Asia’s Reflation, Vaccines and Growth Resumption

Asian economies have been relatively resilient thanks to better pandemic management and strong export growth, particularly in North Asia. However, the state of inflation has remained subdued throughout the region so far, with the average Consumer Price Index (CPI) lower than that in the US. The strong export recovery has also led to wider current account surpluses and comfortable FX reserves, which also make emerging Asia more resilient towards real rates which have been rising in the US.

The mild inflation offer policymakers ample room to nurse the economic recovery, without having to worry too much about capital outflows and the exchange rate impact of higher US real rates. China is an exception to this relatively relaxed policy attitude as policymakers have warned about the risks of an asset bubble and associated leverage in equity and property markets. While policy is not expected to cause sharp deleveraging, investors could see drier excess liquidity.

The pace of vaccinations in Asia is relatively slow compared to many Western countries, especially relative to Asia’s large population. Many key markets only began large scale vaccinations in February, with more likely doing so in March-April. Meanwhile, the number of new and outstanding cases have fallen dramatically across the region. However, Citi analysts see some likely acceleration in vaccine progress in coming months. China now has four approved vaccines and India is a vaccine production hub that is gearing up capacity. Together with China, they account for half of global production. With an efficient vaccination rollout, Singapore could be among the early candidates to take part in international travel arrangements for “vaccine passport” holders.

Along with the vaccinations, travel resumption is just a matter of time. Citi analysts look at China’s recent experience for clues on pent-up demand. In 2H 2020 and during this year’s Lunar New Year holiday, China showed massive demand growth for some of most pandemic battered industries (e.g. travel & leisure, retail, hospitality, and gaming), as both revenue and pricing power return to the businesses. The lack of intercity and international travel did not discourage consumption, but redirected it to local demand in a massive way.

When travel is possible again, this could also see an outpouring of demand for tourism and related businesses in the rest of the region, adding to the eventual recovery in local demand once COVID-19 restrictions are largely relaxed. Southeast Asia is a cyclically-oriented region that Citi analysts prefer in global equities and tourism, hospitality, airlines, retail and gaming are key industries that could benefit the most from this pent up demand.