By Vaibhav Tandon

Asian economies witnessed a volatile 2023, with inflation, rising interest rates, and China’s economic woes dragging growth down.  While the road to reflation will be bumpy for China, the rest of Asia is likely to do well this year.

Several factors contribute to our optimism.  Labor markets in most major regional economies remain strong.  The drag from tighter global monetary policy will fade.  External demand will be constrained by weak growth in developed economies in the first six months of the year, but those headwinds will fade in the second half of 2024 as western economies achieve a soft landing. 

The improvement in the semiconductor/chips cycle will underpin demand for Asian goods, which suffered through a slump for the last two years.  Depleting U.S. inventories are also pointing towards increased demand for regional exports.

The path to economic prosperity is not assured.  Policy uncertainty will remain high as over 50 economies worldwide head into elections.  The evolving international landscape amid heightened geopolitical tensions will remain the biggest source of uncertainty for the trade-dependent economies in Asia.

Following are our views on how major regional markets are poised to perform in 2024.

Japan

• Japan was one of the better-performing advanced economies in the first half of 2023, but lost some momentum in the second half.  High inflation and a subdued external backdrop took their toll.  But the incoming data suggests momentum is returning.  Consumer confidence, corporate sentiment and the outlook for business investment are improving.  Higher salaries and growth in real wages are set to support private consumption.  The Japanese economy has woken up from a deep slumber, but is still some distance from being up and running.
• The Bank of Japan (BoJ) offered no surprises as it left interest rates in negative territory at the December meeting.  To markets’ disappointment, the BoJ governor refrained from giving any hint of an imminent exit from negative interest rate policy.  In our view, the BoJ will be the only major bank which will move to make policy less accommodative this year.  A high wage settlement in spring negotiations will allow the central bank to move rates gradually into slightly positive territory.

China

• China is struggling to reflate its economy with property sector woes at center stage.  Private investment has been anemic, and capital outflows have been substantial.  While Tokyo has exited deflation, Beijing is battling hard to avoid it.  Consumption and sentiment remain weak.  China remains the world’s manufacturing hub, but its dominant position will continue to weaken, constraining its export growth. 
• China is not facing an imminent crisis.  The economy is likely to muddle through a firmly managed clean-up process.  However, the risk of the economy falling into a debt-deflation loop is very much alive as policymakers navigate through the unfavorable structural environment and tough policy choices.  Growing concerns about geopolitical risk will continue to weigh on investor appetite for Chinese assets.

Singapore

• Singapore ended the year on a strong note, with real gross domestic product growing 2.8% year over year in the fourth quarter of 2023 compared to 1.0% in the prior quarter, led by gains in the manufacturing and construction sectors.  Global electronics demand is recovering, driven by a replacement cycle with new models and upgrades.  This will provide support to the vital exports sector.  As the global goods cycle turns, inflation eases and global monetary policy turns less restrictive, Singapore’s economy is expected to post an improved performance in 2024.  But the subdued demand from a structurally weaker China will be a limitation.
• Rebalancing of the labor market and wage moderation will ensure continued progress on disinflation, allowing the Monetary Authority of Singapore (MAS) to unwind its historically tight monetary policy.  We continue to expect the MAS, which uses an exchange rate-based framework to ensure price stability, to reduce the rate of appreciation in the Singapore dollar later this year.

Hong Kong

• Recent activity data showed Hong Kong's (HK) economic recovery remains modest.  The likelihood of a significant improvement in economic fortune is low.  Recent property sector easing measures, such as lower stamp duties and higher maximum loan-to-value ratios have failed to provide a lift to the housing market.  Weaker Chinese demand is weighing on Hong Kong’s exports and its tourism sector.  Consumption, which was underpinned by an improving labor market and the government's consumption voucher program in 2023, will moderate as weaker trade sector performance feeds through to the domestic labor market.
• Apart from trade, Hong Kong is also exposed to China through the ongoing property sector downturn there.  HK banks have significant credit exposure to mainland China, accounting for about 40% of total loans.  That said, the sound financial system will help absorb the potential shocks from credit losses from mainland China.

Australia

• Australia's economy outperformed expectations for much of 2023, but is carrying less momentum into the new year as policy settings exert a drag on activity.  There are signs that the labor market is slackening.  While the growing demand for labor was met with additional population growth, it added to upward pressure on inflation, especially in housing.  The combined impacts of tighter fiscal and monetary policy settings will weigh on growth in the first half of the year, but moderating inflation and the boost to real incomes will aid a durable improvement in the last two quarters of 2024.  
• The Reserve Bank of Australia (RBA) remained on hold at the December meeting as it assessed incoming data.  The minutes of the meeting showed that the central bank was encouraged by global disinflation.  However, strong core inflation warrants a cautious approach by the RBA, leaving less room for early easing.  We expect wage and price disinflation to continue, which will set in motion a gradual easing late in 2024.