By Vaibhav Tandon

If 2023 for Asia-Pacific (APAC) economies was about navigating challenges ranging from aggressive tightening of monetary policy to China’s economic deceleration, this year will be defined by stability, paving the way for more durable growth in 2025. 

Improving domestic demand along with recovering tourism are underpinning economic activity in the region.  Underlying inflation momentum has eased.  Japan has exited from 25 years of deflation.  Regional central banks have been reluctant to start cutting rates ahead of the Fed, fearing capital outflows and currency turbulence.  But the Fed’s expected rate cuts later on this year should allow them to pivot.  China is an outlier, struggling to reflate an economy besieged by deflation, a protracted property market slump and waning investor confidence. 

APAC faces multiple risks: policy uncertainty, China’s slowdown, volatile energy markets and restrictive monetary conditions.  Risks of geopolitical fragmentation are particularly onerous for APAC, given these nations’ integration into global value chains.

Following are our views on how major regional markets are poised to perform during the balance of 2024.

Japan

• Japan avoided a technical recession at the end of 2023 as the economy lacked a clear driver of growth.  But we expect momentum to recover in the coming quarters, led by gradual improvement in all three key drivers of growth.  Consumption, which contracted for three quarters in a row, will get a boost from large wage increases secured by workers in the spring negotiations.  Investment and exports will be underpinned by a continued upturn in the chip cycle.
• The wage settlement also provided impetus to the Bank of Japan (BoJ) to abolish its yield curve control and negative interest rate policies.  But room for aggressive tightening is limited as rapid adjustments to the policy rate will generate market volatility and complicate public debt dynamics.  Contrary to fundamental expectations, the dovish hike by the BoJ has put the yen under pressure.  The yen slid to its lowest level since 1990 against the dollar recently, triggering speculation of more than a verbal intervention by Japanese policymakers.

China

• A few green shoots have been observed in the Chinese economy lately.  But we read these numbers with caution.  Pent-up demand and disruptions from the timing of the Lunar New Year have led to the improvement in some markers.  Measures such as credit growth suggest that the domestic economy remains weak.  There is no end in sight for the beleaguered property sector, a key hurdle to a strong economic revival.  While inflation returned to positive territory in February, it is unlikely to mark a start of sustained reflation.  Real interest rates have increased owing to deflation, counteracting the impact of the monetary easing measures.
• The annual Two Sessions policy meeting set unchanged economic targets of growth of “around 5%” along with an inflation rate of 3% and budget deficit of 3% of GDP.  GDP growth this year will not benefit from a low base, so hitting the target will be very difficult without broader stimulus.  Policymakers reiterated their supportive policy stance, but are hewing to incremental and targeted actions rather than large-scale action, placing China at risk of following the example of Japan.

Singapore

• Singapore’s GDP returned to growth in the second half of last year.  Exports were the main driver behind the turnaround, as the domestic economy suffered from cautious consumer spending amid softening labor market conditions.  The economy is expected to recover gradually this year.  Tourism data shows a decent start to the year.  Manufacturing and trade-related sectors are set to benefit from the turnaround in global electronics demand.
• Singapore's headline inflation increased 0.5 percentage points to 3.4% year over year in February.  Seasonal holidays and one-off factors have likely contributed to upside surprises in recent readings.  With inflation still elevated, the Monetary Authority of Singapore retained policy settings at its April meeting.  But given the labor market re-balancing and wage normalization, we expect the central bank will start unwinding its tight policy settings in the second half of the year.

Hong Kong

• Hong Kong’s growth disappointed in 2023, underscoring the difficulties facing the city’s post-COVID recovery.  China’s slowdown and high borrowing costs abroad proved to be a drag.  Recent readings show Hong Kong's economic recovery remains modest.  Retail sales rose in February, while the Purchasing Managers’ Index returned to expansionary territory (above 50) in March.  The tourism recovery has gained traction, but remains incomplete.
• The economy is expected to get back on its feet.  Given the Hong Kong dollar’s peg to the U.S. dollar, easier monetary conditions will start feeding through to the real economy later this year.  Rising household income and disinflationary pressures will bode well for household spending.  Fixed asset investment will get a boost from the administration’s focus on infrastructure and increasing housing supply.  That said, structural challenges ranging from China’s economic deceleration and declining demographics are going to hinder long-term growth.

Australia

• The Australian economy ended the year on a weak footing, growing 0.2% quarter over quarter in the fourth quarter of 2023.  Consumption grew by a meager 0.1% as Australian households struggle under the weight of high debt levels and high interest rates.  Inflation is eating into the purchasing power of households.  These conditions are expected to ease somewhat as 2024 continues.  
• The Reserve Bank of Australia left the cash rate unchanged at the March meeting at 4.35%, but the central bank neutralized its tightening bias, suggesting that the next move will be a rate cut.  We expect disinflation to continue, which will set in motion a gradual and short easing cycle starting in late 2024.