After posting a strong recovery in 2021, the Asia-Pacific region is set for more modest economic expansion in 2022. This will principally reflect weaker growth in China, where EIU forecasts expansion to slow to 5.3% in 2022, from an estimated 8.1% last year. This will be offset to some extent by accelerating growth in Indonesia and Japan, where recoveries in 2021 were disrupted by covid‑19 outbreaks, and steady economic momentum in India, where real GDP is forecast to expand by 7% in fiscal year 2022/23 (April-March).

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Disinflationary forces emanating from Asia will surprise global markets

Inflation was less pronounced in Asia than in much of the world in 2021, reflecting weaker stimulus policies and less disruption of retail and labour markets. The region will continue to experience much lighter price pressures this year, with consumer price inflation forecast to accelerate to only 2.9%, from 2.1% in 2021. Food prices, which are weighted heavily in the consumer price index baskets of many Asian countries, will remain under control.

In addition, we see sources of disinflation ahead. In China, rising shipment costs and shortages affecting industries that normally operate on thin margins have resulted in growing stockpiles of unsold products in warehouses. As global demand moderates this year, producers will be keen to destock and shore up their bottom lines, which will encourage them to refrain from price increases that may threaten their international market share. This could provide welcome respite for global consumers of products spanning electronic machinery, computers and consumer electronics, rubber and plastics, and furniture. The Omicron variant of the coronavirus represents a potential risk to this forecast if it leads to a crippling of supply chains and port logistics in China.

We also see signs that the semiconductor market, which experienced a severe supply crunch in 2020‑21, may enter a position of oversupply as soon as late 2022. Major capacity expansion by the likes of Samsung Electronics (South Korea) and the Taiwan Semiconductor Manufacturing Company will boost supply, while we expect global demand to moderate owing to a cooling inventory drive in China and softer global demand for consumer electronic products (which fared well during the early stages of the pandemic). A softening in semiconductor prices will help to cool global inflation and assist with manufacturing continuity.

A consequence of the disinflationary forces emanating from Asia is that pressure on global policymakers to tackle price rises is likely to have diminished by late 2022. This may force a readjustment of market expectations for the pace of interest-rate increases and monetary policy normalisation.

Monetary policy divergence will pressurise Asian currencies

Given weaker inflation and mixed progress in terms of economic recovery, many of Asia’s central banks will be reluctant to follow the hawkish path of the Federal Reserve (the US central bank), which is expected to increase its policy rate by 100 basis points in 2022, with the first increase in March. We even expect China’s central bank to lower interest rates this year. With monetary policy retaining a dovish tilt, regional currencies are likely to come under pressure as global capital is attracted by the higher yields available in advanced markets.

Indonesia’s currency, the rupiah, will be among the most vulnerable, given the country’s traditional twin fiscal and current-account deficits and reliance on foreign capital inflows. We expect US rate rises to coincide with a widening current-account deficit, as domestic demand recovers and prices for Indonesia’s main commodity exports level off, with an upward trend in local inflation adding depreciatory pressure. Bank Indonesia (the central bank) will respond with interest-rate increases totalling 100 basis points in 2022, beginning in the second quarter of the year. However, we still expect the rupiah to weaken in the year by 5‑6% in nominal terms—among the steepest depreciations in Asia.

Another emerging-market currency, India’s rupee, is likely to prove more resilient. One source of support will be capital inflows generated by the likely inclusion in 2022 of Indian bonds in several global bond indices. Over time, we believe that this could generate annual inflows of US$10bn‑15bn, around five times that of recent years. This will be supportive of India’s balance-of-payments position and will help to reduce borrowing costs, while also being likely to prompt increased international scrutiny of economic fundamentals and the policy environment. Non‑residents currently hold a very small portion of India’s public debt, by emerging-market standards.

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Elections will bring as much continuity as change

Asia has a busy electoral calendar for 2022, with the setbacks caused to democracy-building in the region by developments in Afghanistan and Myanmar last year adding significance to this year’s polls. Among others, national elections will be held in Australia, Papua New Guinea, the Philippines and South Korea in 2022, alongside an upper-house election in Japan and important local polls in India and Taiwan.

The scope for major policy changes following these elections will be minor, however. In Australia, whichever party emerges as the victor in what is likely to be a tight lower-house election is likely to be constrained by the composition of the upper house, where crossbench representatives will remain highly influential. In South Korea’s presidential election (where we retain our call for an opposition conservative victory, even though the race has become more finely balanced), the scope for legislative changes will be narrowed by liberal control of the legislature. Meanwhile, the frontrunner to replace Rodrigo Duterte as president in the Philippines, Ferdinand Marcos Jr, has emphasised continuity with the incumbent administration and has even chosen Mr Duterte’s daughter, Sara, as his running mate.

In China, it would be a major shock if the 20th national congress of the Chinese Communist Party later in the year did not lead to the reappointment of the president, Xi Jinping, for another five-year term at the top of the ruling party (in defiance of previous retirement norms). The broader reshuffle of top party roles at the meeting is more unpredictable, however, and will provide important clues as to Mr Xi’s plans for his third term. Businesses will want to watch closely who emerges as the successor to Li Keqiang, who is constitutionally required to step down as premier in 2023. The appointment of a loyalist would assist with co‑ordination, but a lack of checks and balances could mean that the policy unpredictability that unnerved investors in 2021 persists.

Policymakers will begin to execute more ambitious climate pledges

Policy action aimed at tackling climate change is likely to accelerate in 2022, after a number of Asian economies committed to “net zero” carbon targets ahead of the UN Climate Change Conference (COP26) held last year. Seamless execution of policies aimed at reducing emissions is unlikely, given Asia’s reliance on fossil fuels, energy security concerns and, in some cases, the near-term social and economic costs of changes. However, businesses should still expect meaningful policy changes, given Asia’s exposure to the effects of climate change; growing pressure on governments to reduce pollution; and external pressure to climate-proof regional supply chains.

Japan was among those countries pledging to achieve carbon neutrality (by 2050), and in October 2021 the government unveiled an energy strategy that envisages a significant expansion in energy from nuclear and renewable sources. In the near term, complex nuclear safety regulations and public unease over use of the source suggest that the government will enjoy greater success by focusing on solar, wind, biofuel and other renewable options. As part of this, we expect the authorities to introduce (from 2022) a nationwide carbon pricing and trading scheme that will supersede smaller schemes already in operation.

With an adequate mechanism to monitor emissions, the new system will expose companies to carbon prices closer to the real cost of their emissions and will incentivise emission reduction and the use of cleaner energy sources. Consequently, businesses in high energy-consuming, heavy carbon-emitting industries, such as metals, cement and ceramics, will face a greater impact on their profits. This will also help to accelerate the development and expansion of hydrogen-powered and electric vehicles by Japanese automotive manufacturers.

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