The Asia House Annual Outlook 2023: Resilience Required to Confront Uncertainty
Published On: 30th January 2023
The Asia Annual Outlook 2023 aims to help business leaders and policymakers better understand the prospects for Asia in the year ahead across eight economies: China, Japan, India, Indonesia, Vietnam, Malaysia, Thailand and the Philippines.
Produced by the Asia House Research and Advisory team, the report identifies that Asia can defy a global economic slowdown in 2023 through an acceleration in digital transformation, greater regional coordination, and balanced monetary policies.
However, and mirroring the global outlook, Asia is susceptible to risk and faces shocks, such as energy-price volatility geopolitical conflict and higher borrowing costs.
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KEY POLICY RECOMMENDATIONS:
▪ The centre of global economic gravity continues to shift to Asia. Scaled-up regional coordination is necessary to bolster economic integration further, particularly in the form of more economic zones and investment corridors.
▪ Enhanced and coordinated reserve management is needed at a time when Asia’s reserves are declining. Supporting digital currency development and digital platforms for early-warning systems will catalyse coordination.
▪ By adopting carbon-pricing mechanisms, the ‘green premium’, or the additional costs of opting for green technology, will be reduced. Pricing mechanisms can account for the cost of fossil-fuel emissions, thus making net-zero alternatives cheaper.
▪ The leveraging of private investment and risk absorption will support scaled-up sustainable finance for borrowers and investors through an enhanced role for development banks and development finance institutions.
▪ Innovations in blended finance – using development funds to spur private investment – need to funnel capital into high-impact and under-capitalised green projects. We spotlight emerging-market green-bond funds.
▪ Asia’s broader digital access and digital skills, particularly in the rural sectors in its larger economies, is a policy gap. By addressing digital inequality, job market vulnerabilities will be mitigated among the rural poor across Asia.
Global economic prospects have dimmed for 2023, with many economies heading towards recession, accompanied by persistently high inflation and rising interest rates. Asia’s economies look brighter, however, and some may defy the global trend.
This will hinge on factors that include an acceleration in digital transformation, greater regional coordination, and striking the right balance in monetary policy.
As elsewhere, the region faces both multiple and multi-faceted shocks, such as energyprice volatility, geopolitical conflict, and higher borrowing costs.
Developing countries and emerging markets in Asia are especially vulnerable to seeing their economies contract.
We see three major risks.
The first is central banks making policy mistakes – by either under- or over-tightening. The former may prove costly, as it risks causing inflation to become entrenched. The latter risks prolonged recession.
To date, monetary policy responses across Asia have varied, with a general sensitivity to growth. The range of Taylor Rules calibrated in this report for analysing central bank policies suggests this has been the case with the People’s Bank of China, the Reserve Bank of India, and Bank Indonesia. But there remains a danger that unforeseen interest-rate jumps from unsettled bond markets, or sudden stops1 in investment flows in more vulnerable countries, could materialise.
The step-up in inflation, meanwhile, has dimmed the prospects for a robust turnaround in activity across Asia, including – crucially – in China. Although we anticipate a limited rebound in growth in China following the relaxing of restrictions, risk remains over the spread of COVID-19 and its impact on productivity, which constitutes the second major risk in 2023.
The overall economic impact of COVID-19 will be less of an issue than it was in 2020 and 2021, moderating in most countries. But it is likely to persist in China, even with the scaling back of the zero COVID-19 strategy. The country is likely to balance the competing pressures of maintaining economic growth, providing stimulus measures to bolster domestic consumption, and improving health care capability in post-zero-COVID transition.
But the stresses remain, as do China-centred geopolitical risks.
While the risk of armed confrontation in the South China Sea cannot be overlooked, our 2023 report also notes some of the opportunities in relation to the cooperation between China, the US, and the claimant states in South East Asia. Both China and the US could strengthen existing crisis management mechanisms to prevent unanticipated incidents, given that encounters between the two militaries have become increasingly frequent.
US financial developments are likely to constitute the third key risk for 2023. Renewed risk aversion globally, or unexpectedly strong rate increases in the US, or both, would lead to currency markets elevating the safe-haven status of the US dollar at the expense of other currencies, including Asia’s. How currencies fare in this climate could be decisive in dictating growth outcomes across Asia, given that, in net terms, lower domestic purchasing power (including for productive inputs) would restrain output. These could be offset by positive competitiveness effects, however.
Asia countries’ progress in meeting their climate-change targets has been disappointing. Without prompt action, the climate crisis will be catastrophic for health, social well-being, and economic growth. More extensive digitalisation is needed to fight the climate crisis and to increase Asia’s productivity. Asia’s regionalism, in the form of enhanced economic integration, will help meet these challenges.
The Asia House Annual Outlook 2023 presents updated readings for Asia’s economic readiness indices for green finance and digitalisation. Despite the financial volatility that has occurred, the eight economies tracked by the indices – China, Japan, India, Indonesia, Vietnam, Thailand, Malaysia and the Philippines – are likely to show continued improvement in their green finance ecosystems. Although South East Asia is likely to see further improvement in digitalisation from a low base, China, India and Indonesia could see a dip in their readings in 2023.
Key among the recommendations made in this report are those relating to prioritising innovation – to spur carbon pricing, lower green premiums for zero-carbon alternatives, and boost underfunded and high-impact projects with blended finance. Our indices suggest that prioritising economic readiness to tackle both climate change and digitalisation, and the policies that link the two, will create a higher growth trajectory. The Asia House country readings for 2023 indicate that new innovations in digitalisation, e-commerce and in innovative trading solutions will help Asia’s growth resilience.
The Asia House Annual Outlook 2023 was authored by Phyllis Papadavid, Director of Research at Asia House, with Zhouchen Mao, Head of Research and Advisory at Asia House, a contributing author on China.
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