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Economic Research: Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth


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Economic Research: Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth

Asia-Pacific will be a bright spot in the global economy in 2023. S&P Global Ratings assumes that domestic resilience and solid growth in mainland China--albeit off a weak base--will keep regional growth at a healthy level. Strong consumption in the more domestically led economies of India, Indonesia, and the Philippines will also lift the average.

Beneath this overall resilience are significant pockets of weakness. Soft global demand will deplete growth in export-driven economies, such as South Korea and Taiwan. GDP levels in Asia-Pacific ex-China will decelerate in 2023 to 3.9%, from 4.8% in 2022, by our estimate.

Asia-Pacific will be vulnerable to foreign exchange (forex) stress in 2023. High U.S. interest rates and significant current account deficits in some countries create vulnerability. Policymakers have managed currency strains so far. But the possibility of a currency crunch and capital flight may yet rattle one or more emerging markets in 2023.

The Global Setting--A Halt To Growth And High Interest Rates

The likely absence of significant economic growth in the U.S. and the eurozone in 2023 weighs on demand for exports. We expect a slight GDP contraction in the U.S. and zero growth in the eurozone.

The U.S. inflation problem will drive up global interest rates. The country's core inflation is elevated as firms pass on cost increases and, amid low unemployment, employees demand significant wage growth to compensate for higher prices. This will push the U.S. Federal Reserve (Fed) to tighten policy aggressively.

The Fed will likely raise its policy rate to above 5% by the third quarter of 2023, drawing capital out of the region and pressuring exchange rates. In Europe, core inflation is lower but spiking energy prices following Russia's invasion of Ukraine is a major pressure point.

Following Current Weakness, China's Growth Should Improve In 2023

China's economic data for the third quarter surprised on the upside. Industrial production momentum improved in September. Relatively strong GDP growth prompted us to revise our forecast for the country's economic growth in 2022 to 3.2%, from 2.7%.

However, "organic" growth--from household consumption and private investment--has remained weak amid persistent, widespread COVID disruptions. Retail sales momentum declined again at the end of the third quarter, reflecting mobility restrictions stemming from continued COVID outbreaks. The pandemic's impact worsened in October (see chart 1). Exports have also slowed and housing activity weakened again (see chart 2), leading to a broad-based slowdown at the start of the fourth quarter.

Chart 1


Chart 2


China's growth should pick up in 2023 as the COVID stance and property downturn ease. In November, the government adjusted its COVID containment policies, reducing the emphasis on quarantine and mass testing, steering the bias of local governments away from large-scale lockdowns and calling for the vaccination of elderly people and better health facilities.

These changes are in line with our expectation that the government will relax its COVID stance more systemically in 2023, likely in the second quarter. The relaxation will likely be gradual and will probably initially weigh on the economy as high caseloads make people reluctant to venture out. But the change in policy stance should eventually boost confidence and organic activity. Consumption and private investment will likely grow smartly in the second half of 2023.

The housing sector is unlikely to recover swiftly given weak confidence. However, a policy pivot in November should lay the foundation for an eventual bottoming out of China's property downturn. The package of adjustments includes easing restrictions on bank lending to the property sector, and an allowance for banks to extend existing loans to the sector. It follows a scheme meant to help developers issue onshore bonds with support from policy banks.

Growth should rise next year. Slower external demand next year is a dampener. Nonetheless, with COVID and property policies more conducive to growth, organic activity should pick up. Even with lower infrastructure investment growth, China's GDP will expand 4.8% in 2023, and at a similar pace in 2024, in our view.

The risks to our forecast are evenly balanced. Delays to easings of the government's COVID stance present the biggest downside risk. The key upside risk is that we underestimate the buoyancy of domestic demand after authorities relax mobility controls. Households and corporates have substantial saving balances (deposits), which they could deploy if confidence returns.

The Obstacles To China's Long-term Growth Outlook

President Xi Jinping's report to the 20th Congress of the Chinese Communist Party suggested a broadly unchanged approach to economic policymaking, with a continued focus on growth and reform. It sees "high-quality development" as the most important task. The policy stance toward market orientation and opening up seems to remain unchanged.

The party again committed to "unwaveringly encourage, support, and guide the development of the private sector" and to "fully realize the decisive role of the market in resource allocation". Officials identified technology, common prosperity, and green development as the key themes for development. The report emphasized greater consideration of national security, including food (grain), energy and supply chain security.

