We go from Goldilocks to steady-state expansion. Growth broadens out. Inflation rises but does not get out of hand.

Policy normalises but does not get disruptive.

Fret not, we are going from Goldilocks to steady-state expansion Stagflation concerns have emerged given China's deleveraging and global supplyside constraints. We are not in the stagflation camp and believe our coverage region is advancing from a Goldilocks scenario to steady-state expansion. In the latter, growth broadens out from the front-runners to the laggards and from exports to domestic demand. Inflation rises but does not get out of hand. Policy normalises but does not get disruptive. ASEAN is better placed than North Asia as growth accelerates and growth differentials get more favourable.

The "stag" part of stagflation holds no water; Firmly in an expansionary phase Normalisation in one-off tech demand and China's deleveraging do not portend a cliff-drop in exports. Secular tech demand remains given digitalisation/automation. China's countercyclical easing and the US' procyclical stimulus mean that even as export growth moderates, it will remain at abovetrend levels. Rising vaccination rates enable growth to broaden from exports to domestic demand. We see policymakers implementing enough doses to fully vaccinate ~90% and more of the total population in our coverage region by Mar22. The need to alleviate supply constraints is also leading to capex expansion in Korea and Taiwan.

Inflation rises but does not get out of hand Supply constraints have led to higher input costs and are driven by structural (decarbonisation, truck driver shortages), cyclical (strong recovery) and temporary factors (weather, Covid production disruptions and capex delays).

Structural factors are unlikely to go away but temporary factors should fade and alleviate constraints. MS price forecasts for commodities/semis show peak inflation is mostly behind us. Labour constraints in our region are not as stark as in the US. Besides, most economies are still closing a negative output gap. The spillover of higher input costs to broader demand-pull pressure looks mitigated.

Policy normalises further but does not get disruptive Related to inflation is how central banks respond and how that impacts growth.

Inflation upside had prompted some central banks in LATAM/CEEMEA to tighten significantly. The Fed’s taper is also underway. However, inflation dynamics in our space are markedly different than other EMs. Macrostability has also improved vs 2013. We see policy normalisation as the recovery firms, but aggressive hikes that short-circuit growth are unlikely.