Covid-19 Delta wave to weigh on Apac growth; US to replace China as growth driver: report

ASIA-PACIFIC'S growth is slowing as global trade is no longer rapidly accelerating, and the Delta variant of Covid-19 continues to spread, Moody's Analytics chief Apac economist Steve Cochrane said in an Aug 27 commentary.

As lockdowns dampen domestic demand, exports will remain a lifeline for the region, with the United States emerging as the strongest near-term driver of demand, he added.

Noting the extension of lockdowns in the face of Delta-propelled infections, he said: "The impact on the Apac economy will be deep for the current third quarter and could extend into a weak fourth quarter if the recent wave is not soon contained."

In South-east Asia, the current pace of vaccinations "does not bode well", he said, with low vaccination rates outside Singapore, Cambodia and Malaysia.

On Moody's Analytics' Relative Covid Economic Risk Index, Singapore, China, and Cambodia are seen as having the lowest risk out of 20 Apac economies, while Malaysia, Thailand, and Sri Lanka are considered to have the highest risk.

The index is based on three risk factors: the vaccination rate, with a weight of 50 per cent, as well as Covid-19 incidence and the death rate, with a 25 per cent weight each. High death rates and caseloads in Malaysia and Sri Lanka thus offset the relatively high vaccination rates in those countries.

With domestic production and consumption hobbled by Covid-19 measures, "exports will continue to be a lifeline to the Apac economies into early next year", said Dr Cochrane.

This is as labour market conditions improve in the US and Europe, boosting global consumer spending. Dr Cochrane sees the US replacing China as the greatest driver of global growth in the near term, as its fiscal stimulus carries US spending and investment into 2022.

In contrast, China's limited fiscal stimulus has eased and the pace of exports has slowed, with the official Purchasing Managers' Index dipping beneath the neutral threshold of 50. Retail sales are also "lacklustre", falling short of pre-pandemic levels.

Export performance will not be uniform across the region, however.

Exports have risen most in Taiwan, Indonesia, and India. Taiwan is expected to see continued strong demand for electronics and semiconductors, with new capacity for chip production due to be in place by mid- to late 2022.

Indonesia, however, "will continue to depend upon high commodity prices, which are uncertain given the downside risks from the waves of the Delta variant across much of the world". While India's pharmaceutical exports will thrive, its commodity exports similarly depend on uncertain global prices.

In Malaysia and Thailand, exports may face continued production shortages of autos and electronic products, due to labour shortages amid Covid-related movement restrictions.

Delta threat notwithstanding, in the longer term, "the region's outlook is firmer", said Dr Cochrane.

On the Moody's Analytics Country Risk Index - which takes a five-year look at macroeconomic, business, financial, social, political and security risks - Japan, South Korea, Taiwan and Singapore are among the least risky economies in the region as well as globally.

China and much of South-east Asia, too, rank among the second-tier "low risk" countries.

"Thus we do expect that once the economies of South-east Asia move beyond Covid-19, they will rebound at healthy rates," said Dr Cochrane.

Economies that are dominated by exports, particularly high-text exports, will perform well. These include South Korea, Taiwan, and China.

But those that depend on travel and tourism, such as Thailand, will be slow to rebound completely. In Thailand, Singapore, and Malaysia, "the support from their high-value export industries will be offset in the near term by a slow turnaround in their travel-dependent industries".

Meanwhile, the Philippines and Indonesia will struggle as vaccine shortages and ineffective Covid-19 social distancing measures create much uncertainty on the timing of a rebound.