In fact, Asia’s productivity, or incremental GDP generated by new debt, is poised to turn in the best performance since the 2003-07 cycle. Post-2008, global trade volumes grew at an average of 1.2 per cent compared with 6 per cent in the 2000s. Without external demand, Asian policymakers had to rely on higher leverage to stimulate aggregate demand, which inevitably gave rise to macro-stability concerns.

Now, backed by strong global trade, Asia’s growth will be far less dependent on stimulus and leverage, while inflationary pressures and other macro-stability concerns will be kept at bay.

Nonetheless, unique circumstances have kept this productivity dynamic from playing out fully. Typically, a sharp upswing in exports and capex translates into stronger income and consumption growth. This time round, the transmission mechanism has been stalled by successive Covid-19 waves and restrictions damping consumption. But Asian economies outside of China are adapting to life with the virus and are on a path to put pandemic woes behind them. In China, the Omicron variant could put the zero-Covid policy to the test and still constrain the consumption recovery. But if variants remain mild, policymakers could move away from aggressive implementation of its zero-Covid strategy after the Winter Olympics.

While coronavirus has restrained China’s growth, a bigger factor was its policy cycle. In 2021, macro policies overtightened and regulatory actions intensified in a broad range of sectors. Debt to GDP was cut by 10 percentage points to 283 per cent, the most aggressive reduction in China since 2003.

The policy cycle has clearly shifted from overtightening to easing, and the economy should move from a downturn to an upswing. In late December, top policymakers acknowledged that “China’s economic development is facing three pressures: demand contraction, supply shock and weakening expectations”, suggesting they will continue to ease on all fronts.

First, the credit impulse, a measure of credit growth relative to GDP, will normalise towards neutral territory, removing a big headwind to growth.

Second, policymakers are taking a more structured approach to regulatory tightening, and changes from here on are likely to be incremental.

As governments seek to address income inequality, they are expected not to lose sight of the need to continue reforms to encourage the shift towards higher value-added activities to complete the transition to a high-income society. This shift will not be possible without private sector participation.

Third, measures related to decarbonisation and property will be less stringent, allowing for a gradual pace of adjustment. These should alleviate concerns over further actions weighing on private corporate sentiment. As these shifts play out in the real economy, we expect an upswing in growth to take hold from the second quarter of 2022.

Across Asia, a virtuous feedback loop is about to unfold, of strong external demand and positive spillover effects to capex and consumption.

This cycle will resemble 2003-07, with productivity playing a larger role in Asia’s growth, driving its outperformance. The risk is if persistent inflation in the US prompts an aggressive shift in the Fed’s tightening path, which threatens the longevity of this business cycle.

Chetan Ahya is chief Asia economist at MorganStanley

Asia’s productivity is poised to turn in the best performance since the 2003-07 cycle