Emerging Asia is becoming less shock prone, this along with enhanced economic credibility lowering long-term volatility of growth, inflation and interest rates, is making the region more attractive for insurers and investors alike, according to a recent report by the Swiss Re Institute.
Emerging economies, especially in Asia, are experiencing rapid growth and have made significant progress on disinflation in 2023. They are expected to outperform the rest of the world in terms of real GDP growth in the second half of 2023 and into next year.
That’s no mean feat given recent developments in the region’s two largest economies, analysts pointed out, stating: “First, economic data from China remain weak. That said, we did not assume large growth spill overs from its reopening year, so disappointing economic data now is not a big drag on the growth outlook for emerging Asia either.
“And second, the Bank of Japan has recently relaxed its yield curve control by raising the cap on the 10-year sovereign bond yield from 0.5% to 1%. Yet, fears of a sharp correction of asset prices as returns on the lowest-yielding global safe asset rose, have also not come to pass.”
Headline and core CPI inflation rates have fallen significantly in many emerging Asia economies, allowing some to cut interest rates this year. Weaker China data and the Bank of Japan’s decision to allow yields to rise have not had material impact on growth or asset prices in the region.
But there are downsides to this optimistic outlook, according to the Institute. first from potentially worse-than-anticipated slowdowns in major economies. The most uncertain factor in Asia is mainland China, and how a high youth jobless rate could negatively impact the economy.
To this, the Institute noted that more decisive fiscal policy support to boost confidence will likely be needed to stabilise GDP growth to meet the official target of around 5% in 2023.
A greater risk to Asia’s consumption growth story may be the return of food price inflation due to supply shocks. There are a number of issues and events that make this an increasing concern.
The current lower-headline and higher-core CPI pattern may reverse next year. Extreme heat this summer and the impact of El Niño is bad news for global agriculture, as is the expiration of the Black Sea agreement to allow grain exports out of Ukraine.
Additionally, in July, India imposed an export ban on certain types of rice. This is concerning , as India is the largest rice exporter in the world, and rice is the food staple for many Asian countries.
“On balance, in our view, the higher growth and lower inflation profile of emerging Asia this year and next implies that the “sacrifice ratios” (ie, the cumulative slowdown in GDP growth in return for cumulative disinflation), have been relatively low. In the past, an issue specific to emerging markets was sudden stops of capital inflows due to perceived institutional weaknesses (leading to “external dominance”),” analysts stated.
Adding: “Low credibility in turn used to lead to slower convergence of inflation to target at higher cost to growth. Arguably, the return of food price inflation risk notwithstanding, emerging Asia has emerged from the pandemic with enhanced credibility. That should mean more independent economic cycles, and less volatile inflation, economic growth and interest rates in the long run – conditions all favourable for insurers.”
