Anthony Fensom
Asia’s big economies failed to roar during 2022, weighed down by the continuing COVID-19 pandemic and resulting self-imposed restrictions on economic activity, together with rising interest rates and slowing growth globally.
Amid an increasingly uncertain outlook, The Diplomat takes a look at some potential New Year resolutions for the region’s top economies to help them enjoy better fortunes in 2023, the Year of the Rabbit for much of Asia.
China: End COVID lockdowns
International calls for an end to China’s “zero COVID” policy have been getting louder. But none were heard as clearly in Beijing as the internal protests that rocked the nation in late 2022, finally forcing action from its communist rulers.
However, Beijing’s belated easing of pandemic controls threatens to unleash a new wave of infection, sparking further potential shortages of labor and adding to global supply chain pressures. The risks likely will intensify during Lunar New Year holiday celebrations in late January, a key travel period for the nation of 1.4 billion people.
Yet after suffering sluggish growth of just 3 percent during the first three quarters of 2022, hit by the effects of lockdowns and a property slump, the authorities faced little choice but to ease harsh COVID-related restrictions.
China is now seen as unlikely to replace the United States as the world’s largest economy in the next few decades, with analysts at the Japan Center for Economic Research (JCER) pointing to the impact of COVID-19 lockdowns, U.S. export restrictions, and a declining population.
In the short term, though, China and the rest of the world will be looking for an improvement to Chinese GDP growth in the second half of 2023, to help revive a stuttering global economy.
A Nikkei survey sees China rebounding to a 4.7 percent real GDP expansion in 2023 as COVID-19 restrictions are unwound. That would mark a major improvement from last year’s estimated 3 percent gain, among the worst result in decades and well below the official target of around 5.5 percent.
The International Monetary Fund (IMF) points to further downside risks for Asia’s largest economy, including the effects of the lockdowns, a slowdown in global trade, and the risk of a “significant” slowdown in the real estate sector, which accounts for around one-fifth of GDP.
With a “bushfire” of COVID infections in the months ahead now tipped by the IMF and others, will the authorities hold their nerve as the death toll rises? For Xi Jinping, who secured an historic third term as China’s undisputed ruler in October, political victory has rarely tasted this bitter.
After recently embarking on somewhat of a détente policy internationally following the failed “wolf warrior” approach, Xi and the Chinese Communist Party (CCP) face a delicate balancing act, both at home and abroad, to manage what poses as an extremely challenging year.
Prospects: Xi has described the nation as entering “a new phase of COVID response where tough challenges remain.” With estimates of as many as 1.7 million COVID-related deaths by the end of April, those challenges are set to become a lot harder, particularly when a restive populace is demanding looser controls and the economy is struggling. Easier fiscal and monetary policy could be essential in propping up growth and preventing an escalation of internal dissent.
Japan: Prevent Monetary Mayhem
Slumping approval ratings, ministerial resignations, tax worries, and a sluggish coronavirus recovery have given Japanese Prime Minister Kishida Fumio little cause for New Year cheer.
In December, Kishida’s support rate sank to just 33.1 percent, compared to 63.2 percent in July, according to a Kyodo News poll. The ratings slump followed the loss of four Cabinet ministers over various scandals, including the ruling Liberal Democratic Party’s (LDP’s) links to the Unification Church, which were exposed following the shock assassination of former Prime Minister Abe Shinzo in July 2022.
Kishida was also forced by his own party to postpone planned tax hikes to cover increased defense spending. While the LDP agreed to the defense spending target, amounting to 2 percent of GDP by 2027, there is little consensus on how it will be achieved, whether through tax hikes or increased borrowing. Government debt is on course to top 1 quadrillion Japanese yen by fiscal year-end, or 262.5 percent of GDP, the highest among OECD economies.
The embattled Kishida faces further political challenges in 2023, including local elections in April and the Group of Seven summit, set to be held in his home constituency of Hiroshima in May. While no national elections are scheduled until 2025, Kishida will need to achieve respectable results in the April polls and a rebound in popularity ahead of the LDP’s presidential election, slated for 2024.
On the economic front, Kishida’s biggest challenge will be the appointment of a new Bank of Japan (BOJ) governor following 10 years of ultra-easy policy, with current Governor Kuroda Haruhiko expected to be replaced in April.
In what Nikko Asset Management’s John Vail called “probably the best kept secret of many years,” Kuroda shocked financial markets on December 20 with his decision to widen the BOJ’s target band for interest rates, causing Japanese bonds and stocks to slump and the yen to rally.
