Asia Outlook 2021 – Bracing for Reflation

  • We are overall quite positive on the outlook for Asia in 2021, with an above consensus GDP growth rebound.
  • Covid-19 continues to have a big impact across all economies, with varying pivot points of the vaccine.
  • Central banks are likely to hesitate in unwinding their easy policies because of vaccine uncertainty in H1, currency appreciation and unchanged Fed policy rates.

Overall, we are positive on Asia’s outlook in 2021. We project an above consensus GDP growth rebound, yet benign inflation, placing Asia in a sweet spot. Asia’s sequential growth path may be bumpy into Q1 2021, until vaccines are widely distributed and due to developed market growth uncertainty. But these rolling virus waves are unlikely to derail Asia’s growth cycle since a double-dip is unfortunately expected in ASEAN countries. Into H2 however, we anticipate a sharper business cycle rebound, due to vaccinations, strong global growth and easier financial conditions, to name a few.

Central banks are likely to hesitate in unwinding their easy policies because of vaccine uncertainty in H1, currency appreciation and unchanged Fed policy rates. Further easing is expected in parts of ASEAN by Q1 and unchanged rates elsewhere. As vaccine certainty becomes stronger in H2, a gradual shift in tone is likely from some central banks.

China: A year of respite

In China, we expect stronger domestic demand, higher investments and consumption to lead to an upside GDP growth surprise. Even as policy normalization begins, rate hikes are unlikely in 2021, as inflation will stay low. Although exports of personal protective equipment and work-from-home products may be hit, China should benefit from a post-Covid-19 global recovery.

US-China frictions may ease under the Biden administration, which may prefer a rational, multilateral and less confrontational approach when dealing with China. China’s relatively moderate stimulus to cope with the pandemic, thanks to the aid from unexpected, impressive exports, reduces the need for both larger stimulus measures in 2020 and tightening and deleveraging in 2021, while an elevated current account surplus, a strong RMB and low inflation provide room for dealing with financial risks.

India: A new cycle begins

While we remained rather negative on India’s outlook since the end of 2018, things have taken a positive turn on its cyclical outlook in 2021 due to easy financial conditions. We look to pencil in an above-consensus GDP growth rebound to 9.9% year-on-year, the pick-up of which in the second half of 2020 continues to reflect normalization of activity following the stringent lockdowns.

Unfortunately, in the absence of vaccines, the growth path is likely to face occasional hiccups due to virus infections resurging in H1 2021, though unlikely to derail the cycle, which appears poised to accelerate owing to the lagged effects of easy financial conditions, a synchronized global recovery and likely “vaccine pivot” in H2 2021.

ASEAN-5: Different doses for revival

Although the region now appears to be moving into a recovery phase, the uncertainty surrounding the economic outlook remains very high, in our view, necessitating a greater-than-usual use of assumptions to underpin our forecasts. As is the case everywhere, our most relevant assumption is when the vaccine pivot point will happen locally. In other words, the point at which vaccines start to become more widely available and show demonstrative success in suppressing the virus.

Taking into account the procurement plans in ASEAN, which vary considerably across the region, we pencil the pivot points in Q2 for Singapore, Q3 for Indonesia and Q4 for Thailand, Malaysia and the Philippines. Our 2021 GDP growth forecasts for the region suggest a significant improvement across the board, but this reflects low base effects, particularly in Q2. We would therefore emphasize looking at output in level terms, and when it returns to the pre-Covid-19 levels of Q4 2019. We anticipate this real GDP to return the fastest in Singapore (by Q2 2021), and the slowest in Thailand and the Philippines (in 2022), with Indonesia and Malaysia falling somewhere in between, around H2 2021.

In Singapore, GDP growth is expected to be 7.5%, which is well above the official forecast range of 4-6%. Thailand, in addition to its heavy reliance on tourism, which will likely take time to recover, is once again facing the threat of a prolonged political conflict. Its GDP growth for 2021 is expected to be 3.2%, just under the consensus forecast of 3.9%.

