Asia is the vibrant global hub, yet black swans are there

According to IMF forecasts, the Asia-Pacific region is poised to be the most vibrant global hub in 2023, driven largely by the upbeat outlook for China and India. The region's two largest emerging economies are expected to account for around 50% of global growth this year, with the rest of the Asia-Pacific region expected to contribute another fifth.

Thanks to the proactive measures implemented by policymakers in Asia to mitigate systemic risks, the region has been relatively immune to the recent banking turmoil that has plagued the United States and Europe. This has helped to ease market anxiety, and capital inflows have resumed in Asian economies due to favourable financing conditions for sovereign debt issuers and the stabilization of Asian currencies. Coordinated monetary tightening by central banks, combined with lower commodity prices and shipping costs, has led to the first signs of easing inflationary pressures in Asia.

However, although financial conditions have improved from their peak level of uncertainty last year, core inflation in the region remains persistent, in line with other parts of the world. Global trends potentially continue contributing to volatile conditions in the region, and the area's economic conditions have not been immune to the growing global instability witnessed in recent months. As a result, the region remains susceptible to the negative impacts of a volatile market environment.

The vitality of economic expansion

The opening of the Chinese economy will be pivotal for the region. It is expected to lead to a recovery in private consumption that will lead to a recovery in China's growth. As in the rest of the world, domestic demand is expected to remain Asia's most significant growth driver in 2023.

The recovery in private consumption was supported by the withdrawal of excess savings built up, reflecting a combination of lockdown-related spending cuts, the desire for higher precautionary savings and great government transfers. Increased consumption is expected to continue this year as household savings ratios have not yet normalized. Thus, the improved outlook and still accommodative financial conditions in many Asian economies will likely support household consumption and corporate investment credit flows.

The IMF predicts that the GDP growth in the region will increase to 4.6% in 2023 from 3.8% in 2022, driven by global and regional factors. Asia's growth will primarily be powered by the recovery in China and robust expansion in India. According to projections, China's economy is anticipated to grow by 5.2% in 2023, while India's growth rate is expected to slightly decrease from 6.8% in 2022 to 5.9% this year.

Similarly, the economies of the Association of Southeast Asian Nations are expected to experience a reduction in growth from 5.7% in 2022 to 4.6% in 2023. This can be attributed to a slight decline in domestic demand momentum, monetary tightening, easing commodity prices, and weaker external demand from the United States and Europe. Japan's growth is anticipated to rise slightly to 1.3% in 2023 due to monetary and fiscal policies. Furthermore, a technological cycle decline will likely weaken the growth momentum in Korea and Taiwan.

Black swans are there

Various internal and external factors are expected to influence the region's prospects and potentially become a "black swan" event. The technology sector's deceleration, demonstrated by the reduction in semiconductor sales and the drop in electronics prices sold to the US from Asia, is projected to weigh on the region's tech exports. Furthermore, within the region, the effects of the tight monetary policy are already being observed as the housing markets soften and demand for commercial and residential construction investment weakens. In the near to medium term, the most significant risk lies in the potential for persistently high inflation, particularly for emerging markets and developing economies in Asia, which have high debt levels.

However, the most significant medium to long-term peril as a "black swan" is the potential for geo- economic fragmentation resulting from geopolitical tensions, economic nationalism, and the imperative to safeguard domestic industries from foreign competitors. This could result in significant consequences for both global economic growth and stability and for individual countries that may become isolated from critical economic partnerships and networks.

The impact of geoeconomic fragmentation could alter the balance of power in the global economy as dominant forces strive to assert their influence and protect their interests. This could lead to a less cooperative and more fragmented global economic system, with negative implications for international trade, investment, and development. Therefore, geo-economic fragmentation represents the "black swan" for the most significant risk to the region's and the world's economic recovery.