Our updated prognosis for China sees trend growth slowing to 4.4% over 2022-2030, and then to 3.1% in 2031-2040. This would be a significant drop from the 6% expansion over 2017-2021 (see chart 3 and "China's Trend Growth To Slow Even As Catchup Continues," published Nov. 9, 2022, on RatingsDirect).

The gradual slowdown is driven by demographics, rebalancing and reduced international economic interaction as the U.S. and other countries try to "decouple" at least partly from China.

Still, we expect China to continue to catch up with advanced economies. Its productivity and living standards will be around 40% of U.S. levels by 2040 (in purchasing power parity terms). By reference, South Korea reached this level in 1997 (see chart 4).

Our downside scenario assumes less reform and opening-up by China than in the baseline, and more decoupling by the U.S. and other advanced countries. Our upside scenario includes more policy efforts to boost growth.

Chart 3


Chart 4


Asia-Pacific Ex-China Likely To Slow In 2023

Growth largely held up in the third quarter, judged by the GDP data and other indicators. The global slowdown has started to weigh on manufacturing activity and sentiment, especially in Northeast Asian manufacturing export economies. But solid domestic demand boosts GDP growth, helped by continued gains derived from the loosening of mobility controls, post-COVID.

The global demand slowdown will intensify in 2023, weighing on Asia-Pacific exports. The likely pick-up in China's growth should dampen this hit. Domestically, while the recovery from COVID should continue to support growth, tighter monetary conditions will hamper demand.

We expect the slowdown in 2023 to vary, depending on the impact of these factors:

  • Economies where exports are very important are more exposed to the global slowdown. This disadvantages South Korea and Taiwan, where large semiconductor industries are also exposed to a pronounced global downturn. GDP growth in both places should slow significantly in 2023. The accelerating mainland Chinese economy should partly offset the hit of weaker growth in the U.S. and Europe.
  • The global slowdown will have less impact on domestic demand-led economies such as India, Indonesia and the Philippines. India's output will expand 7% in the fiscal year 2022-2023 (ending in March 2023) and 6% in the next fiscal year, by our estimates. Indonesia and the Philippines should both grow at least 5% in 2023.
  • In some countries the domestic demand recovery from COVID has further to go. This should support growth next year in India, Indonesia, Malaysia, the Philippines, and Thailand. Improving inbound tourism should support growth in the latter three and Japan, although the resumption of Chinese tourist arrivals will likely not happen before late 2023.
  • Higher interest rates will have a pronounced hit on growth in parts of the region, either because policy rates climb strongly or the effect of the increases is profound (see below).

We expect GDP growth in Asia-Pacific ex-China to slow to 3.9% in 2023, from 4.8% in 2022, before picking up to 4.4% in 2024.

Table 1

Real GDP Forecast Change from September 2022 forecast
(% year over year) 2021a 2022 2023 2024 2025 2022 2023 2024
Australia 4.9 3.9 1.7 1.9 2.5 0.0 (0.1) (0.1)
China 8.1 3.2 4.8 4.7 4.6 0.5 0.1 (0.1)
Hong Kong 6.3 (2.6) 3.8 3.0 2.0 (2) 0.0 0.3
India 8.7 7.0 6.0 6.9 6.9 (0.3) (0.5) 0.2
Indonesia 3.7 5.3 5.0 5.0 5.0 (0.1) 0.0 0.0
Japan 1.7 1.5 1.2 1.1 1.1 (0.1) (0.2) (0.3)
Malaysia 3.1 8.9 3.2 4.7 4.5 2.3 (1.2) 0.1
New Zealand 4.8 2.1 1.2 1.5 2.5 (0.2) (1.6) (0.9)
Philippines 5.7 7.1 5.2 6.6 6.3 0.8 (0.5) 0.2
Singapore 7.6 3.6 2.3 3.0 3.0 0.3 (0.3) 0.1
South Korea 4.1 2.7 1.4 2.2 2.1 0.1 (0.4) 0.0
Taiwan 6.6 2.2 1.5 2.5 2.6 0.0 0.0 0.0
Thailand 1.5 2.9 3.5 3.5 3.1 0.0 0.0 0.0
Vietnam 2.5 8.3 6.3 6.9 6.7 1.7 (0.2) 0.1
Asia Pacific 6.7 4.1 4.3 4.6 4.5 0.3 (0.2) 0.0
Note: For India, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26. a--Actual. Source: S&P Global Economics.

