Why Asia’s CEOs fear inflation as biggest hurdle to coronavirus recovery
- Supply-side constraints, loose monetary policy, geopolitical tensions and weakening consumer sentiment are just some of the issues weighing on business leaders’ minds
- Asia’s economic vitality means it will remain a leading source of growth in the future, but expect more bumps on the road to recovery
In a recent survey of Asia-based CEOs conducted by the Asia Business Council, nearly 40 per cent of respondents believed that inflation – driven by supply-side constraints and loose monetary policy – would be the biggest economic challenge over the next year. That is up from just 7 per cent of respondents in last year’s survey.
Even in mid-2009, when 67 per cent of respondents surveyed thought economic conditions would improve in the next 12 months, only 18 per cent saw inflation as their primary concern. That was the second-most optimistic year on record since the survey began in 2006.
There is evidence that the inflation expectations of businesses are good predictors of actual future inflation. As the IMF warned, there is cause for concern if companies and workers expect inflation to linger, which could feed into a cycle of wage increases and higher prices.
If production was organised on a lowest-cost strategy, nearshoring could mean higher expenses. Adopting standardised processes across plants and sites is associated with an initial upfront cost. The shift towards greater resilience is likely to also mean higher costs, at least for some time.
Tit-for-tat tariff increases might be a thing of the past, but there is always the risk that a sudden policy shift could force businesses to rejuggle their supply chains. That is yet another reason for businesses to build more redundancies into their systems or implement onshoring, further increasing costs.
A winter 2020 World Bank survey of businesses ranging from micro to large, for example, found that business sales were around 50 per cent lower than before the pandemic in the Philippines and Indonesia. Small and micro enterprises were more affected than large enterprises.
That could have long-term effects on economic growth through the breakdown of supplier and customer relationships and the loss of job knowledge. Food and energy price spikes could make the situation even more dire, further cutting into households’ pocketbooks just as demand is starting to recover.
On the other hand, while most executives polled in the survey attributed rising prices to supply-side factors and monetary policy, a few credited a recent surge of pent-up demand. Some 60 per cent of respondents, representing some of the largest businesses in Asia, said demand in their industry or sector had already surpassed pre-pandemic levels.
More needs to be done to ensure smaller enterprises benefit, too, but the fact the recovery has been impressive overall despite waves of continued pandemic-related restrictions on commercial activity speaks to the economic vitality of the region.
Asia remains likely to be one of the fastest-growing regions in the years to come, but expect some bumps in the road as the recovery continues.
Colleen K. Howe is a programme associate at the Asia Business Council