Economic Letter From Asia: The Year in Review

In this week’s letter, we look back at and review some of the key trends that have shaped the outlook for Asia this year. While growth picked up in several parts of the region earlier in the year, signs of a slowdown have emerged as we head toward year-end (Chart 1). Disinflationary trends have continued in many economies, welcome news for central banks across the region. However, the growth and inflation landscape remains uneven. Economies like Japan and India have experienced slower growth, while others such as Singapore, Taiwan, Malaysia, and Vietnam have seen improvements, in part driven by strong demand for electronics and semiconductors (Chart 2).

On monetary policy, the anticipated regional alignment with the Fed's easing cycle has not fully materialized. Instead, many central banks in Asia have opted to keep policy rates higher for longer, thanks to the influence of various domestic factors (Chart 3). Touching on semiconductors, key players like Taiwan and South Korea have reaped significant benefits from the AI-driven surge in demand, while China’s pre-emptive purchases of semiconductor equipment have finally started to taper off (Chart 4). Turning to financial markets, Asian equities largely tracked their US counterparts through early October. However, market expectations were disappointed by China’s underwhelming stimulus plans, triggering sell-offs across regional markets, while US equities maintained a broader upward trend (Chart 5).

Lastly, in the political arena, both India and Japan saw their incumbent governments retain power, although with notable losses in parliamentary seats, raising some concerns over future economic policy direction (Chart 6). And as we head into December, uncertainty remains—particularly following President-elect Trump’s recent victory in November. We will continue to explore these developments and their potential impact for 2025 in next week’s publication.

Growth and inflation Asia-Pacific economies had plenty to celebrate this year, as growth strengthened on average while inflation remained well-behaved in many economies. As shown in Chart 1, GDP growth rates rose from the lows of 2023, averaging just under 4% y/y in both Q1 and Q2. That said, while growth momentum persisted in some economies during Q3, it slowed further in many others. Meanwhile, the region experienced further disinflation, with average CPI inflation falling from a peak of 2.9% y/y in May to just 2% in October—a level at which many central banks would likely feel comfortable. However, a deeper dive into economy-specific nuances reveals disparities in the relationship between growth and inflation across the region's economies—an issue we will explore in the next section.

A closer look at economy-specific developments, as shown in Chart 2, reveals a divergent picture of growth and inflation across Asia-Pacific economies. Starting with growth, economies like Singapore, Taiwan, Malaysia, and Vietnam have seen their growth momentum strengthen in recent quarters. In contrast, economies such as India and Japan have experienced a slowdown in real GDP growth. Singapore’s growth exceeded expectations in Q3, driven by strong demand for electronics and semiconductor-related products—a trend also observed in Taiwan, Malaysia, and Vietnam. As for the slower-growing economies, not all is bleak. India’s Q3 slowdown may have been partly influenced by its ongoing elections. However, Japan continues to face challenges in generating growth drivers. On inflation, the picture is similarly nuanced across the region. While economies like China and Thailand are experiencing relatively low inflation, others, including India and Vietnam, are still grappling with relatively high consumer price increases.

Monetary Policy Turning to monetary policy, we have yet to see a widespread shift toward monetary easing in Asia-Pacific economies, despite the Fed beginning its own easing cycle. As a result, the region's average policy rate has only declined slightly, in contrast to the Fed's more significant rate cuts (Chart 3). This runs counter to expectations heading into the year, when many economists anticipated rate cuts in Asia in tandem with the Fed. However, country-specific factors—such as high household debt, rapid property price inflation, and sticky inflation—have led to a "tighter-for-longer" stance rather than rate cuts. Nonetheless, rate cuts have already been implemented in Indonesia, the Philippines, New Zealand, South Korea, and Thailand. Looking ahead, as discussed in our previous publications, Asian central banks may have less scope to ease, especially since the US Fed may not need to cut rates as aggressively as once expected, due to the reflationary impact from some of Trump's proposed fiscal measures.

Semiconductors and AI Next, we take a closer look at the substantial dividends reaped by certain Asian economies from the AI-driven semiconductor boom. Taiwan and South Korea are among the biggest beneficiaries of this year’s surge in AI demand, as both are key players in the semiconductor industry. South Korea, for instance, continues to see export growth in semiconductors in the high double digits, though the pace has slowed recently (Chart 4). In contrast, Taiwan has experienced a pickup in growth in recent months. On the import side, China’s growth in semiconductor manufacturing equipment imports peaked at 153% y/y in December 2023. This surge was likely driven by concerns over US semiconductor-related controls at that time. However, import growth has slowed considerably this year, and even entered contractionary territory in September.

Financial markets Turning to financial market developments, Chart 5 shows that while regional equities posted solid total returns earlier this year, their performance was disrupted in October. This downturn was partly driven by Chinese equities, which suffered significant declines after market expectations for stimulus from Chinese authorities fell short. Meanwhile, US equities continued to perform strongly, taking a substantial lead over their Asian counterparts. On the currency front, Asia-Pacific currencies have had a volatile ride against the US dollar. On average, however, they have experienced net depreciation, with the Malaysian ringgit being the only exception, posting a clear net appreciation so far this year. Recent drivers of dollar strength, and thus Asian currency weakness, include expectations of a higher Fed terminal rate in its current easing cycle.

Political developments Lastly, we review the key political developments in Asia this year, of which there were many. First, India held its general elections in the first half of the year, where Prime Minister Modi retained his position. However, his party, the BJP, lost its parliamentary majority, leading to a sense of policy uncertainty (Chart 6). A similar situation unfolded in Japan, where Prime Minister Ishiba’s party, the LDP, also lost its parliamentary majority in the October elections. Elsewhere, Indonesia held its general elections, and new President Prabowo was sworn in earlier in October, with observers closely watching his ambitious spending plans. In Thailand, a leadership change occurred when former Prime Minister Srettha was removed from office for constitutional violations. Despite this, key policy initiatives, such as the massive digital wallet scheme, continued under the leadership of current Prime Minister Paetongtarn.