Over the past 12 months, Asia has been buffeted by overlapping international crises, including the COVID-19 pandemic and the Russia-Ukraine conflict.
But there is a good case for cautious optimism about Asia’s prospects for 2023. China has taken measures to stabilize the real estate market and reversed course on a zero-COVID strategy that imposed great economic costs. In Japan, substantial household savings will support consumption. India’s economic boom looks set to continue — propelled by massive investments in physical and digital infrastructure and manufacturing capacity, and tourists are returning to Southeast Asia. Bangladesh, the Philippines, India and Vietnam are among the countries expected to record the region’s highest growth rates next year.
Yet there are potential obstacles to regional recovery, including soft global demand that could hold back economies with a high dependence on exports, like the Republic of Korea and Taiwan. Following are five major risks to Asia’s growth prospects and stability in 2023.
The Fed’s campaign to control inflation through a series of interest rate rises has impacted Asian currencies and markets. The rise in food and energy prices has caused inflation to exceed central bank targets in most Asian economies. Tight labor markets are contributing to higher wages and more inflationary pressures in some parts of the region.
Continued monetary policy tightening in the U.S. and other OECD member countries could lead to large exchange rate depreciations, financial instability and balance-of-payment difficulties in economies with vulnerable fundamentals. There remains some threat of capital flight. Consumer and business confidence are likely to be impacted by high inflation and interest rates.
If Asian governments seek to shield households and businesses from higher prices through subsidies, price controls and easier lending, the result could be the trapping of resources in unproductive firms and a diversion of spending away from investments in physical and social infrastructure. Increased government expenditures could exacerbate inflation.
Mitigating this risk are indications that U.S. inflation may be peaking and that future interest rate…