Delta blow knocks wind out of Asia’s economic recovery
Asia’s robust economic recovery from last year’s coronavirus low is losing momentum as a surge in COVID-19 cases sees shops empty again and factories close, dimming prospects for corporate profit growth after a blockbuster half year.
The rapid spread of the highly infectious Delta variant of the novel coronavirus and low vaccination rates have caught much of the region off-guard, especially in emerging markets, even as economies in Europe and North America reopen.
“It’s clear that economies across the region are suffering more from COVID-19 than they previously did. The biggest factor is that Asia is poorly vaccinated,” said Rob Carnell, Asia-Pacific head of research at ING in Singapore.
While year-on-year corporate and economic indicators continue to show strong recovery, flattered by comparisons with 2020’s sharp declines, quarter-on-quarter indicators reveal flagging momentum.
“There’s no mistake there will be a slowdown in the third quarter,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
In the near-term, much depends on vaccination progress in Southeast Asia – a major production base – and whether China takes extra steps to support its economy, Fujito said.
Toyota Motor Corp (7203.T), the world’s largest automaker by sales volume, said last week it would cut September production by 40% from its previous plan due to the chip crunch, though it retained production and sales targets for its fiscal year.
Regarding broader parts supply, Toyota executive Kazunari Kumakura said, “The spread of the coronavirus and lockdowns in Southeast Asia had a major impact.”
Factory activity in the region contracted in July at the fastest pace since June last year, IHS Markit data showed.
“That’s quite a strong signal that economic momentum in Southeast Asia will slow in the third quarter,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore.
Delta outbreaks in Southeast Asia have caused supply chain headaches for many of the world’s largest manufacturers, many of which rely on auto parts and semiconductors made in low-cost bases such as Thailand, Vietnam and Malaysia.
“Because of those risks, the environment surrounding us remains unstable,” Ikeya said.
In Malaysia and Vietnam, lockdown measures and cases of infection have forced factories to suspend operations.
The extent of any economic slowdown in Asia will not be fully known until governments release third-quarter gross domestic product (GDP) estimates later this year.
Asian economies that were moving from a state of relative openness to lockdown will probably see their GDP contract quarter-on-quarter, said ING’s Carnell.
ING has already trimmed its growth forecasts for Thailand, Malaysia, Indonesia, the Philippines and Australia, he said.