Key themes from the Asia Regional Strategic Forecast

Article tags BusinessEconomyAsiaChinaJapanMalaysiaSingaporeSouth KoreaSouth-east Asia

The Regional Strategic Forecast (RSF) is Corporate Network’s flagship event series which assesses the economic and political outlook by region. These events allow our members to gain critical insights into the global and regional business environment, geopolitical developments and other factors that will affect their businesses.

The theme of the September 2022 RSF series was ‘beating the next recession’. Though we are not yet in a global recession, governments and businesses the world over are bracing against rising costs, rising interest rates, and slower growth. As the war in Ukraine and pandemic disruptions continue to wreak havoc on supply chains, talk of stagflation abounds. The picture is not entirely bleak, however. Unemployment levels across many economies are very low, some economies are set to grow fast, and there remain opportunities for innovation regionally and globally in areas like climate or digitalisation that can be drivers of corporate growth.

Throughout the month of September, our 7 APAC network cities all hosted their own RSF panel briefings, during which EICN members learned how to constructively think about risk resilience and safeguarding their businesses in the face of the next recession. EIU’s chief economist and editorial director, Simon Baptist, set the context of the discussion by explaining the factors that are contributing to a potential global recession – including interest rates, energy and commodity price volatility, supply shocks, geopolitics – as well as changing growth drivers amid shifting supply chains, capital flows, and the role of China in the global economy. To learn more about the key themes that Dr Baptist covered in his keynote, please read on.

The war rages on in Ukraine

Despite sanctions, Russia can still count on support from many emerging countries. There are two main scenarios for how the conflict will end:

1. Russia seizes eastern and southern Ukraine, and forces demands including a partition of the country
2. Russia suffers a humiliating defeat eastward, owing to fierce Ukrainian resistance leading to regime change in Russia.

A widespread, prolonged cut-off in Russian gas will bring EU into recession – how deep depends on dependency 

Non-aligned states (India) will try to stay neutral while Russia-leaning countries, led by China, are forming an anti-Western bloc and further reinforcing geopolitical fragmentation. Two-thirds of world’s population live in neutral or Russia-leaning countries, so Russia (and China) will court more non-aligned countries to join their bloc.

Commodities: Fall of in prices are coming, but not for everyone

Metals: Steel demand has slowed in China, but picked up elsewhere in Asia (India, Japan, South Korea). EMs in Asia also recorded an increase but take note of low base comparisons in growth. Strong demand overall will keep prices high. 

Foodstuffs: Upcoming fertiliser shortage (many countries source from Russia) will hurt crop yields and raise production costs. Worsening climate conditions further adds to production uncertainty. 

Energy: Global LNG supply crunch will last for years as the EU builds capacity. Oil price forecast downgrade to US$90-110/barrel (from US$100-120/b prev) as lowered demand over recession fears.

Inflation: Degloblalisation will fuel inflation

Main drivers include food prices, energy prices and, of course, geopolitics. Asia has the benefit of a looser labour market as compared to the West with less wage pressure. Supply imbalances are also resolving.

Central banks in Asia will not be required to hike interest rates as high as the US, but the destruction of the Wests’ demand will diminish growth prospects for Asia.

A closer look at the global trade landscape

China will continue seeking out FTAs, expanding economic and diplomatic clout.

• Slowing growth and worsening trade relations with the West present obstacles
• Also a problem for markets heavily dependent on Chinese supply and demand

US has the largest consumer market

• US trade growth will slow, remains in deficit
• Concerns over the offshoring in critical sectors
• Growing protectionist policies, bipartisan opposition to FTAs and tariffs on China

EU maintains a steady trade surplus

• Growing calls for self-reliance
• Higher energy costs will lower production capacity (decreasing exports), lowering trade surplus

LatAM: currency depreciation outruns benefits of commodities spike

Value of imports rose faster than the value of exports, raising trade deficits

Decoupling of the global economy

• Gradual decoupling between the West and China would force countries to take sides
• China wants to become a global power with CCP dominance, and a leader in strategic industries like technology or green tech
• The US is pushing back on China before the gap shrinks too much, trying to buttress the international system while meeting domestic goals
• Forcing economies to choose sides will have a disastrous economic impact. Organisations will have to operate two supply chains while fearing operational disruptions
• Priority will also shift from economic development to military and defence
• A stabilisation in US-China ties will remain elusive
• Pelosi’s Taiwan visit has certainly not helped the situation
• No roll back on 2018 tariffs are likely, other than some small exemptions
• Riskier outlook presents opportunity to other markets in Asia to attract FDI into other parts of the chip supply chain

Financial firms still keen on Asia investment

Global financial firms remain strongly attracted to the region’s large populations and economic dynamism, both for their own FDI strategies and their investment activities for clients

The opportunities

• Emerging markets ex-China offer the best prospects because of rising middle classes, shifting supply chains and relative open economies
• Banks and insurers from Japan and Korea have long pursued such a “Go South” strategy
• For Singapore-based firms, regional integration is important.

The risks:

• China’s slowing growth; maturing financial markets and political meddling (delays for licences, tech crackdown, zero-covid, travel ban etc)
• Western lenders such as Citi and HSBC keep exiting underperforming markets

A big question: Can India, soon the most populous country, join the winners?

China’s zero-covid to ease (not end) in mid-2023

• CCP view is that benefits currently outweigh the cost of the zero-covid policy, and Xi has continuously expressed ‘unwavering support’
• Border restrictions are much less than they were but still much more than the rest of the world
• Expect further easing of quarantine periods and flight capacity limits, but not near pre-covid levels and tourism will remain minimal
• Chinese vaccines are OK (like AZ) but not as good as the mRNA ones, and critical care capacity is low 
• Propaganda efforts have tied zero-covid to Xi: this will be hard to unwind rhetorically, but policy will be gradually loosened even if not to ROW levels
• Watch HK as a test-bed for changes

Wed, 02nd Nov 2022 Article tags BusinessEconomyAsiaChinaJapanMalaysiaSingaporeSouth KoreaSouth-east Asia