Across the world, policymakers are searching for the best means to respond to a turbulent world replete with political, economic, financial and climate shocks. Asian economies are mostly highly open and therefore exposed to these disturbances. That means that the authorities in the region have to do two things. One is to craft strategies that best protect their economies from the near-term volatility caused by the monetary tightening that major central banks have been carrying out. The other is to work out game plans to help their economies adjust to the longerterm changes in the world economy. In recent weeks, several countries in the region have signalled their intention to bring in policy changes which if implemented will have significant implications for their economies.
Asian central banks set to enter a long pause in raising rates
Central banks in the region have to manage two separate issues. The first is the current volatility as financial markets anticipate the end of the most aggressive rate hiking cycle in forty years. The second is what to do with “higher-for-longer” interest rates — the prospect that global interest rates will remain at higher levels than the world economy has experienced for many years and for longer than expected.
As far as the near-term outlook for policy is concerned, we see most Asian central banks entering a long period when they will probably hold rates at current levels. The exceptions to this could be South Korea and Thailand where rates might rise as both countries have elevated levels of household debt which the governments would like to curtail. In Thailand’s case, fiscal policy is also likely to become more expansionary, requiring the central bank to tighten monetary conditions to contain potential inflationary consequences.
The region’s policymakers’ likely decisions will be shaped by how the US economy will behave. Our view is that, with growth slowing, inflation easing and unemployment likely to edge up, the monetary tightening cycle is over. There may be one more rate hike in the US but that will be the peak. Other major central banks such as the European Central Bank and the Bank of England are unlikely to raise rates in the near term.
Despite the downside risks, we believe that the US economy will manage to demonstrate greater resilience to sharp rate hikes than in past tightening cycles. Economic growth there will probably slow in the final quarter of this year and there may even be a shallow recession early next year but it will probably still register a small growth for 2024 as a whole. There are several reasons for this relatively benign view:
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• One is that companies and households are locked into lower and fixed-rate loans before the central bank raised rates and so are less damaged by higher rates.
• Moreover, job losses are likely to be contained. Companies seem to be cutting back on vacancies rather than slashing jobs as in previous cycles. So, even with small contractions in activity in the first half of next year, we see unemployment rates remaining relatively low at around 5% (up from 3.8% in August).
• Finally, companies are set to drive capital spending higher despite the short-term economic risks, given the big incentives put in place by the Biden Administration’s Inflation Reduction Act and Chips Act. Investment in new equipment, new factories and software will also expand because of the promise of transformational change unleashed by technological advances in information technology particularly artificial intelligence as well as in renewable energy, bio-medical sciences and the development of new materials.
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The next question is how the monetary authorities in our region will react to a period of higher-for-longer rates. One implication of this scenario is more financial instability. Investors now accept that their earlier view of major cuts in policy rates in 2024 will not pan out. Financial markets are therefore adjusting down valuations, resulting in the ongoing volatility in currency, equity and bond markets. We believe that this volatility will persist for several more months, during which Asian currencies could come under further downward pressures — raising the risk of another round of inflationary pressures as import prices rise. We would not be surprised if central banks resorted to regulatory and administrative measures to curtail speculation against local currencies.
Tantalising hints of shifts in China’s longer-term strategies
Outsiders’ focus on China has been overwhelmingly on stimulus policies to deal with the country’s economic downturn and the problems with the real estate sector and rising risks of defaults. This remains important. But with more signs that the economy is stabilising, we suspect that President Xi and his colleagues will want to turn their attention back to issues of strategic importance. The Chinese Communist Party will hold its third plenum meeting in either October or November. We think that the plenum could be the occasion for some important policy announcements:
• First, we could see more clarity on President Xi Jinping’s thinking on China’s economic development model. On a recent inspection trip to Heilongjiang province, the Chinese leader spoke about “new productive forces”, a term that is being increasingly discussed in Chinese circles, suggesting that something important is brewing. The authoritative Xinhua news agency observed that the term refers to “a new form of productive forces derived from continuous sci-tech breakthroughs and innovation that drive strategic emerging industries and future industries in a more intelligent information era”. Xinhua further commented that the new approach would do away with “the heavy resource input and massive energy consumption” that were the hallmarks of earlier development strategies. The plenum could provide more details on which industries of the future the Chinese leadership will want to focus their resources on.
