There is a silver lining over the concerns around Asia’s sluggish vaccine rollout. Even though at a low level compared with the rest of the world, the vaccination drive has sped up recently.
Almost 30% of the population in Asia have received at least one dose thus far, which is up significantly from less than 7% at the end of April.
That said, participation varies massively across countries. Southeast Asian economies have lagged substantially behind their Northeast Asian counterparts because of supply constraints.
But there is good news: The bottlenecks in vaccine supplies from the West and China should be easing in the second half of the year as these countries move closer to the threshold for herd immunity. Beyond that, local production of vaccines is expected to ramp up in Indonesia, South Korea, Taiwan and Thailand.
But unlike many Western economies that have managed to relax restrictions significantly as vaccination rates rise, mobility restrictions are still in place across Asia, especially as regards cross-border mobility, and are actually greater than a year ago.
The reason is not only the relatively low vaccination rates but also growing concerns about the Covid-19 Delta variant and vaccine efficacy. In fact, new confirmed infections in Southeast Asia have increased this month. Indonesia is the worst-hit as of late but elsewhere in Asia, Japan, Singapore and South Korea are also experiencing a rapid increase in cases.
With suppression measures remaining in place longer than originally expected, Asia’s growth recovery is drifting downward, especially in Southeast Asia. Imports from China are still helping but domestic demand remains subdued.
An additional problem is the rather limited fiscal and monetary space, especially in Southeast Asia. The massive increase in public debt also limits the scope of additional government spending, particularly in countries where borrowing costs are relatively high or access to funding is constrained. This is in clear contrast to developed economies where the room for fiscal and monetary stimuli still exist.
In fact, fiscal consolidation is starting in Asia already, as shown by China’s much slower local government bond issuance in the first half of the year. It is, however, still to be seen whether China will continue with such fiscal consolidation as the economy has clearly peaked and the deceleration in GDP growth for the second quarter is faster than previously expected.
The recently announced cut in China’s reserve requirement ratio is a clear sign that Beijing might not be satisfied with such a fast deceleration in growth and will take action to avert it. This is not a space that policymakers in Southeast Asia may have, especially in the event of a relatively imminent tapering by the US Federal Reserve.
In addition to the monetary and fiscal spaces, Asian economies are affected differently by the Covid-19 restrictions, especially as regards tourism. This is the case in Hong Kong, Singapore, Thailand and, to a lesser extent, the Philippines. Others are more dependent on exports, such as Taiwan or Vietnam and, thus, less affected by cross-border travel restrictions.
In short, 2021 will not be as bright a year for Asia as originally expected. Some economies will still keep growth expectations in place, such as China, but with increasing difficulties in the second half of the year unless a new round of fiscal or monetary stimulus is conducted.
The situation in Southeast Asia is much more complex as the policy room is more limited and cross-border restrictions tend to impact more. Such problems will not be fully solved with an acceleration in the vaccination rate, as new variants and lower-than-expected efficacy of some vaccines complicate matters further.
Alicia Garcia Herrero is chief economist, Asia-Pacific, at Natixis. Junyu Tan is economist, Asia-Pacific, at Natixis.