A household spending rebound underpinned Asia’s resilient growth in the first half of 2022. Despite an Omicron wave at the start of the year, worsening stagflation shocks due to the war in Ukraine, and China’s lockdowns, private consumption growth has been robust.
This undoubtedly reflects pent-up appetites. With most of the region under strict social-distancing measures well into late 2021, COVID fatigue was clearly on the rise, and the consumer was raring to spend. But it also helps that, unlike in most Western economies, real incomes have not declined in Asia. With wage growth outpacing inflation, consumption has been boosted by re-openings and rebounding tourism. At the same time, governments have stepped up measures to shield consumers from the increase in consumer prices and normalising financial conditions.
Exhibit 1: Global downturn will put another dent in Asia’s consumption recovery but not derail it
Bottom-up data signal a turn
At first glance, retail sales trends do not appear particularly discouraging. South Korea’s weakness likely reflects a rotation from goods to services, as consumption posted strong sequential growth in the second quarter. That said, retail sales in some countries, such as Thailand and Singapore, are recovering from very depressed levels and may be peaking. At the same time, consumer sentiment surveys present a more sobering picture (Exhibit 2). Confidence indices are generally trending lower, with Indonesia, India and the Philippines notable exceptions.
Exhibit 2: Rising inflation has hit consumer sentiment
This raises the question of whether a downturn in consumption is just around the corner. It isn’t unusual for real consumer spending to respond with a lag during periods of high inflation. Households may not have factored in price increases into their budgets, given the continuing debate over the persistence of what remains largely supply-side-driven inflation.
A slowdown is in the offing
Downside pressures, in our view, have risen. While China’s re-opening will impart a positive impulse to exports in the third quarter and support earnings and consumption, we expect momentum to slow thereafter and remain muted in 2023 as the external backdrop weakens considerably. In line with this, we forecast Asia ex-China’s consumption growth to slow to 3.2% in 2023 from 4.6% in 2022.
Looking at intra-regional dynamics, we think that Northeast Asia economies will underperform India and Southeast Asia (Exhibit 3). While South Korea’s consumption growth has been resilient in the face of the region’s most aggressive monetary tightening so far, we do not think this can sustain.
More generally, Northeast Asian economies’ greater economic integration with China and reliance on certain exports as drivers of growth, exposes it to stronger headwinds in an environment of modest recovery in the mainland and surging recession fears in the US and in Europe. Most Southeast Asian economies are also open and subject to similar downsides, but they benefit to a degree from trade diversification and a greater contribution of tourism to employment and growth.
Exhibit 3: Consumption will likely slow more in Northeast Asia than elsewhere
But in the short term, Asia seems better placed than others
Globally, however, Asia’s consumption is likely to continue growing at a faster pace than other regions in 2023. Four factors underpin this divergence.
Living with COVID
With most of Asia now having transitioned to living with COVID, we expect fewer disruptions to activity and spending from containment measures, although there are important exceptions. China still has a zero-COVID strategy, and Hong Kong and Japan also have strict policies in place to limit a renewed rise in infections. Elsewhere, however, there’s little inclination to re-impose severe social distancing to tackle new COVID waves. This will give Asian consumers more scope to spend going forward and bring them on par with consumers in other regions that switched to an endemic COVID approach much earlier.
Slowing but positive real income growth
Labour markets have bounced back with the easing of containment measures. This has fuelled a solid increase in wages that has outpaced inflation. The smaller divergence in Asia’s inflation from “usual” trends, as compared to the West, has also helped. We expect the labour market recoveries to continue into 2023, as employment in high-contact services and tourism is likely to rise and participation rates are still below pre-pandemic baselines in most economies (and below pre-pandemic levels in some).
With labour supply rising incrementally and the much weaker global outlook next year, we expect the pace of real income growth in Asia to slow in 2023 from 2022. But it will still likely stay positive in most of Asia as it coincides with declining inflation (Exhibit 4).
Exhibit 4: Rising real incomes are positive for consumption
The savings buffer
Developed Asian economies have the added advantage of substantial excess savings accumulated over 2020 and 2021 due to the generous fiscal measures announced to support households through lockdowns. This gives them the option of running down the savings rate to below pre-pandemic levels in the short term to support consumption. The cushion is not as large for emerging Asian economies, but savings rates remain above pre-pandemic levels in most of the region, and we expect households to dip into savings over 2023 as disposable income growth slows. As such, we see personal savings rates in most Asian economies falling to below 2019 levels next year.
Policy is less accommodative but still supportive
Following the Fed’s aggressive moves and off-cycle hikes in Singapore and the Philippines, we now expect more front-loaded rate hikes in the second half of 2022. That said, it’s important not to overstate the impact of hikes on consumption. First, despite a rise in Asian household debt levels in the aftermath of the pandemic, they remain well below alarming thresholds, with the exception of South Korea, Hong Kong and Thailand. Second, prevailing output gaps and less severe inflation problems will discourage Asian central banks from moving in lockstep with the Fed. While monetary conditions will be less accommodative, we do not expect rate hikes to be so rapid as to severely constrain activity (Exhibit 5). Lastly, notwithstanding the ongoing fiscal consolidation, governments could play an offsetting role. As noted, Asian governments have been quick to announce subsidies, cash handouts, tax cuts and other measures to lessen the impact of global price shocks on consumers. While some of the measures will lapse this year, we expect authorities to be prepared to act to prevent a collapse in consumption.
Exhibit 5: Aggressive monetary tightening is not on the cards
Notwithstanding the short-term consumption growth outperformance, the combination of external headwinds—a hawkish Fed, high energy prices and a downshift in Chinese growth—are impeding Asia’s post-COVID recovery. Additionally, the pandemic has created several domestic challenges that are also acting as constraints on consumption and investment recovery.
For Asian economies to overcome these challenges and reach pre-COVID growth trends, consumption will have to grow much faster than we currently anticipate.
Priyanka Kishore has more than a decade’s experience in macroeconomic research and forecasting across emerging markets, with a special focus on India and ASEAN. She currently leads Oxford Economics’ Singapore Global Macro Services team and is responsible for overseeing the firm’s South and South East Asia research.