The weak recovery in the Philippines is partly self-inflicted, as risks of a fiscal cliff are unlikely to abate quickly, given the size of the 2021 budget and political risks ahead of the May 2022 election. We forecast GDP growth in 2021 at 6.8%, below the consensus forecast of 7.8%.

In Malaysia, we foresee a tale of two halves: a weak H1 due to the ongoing resurgence of Covid-19 and political uncertainty, but better performance in H2 thanks to improving external demand and the onset of the vaccine pivot point. We forecast GDP growth in 2021 at 6.8%.

Finally, Indonesia’s GDP growth is expected to improve in 2021 with our forecast of 4.9% being very close to the consensus’ 4.7%. However, we still see a bumpy trajectory, in view of the risk of a resurgence in Covid-19 infections.

Australia: The journey back

The pandemic continues to affect our outlook on Australia. With Covid-19 numbers low, and mobility and survey data improving, the economic clouds are lifting in Australia. We expect a further recovery though 2021, aided by policy stimulus and stronger growth in Asia.

However, there are also some headwinds to look out for, including elevated Australia-China friction and slower population growth. Australia is not likely to get back to pre-Covid-19 levels of GDP until late 2021, while unemployment remains uncomfortably high, and inflation uncomfortably low over the forward horizon to end-2022.

This year also delivered a sea-change in the RBA’s thinking – with the cash rate cut to its effective lower bound, and a range of unconventional easing initiatives and aggressive (dovish) forward guidance introduced.

We do not expect the RBA to take any chances in 2021. We think it will remain patient amid further signs of growth, as it looks to help secure the recovery. Monetary policy (and market) risk is more balanced – those growth signs will likely encourage some to consider an early unwind of existing RBA support, although further easing elsewhere and still-low inflation could lead it to consider a QE-extension in mid-2021.

Asia strategy outlook 2021: A shot in the arm for markets

We expect more significant Asia FX appreciation (versus USD) into Q1 2021, while short-dated Asia bonds/rates and high yield bonds should perform. Global supports include positive vaccine developments, potential for more Fed and ECB stimulus, and expected policies from a Biden administration.

Locally, flow dynamics should remain favorable into Q1 2021, with a likely pick up in foreign portfolio inflows. Also, FX valuations are currently not a hurdle to Asia FX performance, with scope to price in the potential unwinding of tariffs on US imports from China. We are positive on PHP and THB in the near term but are more cautious on THB and IDR as we progress through 2021.

On rates, we are positive overall but see divergences based on growth, supply and flow dynamics.

For a more detailed insight into our 2021 outlook for Asia, read our full report here.


    Sonal Varma

    Sonal Varma

    Chief Economist, India and Asia ex-Japan

    Ting Lu

    Ting Lu

    Chief China Economist

    Euben Paracuelles

    Euben Paracuelles

    Southeast Asia Economist

    Andrew Ticehurst

    Andrew Ticehurst

    Week Ahead Podcast Host & Australia Economist

    Jeong Woo Park

    Jeong Woo Park

    Asia Economist


This content has been prepared by Nomura solely for information purposes, and is not an offer to buy or sell or provide (as the case may be) or a solicitation of an offer to buy or sell or enter into any agreement with respect to any security, product, service (including but not limited to investment advisory services) or investment. The opinions expressed in the content do not constitute investment advice and independent advice should be sought where appropriate.The content contains general information only and does not take into account the individual objectives, financial situation or needs of a person. All information, opinions and estimates expressed in the content are current as of the date of publication, are subject to change without notice, and may become outdated over time. To the extent that any materials or investment services on or referred to in the content are construed to be regulated activities under the local laws of any jurisdiction and are made available to persons resident in such jurisdiction, they shall only be made available through appropriately licenced Nomura entities in that jurisdiction or otherwise through Nomura entities that are exempt from applicable licensing and regulatory requirements in that jurisdiction. For more information please go to