After a strong recovery in 2021 from the worst recession since the Great Depression, global growth is expected to moderate in 2022. We forecast global real GDP expanding by 4.5% in 2022 after rebounding by 6% in 2021. But this headline number fails to capture how lopsided and divergent growth has been between developed and emerging economies. Covid vaccines work but the rollout and impact has been uneven. Year 2022 will, hopefully, be a year when vaccination coverage broadens and speeds up the recovery in emerging economies.

ASEAN-6 GDP is projected to expand by a stronger +5.4% in 2022 and +4.8% in 2023, after the sluggish +3.8% in 2021. This assumes Omicron is no more lethal than Delta and current vaccines are effective. ASEAN’s GDP growth will surpass China’s (+5%) in 2022, the first time in three decades. All ASEAN-6 countries would have vaccinated 70% of their population by April 2022. Risks of lockdowns and disruptions will be lower in 2022 than in 2021 as ASEAN adopts a “living with Covid” strategy and adapts to an endemic new normal.

Inflation was one of the big surprises in 2021 and remains uncomfortably high in the US and parts of Europe. Rising commodity prices, supply chain bottlenecks and revenge spending from economic reopening have driven up prices. Some workers are cautious about returning to the labor force, pushing up wages. We expect inflation pressures to persist in the first half of 2022 but moderate in the second half as supply chain bottlenecks and commodity inflation ease.

Global monetary conditions will be tightening with the Federal Reserve unwinding its asset purchase program by June 2022. We expect the Fed to hike the funds rate by 25bps in 2022 and by another 50-75bps in 2023. ASEAN have greater foreign reserves, stronger current account balances and depend less on foreign capital. We don’t expect a repeat of the 2013 taper tantrums. We expect 4 ASEAN central banks – BI, BNM, BSP and SBV – to hike the policy rate by 25bps late 2022 – and the MAS to tighten again via a steeper appreciation bias on April 2022.  

Rate strategist Winson highlights the risk of earlier Fed hikes. He forecasts a much higher 2-year US bond yield at 1.25% but moderately higher 10-year yield at 1.9% by end-2022. The US treasury curve will flatten further to 65bps in 2022. He is neutral on China bonds; neutral but cautious on Indonesia and Malaysia; and bearish on Singapore. The wildcard will be a sharp curve flattening with the 2y10y US treasury spread narrowing to below 25bps. Some warning indicators are flashing for an early Fed move: US unemployment rate falling below 4%; inflation remaining above official targets; and extremely accommodative US financial conditions.

FX strategist Andi highlights the safe haven appeal of the US dollar given lingering pandemic uncertainties. He looks for gains in NZD, GBP, CAD and KRW, where performances have not been commensurate with their growth, inflation and relatively more hawkish monetary policy stance. Negative yielders EUR, JPY and CHF will remain interim drags on dovish policy stances. In the second half of 2022, regional laggards should catch-up including AUD, IDR, MYR and PHP as their central banks hike policy rates from record lows.

2021 has taught us that plenty can go wrong and the recovery will be bumpy. The infectious Omicron variant is already triggering a wave of border closings and pausing plans for a broader reopening. More effective vaccines to deal with Omicron may take several months to deploy. China’s ideological shift towards common prosperity and crackdown on property debt may lead to a sharp slowdown. A zero Covid strategy may fail with a more infectious variant and trigger months of lockdowns and disruptions. We are past the worst but the path to an endemic new normal will be far from smooth.