Macroscope | Why the case for Asia to roar back to growth is stronger than ever

Compared to the US and Europe, Asia has lower inflation and interest rates, much improved financial systems, and solid domestic consumption and export demand

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Visitors look at shops selling trinkets and souvenirs along a tourist shopping street in Beijing on February 28. China’s recovery is largely driven by a rebound in consumption and this counter-trend recovery can play a key role in supporting Asia’s growth. Photo: AP

Published: 3:45pm, 6 Apr 2023

Coming into 2023, I believed Asia’s economy was poised to grow faster than most, arguing that the region will start to build up a meaningful growth differential over developed market economies.

With the recent banking sector stresses in the United States and Europe, investors may wonder if similar funding challenges could occur in Asia and, given this backdrop, whether the region’s growth can still outperform others?

If anything, recent developments have made the case for Asia’s growth outperformance even more compelling. For starters, the funding challenges in the developed world emerged because central banks – to combat inflation – raised interest rates aggressively.

Rates have risen by 4.75 percentage points in the US and 3.5 percentage points in Europe in this cycle. Both tightening cycles are the sharpest and fastest in recent times. In contrast, as Asia’s inflation is running at half the pace in developed markets, aggregate policy rates have risen by just 1 percentage point.

Another important distinguishing factor has to do with the set-up of the banking sector. In Asia, liquidity coverage ratios are well above 100 per cent, loans tend to be more floating rather than fixed, and deposit franchises are more diversified. The upshot of this is that while lending standards look set to tighten in developed markets and ultimately weigh on growth, it should be clear that Asia does not face similar challenges.

The relative health of the financial system is not the only reason I think Asia can still outperform. The large economies in Asia, namely China, Japan, India and Indonesia, all have economy-specific factors that are supportive of domestic demand and hence shelter them somewhat from the potential negative spillovers from weaker growth in developed markets.

People walk by construction cranes near office buildings at the central business district in Beijing on March 15. China’s reopening should allow it to achieve growth of over 5 per cent this year. Photo: AP