Asia well-placed to navigate coming global downturn

The global economy grew at a healthy pace in Q1 2023, defying expectations of a growth crunch. Gains were not uniform, however. The Eurozone slipped into a mild recession, as did Taiwan, and growth slumped in Singapore and South Korea. But overall, Asia did well, with aggregate growth in the 12 major economies—Japan, China, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Indonesia, Thailand, Philippines and India—rising 3.8% y-o-y in Q1, after 2.6% in Q4 2022 and 3.2% in the full year of 2022.

Three factors contributed to Asia’s growth. The first was China’s reopening in January, that came earlier than most were expecting. The second was the continued strength of the US economy. And finally, the strong revival in tourism supported local employment and household incomes, especially in Hong Kong and Southeast Asia. Together, this lifted global demand, which benefitted Asia’s external-facing manufacturing sectors and services industries.

Despite this, the global economic outlook faces a high level of uncertainty and markets are signalling an end to the good economic run. Copper, which is considered a leading indicator for demand, is down more than 10% since its peak in February 2023, and could have been down more if it wasn’t being propped by demand from the electronic vehicles industry in China. 

There are two key economic trends to monitor as we enter the second half of this year. The first is the momentum of China’s post-COVID recovery. Second-quarter data indicates the momentum is beginning to fade and the stimulus announcements will likely have limited impact. With the real estate and manufacturing industries in a consolidation phase—with repercussions for employment and incomes—there is only so much rate cuts can do to revive demand. The second trend to watch is demand in the US and Europe. Whether the US manages a soft landing or slips into recession is the key to the 2023-24 global outlook puzzle. 

The US Federal Reserve (Fed) paused rate hikes in June, but kept the door open for more hikes, and one or two more can be expected. While moderating, CPI is still well above the Fed’s 2% target at 4%. Moreover, core inflation (CPI minus food and energy), which is a better indicator of underlying demand, has proved to be stickier and has fallen only 1.3ppt to 5.3% in the last eight months. A 54-year low unemployment rate (3.4% in Apr 2023) and 4%+ wage growth continue to support consumer demand. We do not expect any rate cuts until 2024 as it is unlikely the Fed would risk a renewed flare up in inflation due to a policy misstep. But this does raise the downside risks to our US growth forecasts of 0.4% in 2023 and 2.5% in 2024, with leading indicators, such as bank lending and credit card delinquency rates, hinting towards a downturn in the coming months.

Asia more resilient

Asia’s outlook is on firmer ground. IMA Asia forecasts the 14 Asia-Pacific markets in its coverage to grow by 3.7% in 2023 and 4% in 2024, following average growth of 3% over 2020-2022. Growth rates for nine of the markets in our coverage have been revised up following a strong Q1 in the last month. The biggest change is to Japan, where the 2023 forecast has lifted to 1.7% from 0.3%. India is revised up to 5.8% from 5.4%. On the other hand, Singapore’s growth projection has been cut to 0.9% in 2023 and 3.5% in 2024 from 2% and 3.8% at the start of the year, while Indonesia is also lower at 5.2% and 5.5% from 5.5% and 5.9% previously.

Japan’s upgrade reflects its post-COVID consumption rebound that is supported by rising wages and incomes. This will be the main driver of growth in 2023 and more than offset the downside pressure from falling manufacturing exports and easing capex growth. Nominal goods exports have declined for the past four quarters, and manufacturing output contracted in Q1. We expect exports to fall by 5% in 2023, leading to a 2.2% decline in manufacturing. But a 2.1% increase in private consumption should see overall GDP growth rise by 0.7 percentage points in 2023 from 2022.

Surging infrastructure investment spending has been the highlight of the India story for the past three years. This pushed GDP growth to 6.1% y-o-y in Q1 2023, even as private consumption growth slumped to 2.8% y-o-y. Consumer spending has been hurt by elevated inflation and rising interest rates, and will likely remain weak until late in the year. But the strong outlook for the government’s investment spending and services exports improves India’s growth prospects.

Singapore is the other big change. Deepening manufacturing contraction and fading services rebound are dragging down growth. Electronic products exports fell 25% y-o-y in Jan-May 2023 and underpin our view of a 2.2% contraction in nominal goods exports in 2023 and a 4% fall in manufacturing output. The consumer is a silver lining and will help cushion the growth downturn.  Despite the slow downtrend in inflation (5.1% y-o-y in May 2023 from a peak of 7.5% in September 2022), consumption has been resilient due to low employment, rising wages, and government vouchers and other handouts for citizens. 

Our inflation forecasts for Asia for 2023 have stabilised and are generally moving lower. With headline inflation dropping much closer to (or below) central bank targets, most have paused. This is the case even in the Philippines, where the inflation outlook is not so reassuring. Core inflation (CPI minus food and energy) pressures are still relatively elevated. But policy rate cuts will likely come well ahead of the US Fed and European Central Bank. The Bank of Korea could move this year given the rising risks of a housing crisis. Vietnam and China are already lowering rates.

With the prospects of a US slowdown or recession being pushed out to late in 2023 or the first half of 2024, this positions the Asian policymakers well to navigate a global downturn and for the economies to continue their outperformance.