Geo-political risks: Indo-Pacific arena heats up Omicron variant: Mere speed bump rather than pothole in path to recovery

Highlights from the CAA Weekly Table:

Asian economic prospects:

• China is at a turning point: The real estate contraction is hurting and there are signs of behavioural changes which could deepen a slowdown. The authorities are likely to shift to a more nuanced approach to the pandemic combined with carefully calibrated policy support.
• Elsewhere economies remain on a recovery path: India’s activity indicators remain positive but there are risks to economic stability. The South Korean and Malaysian economies are performing well but might moderate a tad. The Philippines will suffer more from the the omicron variant, so its path to recovery might be slower. Indonesia’s recovery remains on track but a rebound in demand could stir price pressures.

 As the year begins, where does the region stand?

(A) Geo-political risks: Indo-Pacific arena heats up

• The US and Japan are further strengthening their defence ties as they face up to China’s challenge: they will step up collaboration on military technology. Japan & Australia have deepened their defence cooperation through their new Reciprocal Access Agreement. Japan is also extending its naval build-up.
• China may have erred in pressuring Indonesia over the latter’s oil exploration activities in waters claimed by China but belonging in Indonesia’s exclusive economic zone. This is likely to push Indonesia into a more robust stance towards China.
• China’s BRI projects may be turning out to be costlier than it had expected. Sri Lanka, where China is a major investor is pressing China to restructure its debt as its economic crisis deepens. In Pakistan, where China made its biggest BRI bets, project returns are lower than expected and debt repayments will need to be restructured. Several Chinese nationals have
  also been killed in terrorist incidents, adding to China’s disappointment.
• China is likely to recalibrate strategy to deal with these challenges. It needs to dial down its assertiveness towards other Asian countries and will revise its BRI to be more cautious and selective in its commitments.

Omicron variant: Mere speed bump rather than pothole in path to recovery

• PMI surveys show the regional economies performing well. Manufacturing is supported by improving demand. Price pressures, while diminishing somewhat, remain a risk, though.
• The omicron variant will produce a surge in infections across our region. However, if the pattern in South Africa is repeated, this surge will end fairly quickly: Our baseline scenario is for caseloads to peak later in early February before falling sharply by March.
• The economic damage is likely to be limited in duration and scale because governments are avoiding overly stringent responses, helped by rising vaccination rates. Consumers and businesses have also learnt to adapt better to surges of infections.

Read more: CAAWeekly-10Jan22.pdf