We see Asia’s recovery gaining strength and building breadth as more economies join the upswing. Underpinning this recovery are the best productivity dynamics since 2007, with the strong rebound in private capex making a compelling case for a self-sustaining recovery.

Gaining strength: Asia has had a good recovery so far. A sharp liftoff in exports and capex – both of which have recovered faster than in the previous three cycles – is the key reason for relatively strong growth. We forecast Asia’s GDP growth to stay strong in 2022 at 5.4%, which is 40bps above consensus.

Building breadth: We expect consumption, the laggard so far, to join in the recovery, unlocked by high vaccination rates. Nine out of 12 Asian economies will have achieved full vaccination rates of 80% or more in three months' time.

Policymakers around the region have also initiated plans to live with Covid as an endemic issue and are starting to gradually ease Covid-related restrictions.

Accelerating momentum: North Asia led the recovery and should sustain relatively strong rates of growth in 2022, In China, we see a lift in growth from 1Q22, supported by policy easing, accelerated infrastructure spending, and a reset of quotas on mortgage loans and energy intensity targets. In North Asia economies like Japan, Korea and Taiwan, growth momentum will likely be sustained by still robust exports and capex growth, as well as faster growth in consumption. The pace of growth in India and ASEAN – which had been the laggards – is catching up. Reopening boosts not just demand but supply as well, lifting production levels and allowing these economies to participate in the global trade boom.

Reviving productivity: Asia’s productivity dynamic is improving after a decade of weakness. An anemic global trade environment had led policy makers to rely heavily on policy stimulus to drive growth, raising leverage ratios. However, we expect the global trade cycle to remain strong and Asia’s growth to be driven more by exports and private capex, creating a favourable environment for reforms to reduce reliance on less productive sources of growth. This macro setup will look a lot like the 2003-07 cycle. Supported by the best productivity dynamics since 2007, a self-sustaining cycle is underway.

Three risks to our view – China, the external demand environment, and the Fed’s policy path: First, if the spillover risks from China’s property market are not contained by decisive policy action; second, if external demand weakens significantly; and third, if US inflationary pressures persist and remain above the Fed’s goals for longer, leading to faster and sharper rate hikes.