Central Banks Grapple With Inflation And Rising U.S. Rates

While inflation strains vary, they are generally less of a problem than in the U.S. Core inflation has risen especially fast in Australia, New Zealand, and the Philippines. It has also increased substantially in South Korea and has remained high in India (see chart 5). On the other hand, it has remained low in China and Japan and stayed modest in Hong Kong, Indonesia, Malaysia, Taiwan, and Thailand.

Monetary policy decisions have generally been in line with core inflation developments. The central banks of Australia, New Zealand, the Philippines, and South Korea have hiked policy rates considerably in 2022 (see chart 6). These increases were not as large as those in the U.S. but the Reserve Bank of New Zealand lifted it almost as much. Moreover, the Reserve Bank of New Zealand and the Bank of Korea started raising rates earlier than the U.S. central bank.

Other Asia-Pacific central banks have tightened less, mostly reflecting less intense core inflation. The Hong Kong Monetary Authority's peg with the U.S. dollar forces it to increase rates one for one with the U.S., even as inflation remains low. The rise in the Reserve Bank of India's policy rate of 1.9 percentage points so far this year is from an already elevated level at end-2021.

Chart 5


Chart 6


Although most of the increase in inflation in the region should be behind us, central banks are likely to tighten monetary policy further. We generally expect inflation to decline in 2023 (see table 2). The exceptions are China and Hong Kong, where a late reopening from COVID should raise price pressures next year. Yet, almost everywhere further rate rises are likely. To varying degrees regional central banks will raise rates in synch with the U.S. Fed, at least partially, to limit the squeeze on the domestic currency.

Table 2

Inflation (year average)
(%) 2021 2022e 2023e 2024e 2025e
Australia 2.8 6.6 5.9 3.9 2.6
China 0.9 2.1 2.6 2.4 2.2
Hong Kong 1.6 2.5 2.8 2.4 2.0
India 5.5 6.8 5.0 4.5 4.5
Indonesia 1.6 4.4 5.0 3.7 3.6
Japan (0.2) 2.3 1.5 1.2 1.2
Malaysia 2.5 3.3 2.6 2.4 2.4
New Zealand 3.6 7.0 5.3 3.4 2.6
Philippines 3.9 5.5 4.3 2.7 2.7
Singapore 2.3 6.2 3.8 2.4 2.0
South Korea 2.5 5.2 3.9 2.5 2.1
Taiwan 2.0 3.1 2.6 1.1 0.8
Thailand 1.2 6.4 3.1 1.1 0.7
Vietnam 1.8 3.1 3.3 3.1 3.0
Note: For India, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26. e--Estimate. Source: S&P Global Economics.

We project a modest tightening of the Bank of Japan's (BOJ) monetary policy in 2023 (see table 3). Recent scrutiny of the BOJ's highly accommodative stance has centered around the sharp yen depreciation, caused by the divergence from U.S. Fed tightening, and the impact of the BOJ's yield curve control on the government bond market. With U.S. interest rates expected to rise further next year, the pressure on the BOJ will intensify.

Japan's consumer inflation is unlikely to remain above 2% for long, given low wage growth. Thus a major tightening is unlikely. But given the strain from sharply higher global interest rates and bond market tension, we assume the BOJ will nudge its policy rate into positive territory, and possibly adjust its yield-curve controls.

Table 3

Policy Rate (Year End)
% 2021 2022e 2023e 2024e 2025e
Australia 0.10 3.10 3.60 3.10 2.60
India 4.00 6.25 5.50 5.00 5.00
Indonesia 3.50 5.25 5.50 5.00 5.00
Japan (0.10) (0.10) 0.10 0.10 0.10
Malaysia 1.75 2.75 3.25 3.50 3.50
New Zealand 0.75 4.25 5.50 4.75 4.25
Philippines 2.00 5.50 5.50 4.00 4.00
South Korea 1.00 3.25 3.50 2.75 2.50
Taiwan 1.13 1.75 1.88 2.00 2.00
Thailand 0.50 1.25 2.50 2.25 2.00
Note: For India, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26. e--Estimate. Source: S&P Global Economics.

Increased rates in the region will hit economies, albeit with lags. While financial sector stability remains largely manageable, rising interest rates will weigh on housing activity and spending more generally.

Where housing and other household debt is high, such as in Australia, New Zealand, and South Korea, the hit will be significant (see chart 7). We identify these housing markets as most exposed to monetary policy tightening (see "Higher Interest Rates Will Cool Some Red-Hot Residential Markets in Asia," June 16, 2022). This is especially so in Australia and South Korea, where a high share of mortgages have variable interest rates. Having said that, policy rate hikes can take time to work through financial systems, even ones with a lot of variable-rate mortgages (see chart 8).

