Skip to main content

Why Asia is likely to escape the global inflation scare

8 February 2022

Sue Trinh, Head of Macro Strategy, Asia   

Asia isn’t immune to emerging global macro headwinds. The region’s overall growth picture this year is likely to be mixed; however, there are good reasons to believe that inflation isn’t likely to dent the continent’s prospects.

It would be disingenuous to paint a rosy picture of the region’s growth prospects— important challenges remain. It’s undeniable that economies in the region have a long way to go to recoup output that’s been lost due to disruptions brought about by the pandemic. In our view, the biggest concern remains weak consumer demand, which will be exposed by the looming downturn in export growth.

The upshot, however, is that policymakers in the region can afford to be patient when it comes to monetary policy normalization. While prices are expected to tick up further, large output gaps—the difference between an economy’s actual output and its potential output—should help keep underlying price pressures in check. As such, we believe Asia will escape the worst of the global inflationary shock, particular versus other emerging-market (EM) economies, even if inflationary pressures heighten as a result of ongoing global supply bottlenecks.

Asia is better positioned to manage rising price pressure

Broadly speaking, Asia’s milder inflation outlook comes down to one simple factor— trade surpluses. Economies in the region were able to maximize export production through much of the past two years. At the same time, the surge in pent-up demand in Asia after the reopening wasn’t as strong relative to other regions, particularly when compared with other EM economies.

Chart 1: EM economies: aggregate trade balances


Chart 2: Household consumption growth

Much smaller-ramp up in Asia vs. other EM in past year

Source: Macrobond, Manulife Investment Management, as of January 7, 2022. EM refers to emerging markets. YoY refers to year over year.

One other set of data also supports our view that inflationary pressure in Asia is likely to be more tamed: long-distance freight rates. The rise in intra-Asia shipping costs has been much more muted in comparison with other regions, thanks to excess manufacturing supply and relatively weaker consumer spending. An important takeaway here is what this means in regard to monetary policy: For the region as a whole, we expect to see policy normalization take place at a much slower pace and at a lower magnitude relative to previous cycles and other EM economies.

Chart 3: Shipping costs from Asia have risen dramatically since the pandemic

Source: Bloomberg, Macrobond, Manulife Investment Management, as of January 13, 2022.

The strongest macro stories in Asia

Taiwan and Vietnam

These two economies are already growing above their long-term trend GDP levels, and consensus forecasts point toward a Goldilocks regime of accelerating growth and decelerating inflation this year.

In Taiwan’s case, GDP is likely to be boosted by a consumption recovery and steady support from investment. Continued global demand for semiconductors amid tight supply should help support Taiwan exports even as global consumption patterns normalize.

Meanwhile, economic activity in Vietnam has resumed much faster than anticipated following extensive factory disruptions in Q3. Fiscal support also continues unabated. Vietnam’s parliament has approved a stimulus package worth ~5.5% of the country’s GDP, with a focus on assisting virus-hit businesses and workers. Notably, around half the package is focused on increased infrastructure spending for 2022/2023. In our view, foreign direct investment into Vietnam should underpin GDP for some time.

Singapore and Malaysia

These two economies may be starting the year at below-trend GDP, but we think they have strong potential to recoup lost output. In Singapore, the pace at which vaccination/booster shots are administered has enabled a calibrated reopening; a broad-based recovery therefore seems feasible with an improving labor market. In Malaysia, an accelerated vaccination rate and higher government spending ahead of the upcoming election—widely expected to take place in the second half of the year— should support domestic demand.


Personal consumption, particularly of in-person services, has been picking up since the state of emergency was lifted last September. Nonetheless, prices should stay benign, and we believe any effort from the Bank of Japan to withdraw liquidity will lag its developed-market peers.

No rush to normalize monetary policy

Overall, the macro picture in Asia is likely to be mixed; however, the operating environment is likely to be more favorable for select economies in the region. Crucially, the relatively muted rise in consumer demand and existing excess capacity mean that inflationary pressure on the continent isn’t likely to be as acute as in other parts of the world—implying that the likelihood of a mad dash to normalize monetary policy is much lower.

Download full PDF


  • The Fed remains hawkish, but easing could occur before the end of 2023

    The Fed’s decision to raise US interest rates by 75 basis points to a target range of 3%-3.25% was well priced into the markets.We describe the factors contributing to the Fed’s increasingly hawkish tone and explain why easing could occur before the end of 2023.

    Read more
  • After four interest-rate hikes, what will the Fed do next?

    On July 27, the U.S. Federal Reserve hiked interest rates for the fourth time this year, raising them by another 75 basis points. What does this tell us about the FOMC and what does it mean for growth?

    Read more
  • China’s policy tailwinds set economic recovery in motion

    Chinese equities are poised for a brighter outlook in the second half of 2022. Policy tailwinds are paving the way for a gradual economic recovery, as well as structural themes and opportunities in Chinese equities.

    Read more
See all
  • The Fed remains hawkish, but easing could occur before the end of 2023

    The Fed’s decision to raise US interest rates by 75 basis points to a target range of 3%-3.25% was well priced into the markets.We describe the factors contributing to the Fed’s increasingly hawkish tone and explain why easing could occur before the end of 2023.

    Read more
  • The high-yield market isn't signaling a recession

    Through the interest-rate volatility and higher inflation so far in 2022, we haven't seen a reason to abandon high yield. If anything, the higher-quality segment of this market could provide a welcome boost to a portfolio's risk-adjusted return potential.

    Read more
  • U.S. banks’ fundamentals continue to strengthen despite the economic slowdown

    The latest quarterly earnings reports from U.S. regional banks confirm the favorable investment outlook as loan growth and an improved interest-rate environment provide a tailwind for the industry, in our view.

    Read more
See all