When will Asia's missing consumers return?
Shaun Roache, chief economist at S&P Global Ratings' Asia Pacific office / Courtesy of S&P Global Ratings
By Shaun Roache
The global COVID-19 pandemic is far from over, but the contours of a global recovery are emerging. In the U.S. and Europe, this recovery is built on a rapid vaccine rollout and substantial policy stimulus, including help targeted directly at households.
Across much of Asia, the picture is different. Here the vaccine rollout has been slower and policy stimulus has, for the most part, been less directly supportive for household incomes. The result is a lopsided global rebound in which consumer demand from the U.S. and Europe has been the thruster that has helped pull Asia along in its wake. This is not sustainable, however, and Asia will need its consumers to start spending more if its recovery is to maintain momentum in the next year or so.
Asia's performance during the early stage of the pandemic through early 2021 helped stabilize the global economy. In many countries, early border closures, rigorous social distancing, and widespread contact tracing, kept infections and deaths low. In turn, this helped economies that produce the durable goods now in high demand reopen factories quickly; China, Korea, Singapore, and Taiwan, all ramped up production to meet surging global demand for healthcare equipment, cars, and electronics. Supply bottlenecks and rising prices have since emerged, most notably for semiconductors, but Factory Asia has largely come through the pandemic test. This has boosted exports and fueled the recovery across the region.
Still, despite impressive health outcomes during the first stage of the pandemic and surging exports, households across Asia have been slower to reduce the spike in saving that naturally followed a period of enforced restrictions on movement and exceptionally high uncertainty.
For example, China's urban households saved over 40% of their disposable income during the first half of 2020, a rise of about 7 percentage points over pre-COVID levels. Since then, despite a steady normalization of social activity, saving has fallen only slightly; in fact, saving started rising again in early 2021. The flipside, of course, is soft household spending, evident in China's underwhelming retail sales recovery. Korea has trodden a similar path. During the first quarter of 2021, private consumption spending, in real terms, was still about 5% below pre-COVID levels, while exports were 5% higher.
We can clearly see these imbalances in global demand in current accounts which show the balance of external receipts and payments countries make. These balances rise when countries save more and spend and import less, relative to their trading partners. Asia's current account surplus, measured as a share of GDP, has risen about 2 percentage points to 3% of GDP during the pandemic. This is a large rise by historical standards.
Is this a problem for Asia's recovery? It could be. New variants are complicating the global re-opening, but the trend in most advanced economies is towards easing social restrictions. In turn, we should expect consumers in those countries to spend less on durable goods and more on services, including eating out and tourism. Asia's exports can continue growing but as demand for goods slows, their contribution to domestic growth will surely moderate over the next year. Unless the region's major economies can find a new economic engine, growth may slow much more than expected.
The outlook in Asia now depends squarely on the vaccine rollout. We are learning that aggressive suppression of the virus does not come without lingering economic costs. Even though low infections can allow governments to ease many restrictions, voluntary social distancing, and the risk that restrictions might return quickly are keeping Asia's households cautious. In the face of more infectious variants, even “gold standard” virus defenses are being breached, as Singapore and Taiwan have discovered in recent months.
The good news is that, after a slow start, the vaccine rollout is gathering speed across many parts of Asia. Governments have stepped up their efforts to secure supplies of global vaccines and boosted domestic production. Populations are losing their vaccine hesitancy as new variants spread. By the end of this year, China, Korea, and Singapore look set to achieve coverage levels the World Health Organization has suggested should provide widespread immunity. A second group, including Australia, India, and Japan should reach this milestone during the first half of 2022.
Once Asia's consumers see that the end of the pandemic is truly in sight, we expect confidence and spending to rise, particularly on services. This is important because this is where most jobs have been lost, particularly among irregular workers. For example, in Korea by June 2021, regular employment had risen about 2% above pre-COVID levels, but there were still almost 3% fewer irregular jobs, including temporary jobs and self-employment. These jobs account for almost all total employment and healing will not be complete until these jobs return.
We should expect to see both fiscal and monetary policies tighten at a more gradual pace in Asia as its recovery now lags behind those elsewhere, particularly in the US. We still see plenty of spare capacity across the region, especially in the service sector, which leaves many countries with space to allow growth to run well above normal for a while longer without worrying too much about inflation.
Central bankers will, of course, keep one eye on the U.S. Federal Reserve because experience teaches us that when U.S. rates start rising, it can lead to spillovers, including in currency and bond markets. Central banks also worry about rapidly rising asset prices, fueled by low interest rates. Still, tightening policies in Asia too quickly could generate even more problems, including a slower-than-needed recovery, a shortfall in jobs and, eventually, a failure to push inflation back to central bank targets.
Asia's consumers have been missing from the global recovery so far. We expect this to change over the coming 12 months as saving falls and spending picks up. This is important not only for Asia, but for the health of the entire global economy.
The writer is a chief economist at S&P Global Ratings' Asia Pacific office.