Inflation in the United States and Europe has been rocketing recently, but it is unlikely to take off to the same extent in Asian economies, according to the expert speakers at our hybrid event on 19 July.
However, Hong Kong will probably see some increase in inflation, and the upcoming interest rate rises by the U.S. Fed will also have an impact.
Louis Kuijs, Chief Economist for Asia Pacific at S&P Global Ratings, said that economies from the U.S. and Europe to the Asia Pacific were holding up well, despite a slowdown in trade, and modest growth is expected to continue.
However, inflation is the main concern, having soared recently to 8.6% in the Eurozone and over 9% in the U.S. and the United Kingdom.
“The inflation was probably kick-started by energy and commodity increases, but it is the increase in core inflation that is worrying central bankers so much,” he said.
Core inflation is the figure when commodities and food – which are more volatile – are removed. Core inflation this year has reached around 6% in the U.S. and 4% in Europe, but has remained negligible in Japan.
“More than 80% of Japan’s economy is driven by domestic service companies and it is very hard to get wage increases, so Japan is not seeing energy and food price increases,” he explained.
Kuijs noted that high energy prices had been around for some time, but did not trigger the inflation that we are seeing today. “It is really a story of core inflation,” he said. During the Covid pandemic, the U.S. and many European economies rolled out large-scale support for businesses and households, which helped drive consumer spending.
“In the U.S., an already quite heated economy was getting a lot of help on the demand side,” he explained. “Firms started to pass on cost increases, and staff have been expecting pay increases.”
Asian governments largely did not respond in the same way. “One reason APEC doesn’t have overheated economies is because fiscal policy was more restrained during the pandemic,” Kuijs said.
However, central banks across Asia Pacific are facing domestic inflationary pressure, as well as the impact of U.S. interest rates rising. Ultimately, he expects that central banks across the region will raise interest rates, but not as much as the U.S.
Wei Liao, Senior Vice President and China Economist at PIMCO, then shared her insights on China’s economic landscape and the inflation issue. She said that, contrary to some media reports, the Mainland’s supply chains have continued to perform largely as normal in recent months, even amid Covid-related pressures.
“The market has often overreacted,” she said. “For example, markets were worried when Shanghai shut down, but exports held up very well, even during the lockdown.”
A bigger concern is China’s relatively low growth, and the impact on demand for commodities.
“The Central Government has rolled out fiscal stimulus to support infrastructure. But the property market is weak, which is commodity-intensive,” Liao said.
On the topic of property sector woes that have hit the headlines recently, she said that the proportion of troubled projects is actually quite small, so won’t affect the broader economy. Chinese households have high levels of savings and are unlikely to stop paying mortgages on a significant scale.
However, investors should be aware of the impact of the “regulatory storm” that the Mainland has seen recently. “This is not only in the property sector but also affecting tech and education,” she said. “It has had a negative impact on household incomes and has also affected perception.”
On a more positive note, Liao added that policymakers in China have more “bullets” to deal with any economic downturn, compared to other major economies. “They started tightening monetary policy in the second half of 2020, so there is a lot of room to ease if they want to.”
Going forward, Liao noted two key issues to watch out for in China. The first is if another wave of the pandemic arrives, requiring large-scale lockdowns. The second is the possibility of falling demand for exports if there is a recession in the U.S. and globally.
Turning to Hong Kong, the speakers agreed that while the city’s inflation rate may rise from its current low levels (1.3% in May), it is unlikely to increase dramatically in the near future.
“Hong Kong is definitely facing pressure from the global price increases,” Kuijs said. “However, we are not seeing very high wage increases.”
The Hong Kong dollar is also strong, compared to economies that provide Hong Kong with products, he added, so it is hard to see inflation rising too much.