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On the path to recovery

Danial Norjidi

Due to the emergence of COVID-19 new variants and elevated inflation from the combined effect of supply shocks and strong pent-up demand, the Asia-Pacific Economic Cooperation (APEC) region’s economic growth is expected to be moderate, according to a report from the APEC Policy Support Unit.

In a press statement, APEC Policy Support Unit Director Dr Denis Hew said, “We are dealing with multiple headwinds that derail our push for recovery.

Among the highlights of the APEC Regional Trends Analysis, Update of February 2022 is the gross domestic product (GDP) of 5.8 per cent in 2021, which was lower than the six-per-cent forecast in the November 2021 edition of the report.

“Adding to that, growth in APEC will remain uneven mostly due to disparities in pandemic management and vaccine coverage,” he said. “China’s modest economic growth is also expected to have some impact on the economic performance of the region.”

APEC is expected to moderate at 4.2 per cent in 2022 and 3.8 per cent in 2023 as multiple challenges derail global economic recovery.

The report added that growth within APEC will remain uneven due to disparities in pandemic management and vaccine uptake as well as narrowing fiscal space and adjustments in monetary policy support.

Higher inflation, the report said, poses an additional challenge as it has already driven some economies to tighten monetary policy settings, which could have a dampening effect on economic activity, adding that APEC’s inflation rate doubled to an average of three per cent in 2021 compared to 1.5 per cent in 2020, thanks to higher energy and food prices.

APEC Policy Support Unit Researcher Rhea C Hernando, who authored the report, said, “We expect inflation to moderate to 2.5 per cent in 2022, with a further decrease to 2.3 per cent by 2023.

“Authorities need to continue to anchor inflation expectations with clear monetary policy intentions, and this, along with the stabilisation of global and supply conditions, will help bring down inflation.”

The report also highlighted how public debt in the region increased to around 65 per cent of GDP in 2020, compared to the pre-pandemic 10-year average of 49 per cent. The significant increase is led by the massive fiscal response to cushion the blow of the health and economic crisis brought by COVID-19.

“Governments are faced with the inevitable option to scale back their fiscal stimulus and shift to a more targetted and calibrated approach to continue their support to vulnerable households and viable businesses,” Hernando added. “However, narrowing fiscal space and tightening monetary policy could slow down consumption and overall economic activity.”

Moving forward, it was recommended that APEC economies continue to prioritise the health of the people in the region to pave the way for recoveries, re-opening and rebuilding.

The report also noted that APEC GDP grew at a slower pace of 4.2 per cent in Q3 2021 following a strong rebound of 10.1 in Q2 that year, which reflected “the impact of the Delta variant that prompted a re-imposition of movement restrictions amid a surge in infections.

This translated into disruptions in supply chains and reduced consumption, slowing down economic activity”.

The emergence of the more contagious Omicron variant, it added, has exacerbated supply chain disruptions and sustained fears of new mutations.

“Compounding these concerns is rising inflation as supply shocks combine with strong pent-up demand. Higher inflation has already driven some economies to tighten monetary policy settings, which could have a dampening effect on economic activity. The moderation in China’s growth could also adversely affect its economic partners within the APEC region,” the statement said.

It also highlighted that, as challenges multiply, priority should be focussed on boosting health systems and ramping up vaccination rates.

“Widening access to vaccines, tests and treatments must go hand in hand with increasing the capacity of economies to ensure proper storage, efficient distribution, and availability of medical workers and supplies to sustain vaccination programmes.

“It is also imperative to address vaccine hesitancy through public information campaigns that focus on protection and correcting misinformation.” While the fiscal policy measures implemented at the onset of the pandemic were comprehensive, a shift towards a calibrated and targetted approach is warranted given the narrowing fiscal space and inflationary pressures, the report said.

Support packages should thus be directed at vulnerable households and viable businesses.

“At the same time, monetary policy needs to be communicated clearly to anchor inflation expectations, while remaining agile and able to immediately deploy tools at its disposal to rein in inflation.”

The report added that global and regional cooperation mechanisms continue to play an important role in recovering from the chaos wreaked by the pandemic and rebuilding stronger economies.

Lastly, the report underlined the APEC region’s Aotearoa Plan of Action (APA) as the right vehicle that comes at the right time.

“The APA implements the Putrajaya Vision of ‘an open, dynamic, resilient and peaceful Asia-Pacific community by 2040, for the prosperity of all our people and future generations’ by setting out individual and collective actions under three economic drivers: trade and investment; innovation and digitalisation; and strong, balanced, secure, sustainable and inclusive growth.”

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