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Retooling factory Asia

By Frederic Neumann, Chief Asia Economist, HSBC

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Asian Economics Quarterly

Asia proved surprisingly resilient in the Year of the Tiger as most economies managed to eke out respectable rates of growth. The Year of the Rabbit, however, is set to begin on a softer note, as the lagged impact of surging living costs, soaring interest rates and wobbly demand in China finally punches through.

Quickly, however, firmer ground will come in sight: by mid-year, if not before, a swift rebound in mainland China, led by pent-up consumer demand and a stabilising housing market, should provide a lift throughout the region.

By then, central banks elsewhere will also have ended their tightening cycles, with some even looking to cut rates again to cushion growth. Another year, then, beckons when the region’s resilience is once more on display. The ‘Rabbit’, perhaps, may not speed ahead as quickly as one would like, but it’ll make steady, dogged progress nonetheless.

Full Impact, not yet

In mainland China, the relaxation of COVID-19 control measures should support a strong recovery in consumer spending, especially services. But experience from other places suggests that the process can be bumpy, with a pull-back during any infection spike preceding the eventual bounce. Housing support measures, too, may take time to filter through.

As a result, growth may be highly volatile, with a sharp contraction followed by a surge. On average, mainland China’s economy should thus still deliver decent growth of 5% for 2023, which would also provide a boost to Hong Kong, not least with the arrival of more visitors. For Taiwan, however, the main challenge will continue to be a lacklustre global electronics cycle.

Japan, meanwhile, is also likely to see growth slide, despite additional fiscal support to offset the impact of higher living costs and weakening global trade. Korea, too, faces external challenges, while higher interest rates are curbing local demand. The Bank of Korea may thus be among the first central banks in Asia to cut interest rates in 2023.

In this, the Bok may be joined by New Zealand’s central bank, as the downturn in the Kiwi housing market is taking its toll on growth and employment. Australia, meanwhile, is facing stiffer headwinds as well as the re-opening bounce fizzles, though the labour market remains robust.

Growth is also expected to cool in India, where consumer spending has already started to pull back and monetary tightening is starting to exert its intended effect. Falling global energy prices, though, provide welcome relief, even if price pressures will prove sticky. Sri Lanka should see signs of further stabilisation, especially with an IMF program in place, though GDP may again contract for the full year. Bangladesh is weathering its acute challenges, and should see the benefits of normalising commodity prices flow through to the economy in 2023.

ASEAN’s resilience is expected to shine again over the coming year – though with growth expected to slow. Indonesia may see less support from once sky-high commodity prices, even if demand remains robust enough to support investment and public revenues. Thailand’s economy is likely to be among the few to see growth accelerate thanks to reviving tourism. Singapore, despite its robust services sector, won’t be able to fully escape the vagaries of the global trade cycle. The Philippines, meanwhile, should see domestic demand cool as the lagged impact of higher interest rates and surging inflation unfolds. Vietnam, too, won’t be able to shield itself entirely from slowing world trade, but it is likely to once again top the growth league in ASEAN.

First published 16th December 2022.

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