The Japanese yen hit a 32-year low in October against the U.S. dollar, and with Japanese consumer inflation hitting a 40-year high, Kuroda was under pressure to act amid a widening interest rate differential with U.S. and other central banks.
The selection of Kuroda’s replacement will therefore be a key test, with current Deputy Governor Amamiya Masayoshi and former Deputy Governor Nakaso Hiroshi among those touted as replacements. Any missteps by the new governor on “normalizing” policy could cause markets to flounder, with economists looking for any signs of an end to “Abenomics” style policies.
While Japan’s economy has returned to the size of its pre-pandemic level, the recovery has been sluggish, with real GDP shrinking by 0.2 percent on a quarterly basis in the September quarter. In its latest “World Economic Outlook” report, the IMF projected GDP growth for Asia’s second-largest economy of 2.1 percent in 2022 but just 0.9 percent in 2023, below the average for advanced economies of 1.3 percent next year.
And should the yen stay weaker, Japan’s economic output per person is set to soon trail both Taiwan and South Korea, having already fallen behind Singapore and Hong Kong due to a widening gap in labor productivity growth, according to JCER data.
Prospects: Preventing monetary mayhem over the selection of a new BOJ governor while mapping out a chart for higher defense spending will ensure a challenging start to 2023 for Kishida. The prime minister’s political longevity may well depend on how he manages these issues while also answering the call of “Kishidanomics” for greater income redistribution, amid the constraints of rising debt and the risks of any tax hikes causing recession.
Further reform to promote “Womenomics,” together with additional labor and product market deregulation, remain essential for an aging nation as it struggles to make up the productivity gap with its Asian rivals.
On the positive side though, Kishida can potentially benefit from the U.S.-led push for increased supply chain security, with Japan seen essential to “friend-shoring” as a key member of the Quad.
India: Keep the $10 Trillion Dream Alive
India’s dream of becoming a $10 trillion economy has been boosted by the Center for Economics and Business Research (CEBR), which sees the milestone being achieved as early as 2035.
“Although there are political factors that could hold India back, it has demographics on its side,” the London-based consultancy said.
According to CEBR, India should post an annual GDP growth rate of 6.4 percent over the next five years, followed by 6.5 percent in the subsequent nine years, which would see the South Asian giant rising from fifth in the World Economic League Table in 2022 to third by 2037.
The latest GDP data showed the world’s fifth-largest economy slowing to 6.3 percent growth in the September quarter, with rising inflation and pressures from war in Ukraine contributing to the slowdown from the previous quarter’s 13.5 percent gain.
The Reserve Bank of India (RBI) sees the economy expanding by 6.8 percent in the current financial year. However, with inflation remaining above the central bank’s target band of 2 to 6 percent, the RBI raised rates in December for the fifth month in a row, describing the inflation battle as “not over.”
Nevertheless, the Indian economy is still set to be among the world’s fastest growing in 2023. Projecting a 6.9 percent GDP expansion, the World Bank said, “India’s economy is relatively insulated from global spillovers compared to other emerging markets… partly because India has a large domestic market and is relatively less exposed to international trade flows.”
Yet critics say that Indian Prime Minister Narendra Modi lacks a coherent plan to cut red tape, increase productivity, and invest in improved education and training.
“Despite the government projecting a more investor-friendly image since India’s economic liberalization in the 1990s, the country’s historically protectionist and conservative economic policies remain well entrenched,” argued economist Chietigj Bajpaee.
Nevertheless, Modi’s stature as a global statesman is set for a boost, with New Delhi to host the Group of 20’s annual summit in September. Domestically, a splintered opposition poses little challenge to Modi extending his eight-year reign, with national elections not due until 2024.
In 2023, India will set a new milestone as it surpasses China as the world’s most populous nation, with an estimated 1.43 billion citizens. With a median age of just 27.9 years compared to Japan’s 48.7 years and South Korea’s 43.9 years, India’s “demographic dividend” should yield increased growth for some time to come.
Prospects: Further structural reform and enhanced social welfare to spread the benefits of economic growth more widely and cut unemployment are essential to India’s long-term success. Modi has succeeded domestically but faces a trickier balancing act abroad, having refused to condemn Russia’s invasion of Ukraine but also joining the Quad in balancing China’s rise.
Managing these growing risks both economically and politically will ensure another challenging year ahead for Asia’s emerging giant, as it seeks to maintain its growth aspirations.
With the coronavirus pandemic continuing to inflict a deadly toll on Asia, much is riding on the region’s leading economies, particularly China, to manage the human crisis and lead the post-COVID economic recovery.
In the meantime, to all Diplomat readers, our very best wishes for a healthy, happy, and prosperous Year of the Rabbit!
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