Kuala Lumpur: Asia must start pulling its weight in the demand recovery to support global growth’s potential during the Covid-19 pandemic and not rely on exports alone, according to S&P Global Ratings.
It said Asia has managed the pandemic better than Europe and the US with lower death rates, while economic activity was less impacted and “Factory Asia” has also benefited from surging export demand.
But Asia has to boost its spending and start pulling its weight in the demand recovery in order for global growth to achieve its potential, it said in its report “Asia, we have a demand problem, ” issued, recently.
“The health and economic effects have been far tamer in the region than elsewhere in the world. However, S&P Global Ratings believes the region’s slack domestic demand and reliance on exports could restrain its recovery and inflame trade tension with the West, ” it said.
S&P Global Ratings Asia-Pacific chief economist Shaun Roache pointed out the popular narrative Asia is leading the recovery and digging the world out of a big hole is “not quite right”
“Demand from the rest of the world is helping Asia out of the hole. This is mainly due to cautious Asian consumers,” he said.
Roache said a University of Oxford report pointed out the region contained death rates due to Covid-19 to 81 per million people in early February, compared with 1,066 in the European Union, and 1,339 in the US.
He added the decline in economic activity at the trough, compared with the pre-pandemic trend, was less than elsewhere.
“We expect the permanent damage to output to vary but on average be lower than elsewhere, at around 4pc-5pc of GDP. There are notable exceptions to this trend, especially India, ” he said.
Short, sharp lockdowns and policies designed to keep people employed, including wage subsidies, have limited job losses and fuelled a rebound in hiring. This will support household income as stimulus inevitably wanes, he added.
Roache pointed out “Factory Asia” has also benefited from surging export demand. Work-from-home measures have boosted electronics demand, consumers have switched some spending from services to goods, and demand for health-care equipment has risen.
Sluggish domestic spending, especially compared with the rest of the world, is forcing up Asia’s current account surplus.
He estimated the region’s surplus with the rest of the world has risen above 3pc of GDP from well below 2pc before Covid-19.
The US Treasury recently named Vietnam as a currency manipulator, and China, India, Japan, South Korea, Malaysia, Singapore, Taiwan, and Thailand are all on the watchlist.
“Rolling back tariffs on China may be harder and more countries may also be at risk of being labeled currency manipulators.
“Until Asia starts pulling its weight in the demand recovery, global growth will fail to live up to its potential.
“The recovery will remain over-dependent on stimulus and consumers in Europe and the US. Asia may see persistent economic slack, low inflation, and a steady turn lower in expectations for revenue growth for some firms, ” he said.
