Trends to Watch
- Emergence of New COVID Variants
The emergence of new COVID-19 variants has added a new layer of uncertainty to the pandemic and brought disruption to the economic recovery. Many markets have extended social restrictions and delayed border reopenings, which will impede cross-border business in 2022.
- Faster Than Expected US Interest Rate Hikes
Minutes from the U.S. Federal Reserve’s meeting on 15 December 2021 indicate that rate hikes may come faster and sooner than expected, heightening concerns about potential capital outflows from emerging markets. While most countries in Asia Pacific are in no rush to put up rates, mainland China has already lowered its Required Reserve Ratio (RRR) and is likely to maintain an accommodative monetary policy in 2022.
- Rising Debt Among Mainland Chinese Developers
Following Guangzhou Evergrande’s highly publicised debt struggles in late 2021, there are fears that more mainland Chinese property developers will fail to resolve debt payments in 2022 amid falling sales, restricted access to credit, and slower economic growth. With real estate accounting for around one-fourth of mainland China’s economy, which is highly investment-driven, a potential debt crisis could derail the recovery in Asia’s largest economy.
- Onging Geopolitical Tension
U.S-China relations continue to deteriorate, with disputes spanning beyond trade into other areas such as supply chains and financial markets. Tension between mainland China and several neighbouring countries has also intensified, adding risk to cross-border investment. Investors and corporates are expected to review regional operations and consider China-plus-one policies to reduce the over concentration risk.
Regional Economy to Remain Steady but Mainland China Slowdown Poses Risk
Asia Pacific economies mostly recovered from the pandemic-induced recession over the course of 2021. While some countries including Korea and New Zealand have gradually withdrawn fiscal and monetary stimulus as inflation picks up, others such as Japan and mainland China are maintaining accommodative policies to support growth.
CBRE expects Asia Pacific to continue to see steady economic expansion in 2022, led by outsized growth in India and Southeast Asia. In mature economies such as Australia and Singapore, growth will be driven by a solid service sector rebound and strong consumption spending. The stronger growth expected in emerging markets such as Vietnam and Indonesia will be due to their relatively lower base in 2021 and continued export demand. With the rapid vaccine rollout and rebound in consumer sentiment, robust domestic markets will support steady economic growth.
Slower growth in mainland China will add some downside risk to the regional economy in 2022. Economic growth momentum was modest in H2 2021 due to a residential market downturn and authorities’ zero-COVID approach, which weighed on domestic consumption. With the economy set to remain under pressure in H1 2022, CBRE expects macroeconomic policy to become more accommodative in the coming months. In addition to policy easing in the real estate sector, recent measures include rate cuts and the extension of preferential tax treatment for annual one-time bonuses.
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Subdued inflation allows interest rates to remain low
In contrast to elevated inflation in the U.S. and Europe, prices in Asia Pacific remained relatively stable in 2021. This scenario has come about primarily due to the limited pandemic-induced disruption in Asia Pacific compared to other regions. CBRE expects the headline Consumer Price Index (CPI) in 2022 to be only slightly higher than the pre-pandemic average across the region. Slower growth in mainland China and the spread of the Omicron variant may affect growth prospects and the subsequent timing of monetary policy adjustments. While the U.S. Federal Reserve has signalled that its tightening of monetary policy may commence as early as March 2022, interest rates in most Asia Pacific markets, except Korea, Australia and New Zealand, will remain on hold as authorities seek to provide supportive conditions for an economic recovery.
New variants a cause for concern
The emergence of new variants of COVID-19 continues to make it difficult to predict the course of the pandemic, with the Omicron outbreak in late 2021 heightening worries about vaccine effectiveness and prompting many Asia Pacific markets to extend or tighten social restrictions and reintroduce strict border controls. While delays to border re-openings will inhibit the recovery in 2022, it is hoped that the situation will normalise as the vaccination rate in most parts of the region improves.
Supply chains set to normalise
Pandemic-related disruption to regional and global supply chains has driven a sharp increase in shipping costs since 2020. At the same time, surging consumption demand driven by the reopening of the U.S. and Europe and labour shortages in those markets has pushed up long-distance shipping prices. The global cost of shipping a container from mainland China to Europe or the U.S. has risen by more than 500% over the past two years, according to the Freightos Baltic Index1. Despite the frequent resurgence in new COVID-19 infections, CBRE expects supply chain pressure to ease over the course of H2 2022. Consumption demand will normalise while inventory levels increase, while shipping capacity will gradually improve. Multiple shipping data indices indicated a slight decline in prices for leading trade routes towards the end of 2021, with the Global Container Freight Rate Index down 16.3% from its peak in September 2021.
1 The Freightox Baltic Index measures daily 40-foot container rates by freight forwarders for 12 main shipping routes through Asia, Europe, and the Americas. The rates include shipping prices and other fees but exclude taxes and port fees.
Source: fbx.freightos.com, MarcoMicro, January 2022.