• Second, even as China attends to its domestic economic growth requirements, it is not neglecting the broader geopolitical struggle with the US. A recent white paper issued by the Chinese government and titled “A Global Community of Shared Future: China’s Proposals and Actions” could provide clues. The paper itself restricted itself to broad principles for international cooperation while hitting out at the “might makes right” and “universal values” arguments propounded by the West.
In the coming weeks, we could see more substance added to these ideas. A refreshed version of the Belt & Road Initiative (BRI) could be one way to do this. With the tenth anniversary of the BRI approaching, China is hosting the third Belt and Road Forum for International Cooperation in October. It could use this occasion to launch a revised version of the BRI. Chinese commentators have mentioned, for example, the possibility that the revised BRI would incorporate more green elements
Other countries in the region are also considering groundbreaking policy shifts
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China is not the only country where deep thinking about the future is going on. Recent weeks have seen signals from leaders in Asean that new policy thinking is emerging in our region as well.
Just this week, Deputy Prime Minister Lawrence Wong, Singapore’s prime minister in waiting, provided some early hints of what his “Forward Singapore” new strategy will contain when its full report is released soon. Wong identified inequality and social mobility as major concerns that the government will address. His broad objective is “to advance the well-being of the broad middle while uplifting the lower-income”. Although not many details were provided, he indicated some of the policy changes that might ensue.
• First, he hinted at a remarkable departure from decades of aversion to the idea of unemployment benefits. Wong suggested that the government understood that the creative destruction that Singapore needs to undergo to adapt to rapidly advancing technology and other changes would hurt many workers. The government would therefore consider providing laid-off workers with some form of unemployment support.
• Second, he also signalled a stronger policy effort to uplift the incomes of lower-income groups. Several strategies are to be employed to achieve this. Those with vocational qualifications earn significantly less than those with higher-level university or polytechnic qualifications. The government will provide such workers with more opportunities to raise their skill levels. Wong also suggested a more aggressive interventionist approach to ensure that children born to low-income or otherwise disadvantaged families are given better opportunities in life.
• Third, while not directly addressing how all this might be funded, Wong seemed to hint that the government was not looking to impose higher taxes on the richer segments of society. Instead, he raised the possibility of incentives to promote philanthropy in Singapore, noting that Singapore lagged advanced countries in the West in philanthropic giving.
Similarly, Malaysia has also recently issued a series of policy papers. It would appear that with politics more settled now, the government is better able to look at long-term strategies again. The Madani Economic Narrative sets out the overall economic vision containing high-level targets and strategies. The New Industrial Master Plan (NIMP) 2030 was more substantive, with its focus on the industrial sector and cross-cutting missions across industries.
The government also issued a National Energy Transition Roadmap (NETR) which laid out policies, initiatives, and projects to shift Malaysia’s energy system away from fossil fuels towards greener, lower-carbon forms of energy. Finally, the mid-term review of the 12th Malaysia plan sought to align the original plan with the current government’s vision. While modestly increasing planned spending under the plan, the review also mentioned the need to retarget subsidies, a hint that subsidy rationalisation is in the works, despite the political risks to the current government of cutting subsidies.
Finally, Thailand’s new government under Prime Minister Srettha Thavisin is bringing new energy to policymaking. He has indicated that he will deliver on his Pheu Thai Party’s election promises of raising the minimum wage, offering direct cash transfers via a “digital wallet” and providing farmers with a minimum basic income. In addition, government officials have revived efforts to promote free trade agreements which could eventually lead to Thailand applying to join the Comprehensive and Progressive Trans-Pacific Partnership agreement. The government is also in a mood to think out of the box. For example, it is preparing to reconsider the proposed land bridge which would connect a port on the Andaman Sea side with a port in the Gulf of Thailand, providing a means of bypassing the congested Straits of Malacca.
After almost two years of intense focus on what the US Fed might or might not do, the focus is likely to turn back to what domestic policymakers will do. So long as there is no unexpected inflation shock, the key issue will be less what the region’s central banks will do and more the long-range planning that will be critical to realising the region’s economic potential.
Manu Bhaskaran is CEO at Centennial Asia Advisors
