaining an easy policy ahead and China growth slowing substantially. These are likely to lead to further strength of the US dollar against G10 currencies and will feed through to Asia FX.
In equity strategy, with the recent hawkish tone from the Fed and the path of Omicron still unclear, near-term volatility is expected. But we are constructive on Asia equities for 2022 as stocks do have some buffers to withstand the volatility: relative and absolute valuations are moderate, balance sheets of Asian companies are healthy and corporate earnings will continue to grow in 2022/2023.
For more on our outlook as we head into 2022, read our full report.
Contributor
Rob Subbaraman
Head of Global Macro Research
Sonal Varma
Chief Economist, India and Asia ex-Japan
Ting Lu
Chief China Economist
Euben Paracuelles
Southeast Asia Economist
Jeong Woo Park
Asia Economist
Craig Chan
Global Head of FX Strategy
Chetan Seth
APAC Equity Strategist
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