Some upside in inflation in rest of Asia likely as China reopens

NEW DELHI: Multinational investment firm Morgan Stanley expects some upside to inflation in the rest of Asia as China reopened their economy after nearly three years.

"...we do see some upside to inflation from potentially higher oil prices as China demand improves, but think this will be offset by an improving supply situation," it said in a report titled 'AsiaEconomics | AsiaPacific - The Viewpoint: Rapid Disinflation and Growth Outperformance'. Powered By PlayUnmute Loaded: 0.20% Fullscreen

There have been concerns about whether China's reopening will bring spillovers to inflation in the rest of Asia.

The recovery in China, the report said, will "naturally mean higher demand for oil". China's oil demand is currently 1 million barrels per day below 2020-21 levels, held back by lockdowns and other restrictions. After January-March of 2023, Morgan Stanley expects the country's oil demand to start recovering, which it said would impart some upward pressure on crude oil prices.

"But the impact will also be mitigated somewhat by a more subdued backdrop for industrial and construction activity, which accounts for about 40 per cent of oil demand, given weak demand conditions. Moreover, the macro implications of a demand-driven rise in oil prices tend to be more manageable than was the case in early 2022 - when prices were driven by supply concerns," it added.

Further, separately, the report said inflation in 90 per cent of the economies in Asia is likely to return to their respective central banks' comfort zone by mid-2023, adding that a number of factors are also pointing toward an even faster pace of disinflation.

The multinational investment firm said the possible return of inflation to the "comfort zone" will lead to the pausing of monetary policy tightening by central banks.

So far, various central banks globally have raised interest rates so as to contain rising inflation.

"2023 will be a year of rapid disinflation. Inflation returns to the comfort zone for 90 per cent of the region by mid-2023, allowing central banks to pause tightening in 1Q23 (January-March). Winning the inflation battle means Asia's domestic demand will be protected, allowing growth to outperform," Morgan Stanley said.

Global food and energy prices have retreated to levels that are below where they were prior to the Russia-Ukraine conflict.

On a year-on-year basis, global commodity prices are in negative territory and a significant disinflationary impulse is looming.

Headline inflation has already peaked in nine out of 12 economies while core inflation has peaked in six out of 12 economies, the report said.

"We have long held a more benign view on the inflation outlook than the consensus. Our perspective is that Asia's inflation is more cost-push in nature. Labour market dynamics have not been distorted by pandemic-era policies nor are they overheating," it further said, adding that which implies that demand-pull inflationary pressures are less likely to emerge.

Moreover, on concerns of investors that China's reopening will lift inflation in China and spill over to other parts of Asia, Morgan Stanley said inflationary effects would be rather muted.

"At the starting point, China's labour market is weak. We expect labour participation to rise alongside labour demand. Moreover, weak industrial activity due to sluggish exports, an expected, counter-cyclical slowdown in infrastructure spending will constrain the rise in commodity demand and prices even as the drag from property activity will reduce," it said.