Chart 7


Chart 8


Forex Strains Remain

The fact that interest rates are rising faster in the U.S. than Asia-Pacific has pulled capital out of the region. We estimate that net financial outflows rose by US$127 billion in the first eight months of 2022 in six large Asian emerging market economies compared with a year earlier to US$400 billion. China accounts for about four-fifths of both the turnaround and the 2022 level.

Meanwhile, soaring energy bills are dragging on current-account positions for net energy importers, especially if strong domestic demand boosts import volumes. In the first nine months of 2022, the trade balance of the Philippines shrank by about 6% of GDP from a year ago. In Thailand, the drop was 5%; in South Korea 4%; and in India, the contraction was 3.6% of GDP. This will likely lead to major current-account deficits in the Philippines and Thailand, and push the current account balance of India into a sizable deficit, from a surplus in 2021.

Exchange-rate depreciation has absorbed most of this strain. Currency drops against the U.S. dollar through November ranged from 7% in Thailand to 18% in Japan (excluding Hong Kong and Singapore, which have special exchange rate regimes).

However, foreign reserves have fallen in Asian emerging markets, even after adjusting for valuation changes. In India, the decrease in foreign reserves of US$73 billion through August was far and above losses attributable to valuation changes (of US$30 billion). This implies that the central bank has made sizable interventions to support the Indian rupee.

The strain on Asian forex will continue into 2023 as the U.S. Fed continues to raise its policy rate. Exchanges rates are particularly vulnerable where monetary policy remains accommodative, such as in China and Japan, and in the countries noted above that have seen their current account worsen substantially.

With the exception of some countries, especially in South Asia, Asian economies are generally better prepared for external pressure than during the taper tantrum of 2013 and the Asia financial crisis. The macro policy framework has improved. Notably, greater exchange rate flexibility helps absorb external stresses, limiting foreign reserves depletion. Also, a much larger share of government borrowing is now in domestic currencies, reducing the hit of currency weakening on debt servicing.

But vulnerabilities exist, notably in the emerging markets noted above that see sharply higher current account deficits this year. Financing these at a time of rising U.S. interest rates won't be easy. If policymakers don't tighten monetary or fiscal policies enough to rein in imports, a degree of turmoil may follow.


Table 4

Exchange Rate (year end)
2021 2022e 2023e 2024e 2025e
Australia 0.73 0.66 0.66 0.68 0.70
China 6.39 7.23 7.16 6.94 6.74
Hong Kong 7.80 7.83 7.80 7.80 7.80
India 75.20 79.50 80.50 82.00 83.00
Indonesia 14261 15750 15800 15950 16100
Japan 115.00 143.20 146.10 137.40 129.30
Malaysia 4.18 4.60 4.34 4.22 4.13
New Zealand 0.68 0.61 0.62 0.64 0.66
Philippines 50.50 58.70 56.90 54.10 52.50
Singapore 1.36 1.40 1.35 1.34 1.33
South Korea 1183 1339 1366 1285 1209
Taiwan 27.84 32.10 31.80 31.40 31.00
Thailand 33.42 36.10 35.70 35.30 34.90
Note: As per market convention, Australia and New Zealand exchange rates are shown as U.S. dollars per local currency unit. For all other currencies, exchange rates shown as local currency units per U.S. dollar. For India, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26. e--Estimate. Source: S&P Global Economics.

Table 5

Unemployment (year average)
(%) 2021 2022e 2023e 2024e 2025e
Australia 5.1 3.7 4.2 4.4 4.4
China 5.2 5.6 5.3 5.1 5.0
Hong Kong 5.2 4.4 3.4 3.3 3.3
Indonesia 6.4 5.8 5.4 5.3 5.3
Japan 2.8 2.6 2.5 2.5 2.4
Malaysia 4.6 3.9 3.6 3.3 3.2
New Zealand 3.8 3.3 3.9 4.4 4.5
Philippines 7.8 5.0 5.5 5.2 4.6
Singapore 2.7 2.2 2.1 2.1 2.0
South Korea 3.7 2.8 3.3 3.4 3.5
Taiwan 4.0 3.7 3.6 3.5 3.5
Thailand 1.9 1.8 1.6 1.4 1.2
Note: For India, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26. e--Estimate. Source: S&P Global Economics.

Editor: Jasper Moiseiwitsch

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