Emerging Asia inflation falling, but so is economic growth

Inflation is falling rapidly across emerging Asia. In fact, headline inflation is now back at its target levels in Vietnam, Thailand and India. Moreover, it seems like core inflation in many emerging Asian economies has already peaked. These developments point to further declines in both headline and core inflation in the months ahead.

Consequently, with inflation subdued, central banks in the region have become more dovish. Vietnam’s central bank, for example, has already begun lowering interest rates to support the country’s economic growth amid growing uncertainty.

Meanwhile, the Bank of Indonesia and the Bank of Korea have kept their policy rates unchanged for a fourth and third consecutive month, respectively. Also, the Philippine central bank has recently decided to stop hiking its policy rates. That said, emerging Asia economies are expected to be among the first to begin easing monetary policy as soon as the middle of this year.

However, despite inflation falling, the growth outlook for most countries in the region is quite weak. Taiwan’s economy, for example, has just slipped into recession after its GDP growth contracted by around 2.9% year-on-year in the first quarter, following a year-on-year decline of 0.8% in the fourth quarter of last year. This decline is mainly due to falling exports from slumping global tech demand and weak economic activity worldwide.

Meanwhile, Singapore’s advance GDP estimate suggested that first-quarter growth fell by about 0.7% from the previous quarter. The fall comes primarily from lower domestic spending due to a sharp rise in borrowing costs and residential property prices. Likewise, the Philippines’ economic growth in the first three months of this year contracted by 1.1% from the previous quarter mainly from lower exports and weaker consumption growth.

South Korea’s economy, on the other hand, grew at a modest pace of 0.3% quarter-on-quarter in the first quarter of this year, following a 0.4% decline in the previous quarter. Nonetheless, the economy should still face headwinds from weak exports and the effects of rate hikes by its central bank.

Although most economies are seeing slow growth, some are rebounding faster than the others. These include Thailand, Hong Kong and China. Thailand’s GDP growth in the first quarter of 2023 accelerated to 2.7% year-on-year from 1.4% in the fourth quarter of 2022, primarily driven by the recovery of the tourism sector. Similarly, Hong Kong’s economy grew by 2.7% year-on-year in the first quarter, mainly due to the rebound of tourist arrivals and domestic consumption.

In the meantime, China’s economic growth jumped by 4.5% year-on-year in the first quarter, marking the highest growth since the first quarter of last year, after the country lifted Covid restrictions. Overall, despite the currently weak growth in most economies, early monetary policy easing should help support the economic recovery in emerging Asia.

According to an OECD forecast, the region is expected to grow by around 5.3% by the end of 2023 and by 5.4% in 2024. This is close to the prediction made by the Asian Infrastructure Investment Bank at 5.2% in 2023. The Asian Development Bank, however, foresees more modest expansion of 4.8% by the end of this year. All told, many economists agree that the region should still be the world’s fastest growing regions this year.