Braking hard
? Global economic slowdown is imminent, with recession likely in some parts of
the world. However, GDP still has some growth momentum left in 2022F.
? The onus to provide growth is on 2023, as the pace of accommodation dries
up and pent-up demand is exhausted.
? Persistent elevated levels of commodity prices, rising debt levels and
geopolitical issues could pose further risks to global economic growth.
? Meanwhile, ASEAN economies are only starting to feel the positive impact from
their borders reopening, softening the blow from high prices.
? We lift Malaysia’s 2022F GDP growth given its strong fiscal support, but lower
Singapore’s for weaker sentiment, and retain Indonesia’s and Thailand’s.
Unrelenting drive to fight inflation is weakening growth prospects
The global economy is on the brink of a significant economic slowdown owing to the near
simultaneous increase in policy interest rates, geopolitical issues, and the persistently
elevated commodity prices. A contraction in qoq annualised GDP growth in the US is a
possibility, even in 2Q22F, taking its economy into a technical recession. However, the
bigger concern is in 2023F, as the US Federal Reserve (the Fed) remains hawkish to fight
inflation, putting global economic growth at further risk of a slowdown. We expect the Fed’s
rate hikes to continue until the end of the year before pausing in 2023F. In Europe, the
Ukraine crisis is likely turning into a war of attrition with no clear end in sight while more
sanctions are being put in place. Combined, global commodity prices could either peak in
2Q22F or 3Q22F, and we expect them to stay elevated vs. 2021 and pre-Covid-19 levels.
Regional economies still robust
In ASEAN, the upward momentum in GDP growth has only just started, driven by delayed
reopening of their borders. The return of foreign tourists will soften the blow from high
inflationary pressures. However, there is no guarantee for a robust 2023F, especially if
global economic growth slows down. Meanwhile, some countries may struggle with the end
of pent-up demand and domestic price adjustments.
• Malaysia: We raise our 2022F GDP growth forecast to 6.2% yoy from 5.6%, and
project the economy to expand 5.0% in 2023F. Malaysia is not as hurt by rising prices,
as with its neighbours, due to the extensive subsidies which have allowed consumer
spending to continue somewhat unabated. However, challenges lie ahead from the
potential withdrawal of policy support, a shift towards targeted subsidies, domestic
political risks, as well as headwinds from the global economy affecting export-oriented
industries.
• Indonesia: We retain our GDP growth forecast of 5.3% for 2022F, and project an
expansion of 5.1% in 2023F. The broad-based commodity price rally since 2H21 has
been a mixed blessing for Indonesia’s current account balance and fiscal position.
The net impact is unarguably positive, hastening its economic recovery momentum
and fortifying its relative economic stability against the backdrop of rising financial
volatility.
• Singapore: We lower our 2022 GDP forecast to 3.8% from 4.2%. The rise in domestic
inflation is weighing on sentiment while coordinated monetary tightening globally
could cause a protracted decline in consumption and hinder export demand. In
addition, many headwinds such as elevated commodity prices, end of the global pentup demand, and the lingering effects of the global monetary tightening will likely hurt
its economy next year.
• Thailand: We maintain our GDP forecasts at 3.3% for 2022F and 3.5% for 2023F.
Consumption is likely to moderate going forward as high inflation chips away at
households’ disposable income; however, this could be partially offset by the revival
in tourism activities. Meanwhile, external trade is robust but likely to normalise going
forward, given the risk of a more protracted global slowdown which could affect the
external sectors.
GLOBAL & REGIONAL OUTLOOK
Braking hard
The global economy is still expanding post-Covid-19 rebound and has yet to fully
face the imminent economic slowdown. High inflation, coordinated global interest
rate hikes, and the spillover from the war in Ukraine are dampening consumer
sentiment and leading to massive supply chain readjustments. However, labour
market continues to recover, with unemployment reaching record lows in many
countries, which should support consumption growth. In the regional economies,
growth momentum is still robust as border reopening is fairly recent. We expect a
surge in tourism-related growth as free travel in ASEAN countries is reinstated.
Moreover, in some countries, consumers are shielded by high subsidies and price
controls, mitigating the dampening effects of inflation.
For 2023F, growth outlook looks more uncertain. We are less optimistic that
commodity prices will significantly come off from the current levels while a series
of rate hikes eats away at consumers’ ability to spend. In many parts of the world,
without government support, consumers will start to cut down on purchases,
dampening demand. We also expect regional economies to see price pressure,
as government efforts to control inflation end as fiscal room nears limit. On the
plus side, most central banks’ reluctance to go hard on inflation means that policy
interest rates will still favour growth. Broadly speaking, our forecasts for global and
regional economies are slightly more optimistic than Bloomberg consensus for
2022F while the opposite is true for 2023F.
Theme 1: Rates rise, slowdown imminent, but recession is still
50-50
The global economy is likely heading for a slowdown. The sudden and
unprecedented commodity price shocks in 2H21 and the continued supply chain
bottlenecks have caused inflation to rise, jeopardising nascent recovery in
consumer spending, and rising past the level deemed comfortable by most central
banks. In response, authorities have launched the most coordinated policy interest
rate hikes over the past decade, reflecting a sudden reversal of support away from
the ultra-low accommodative stance.
Granted, rates are still low compared to pre-pandemic levels, reflecting monetary
conditions that are still supportive of growth. The rise in policy rates has been
below the increase in inflation, as central banks are still looking to engineer a soft
landing. However, central banks can only manage the demand side of inflation,
whereas the supply side has been a major contributor to the rise in prices. Hence,
to dampen inflation, we believe that demand has to be curbed aggressively to
compensate for the producers’ inability to adjust supply rapidly.
We project global economic growth momentum to slow down in 2H22F and into
2023F. We expect the increase in policy rates globally to continue for the rest of
this year and start to significantly weigh on the real economy towards the earlier
part of 2023F. On the other hand, commodity prices may have peaked as more
supplies come online, yet the decline is unlikely to be significant, in our view.
Meanwhile, we project the supply chain disruption to ease as China’s production
returns to normal although bottlenecks may still persist in Europe.
For the US, we project 2022F GDP growth at 2.6%, a milder pace compared with
5.7% in 2021 but still positive growth overall. There is a possibility of a technical
recession in 2Q22F (defined as two consecutive quarters of negative qoq
annualised GDP growth), as the latest Atlanta Fed GDP tracker pointed out.
However, the worst could be ahead, as the current economic conditions are still
robust, supported by the rising wages and strong investment growth.
The onus to provide growth is on 2023, as the pace of accommodation dries up
and pent-up demand ends. This would leave US consumers and businesses with
persistently high inflation, especially if the wage-inflation spiral continues owing to
the tight labour market. At this point, the risk of recession or stagflation is likely
heightened, especially if the pace of monetary tightening is overdone. So far, we
pencil in a possibility of mild GDP contractions on a qoq annualised basis in 1H23
(defined as a hard landing), owing to our assumption of central banks’ careful yet
mildly successful manoeuvring, while geopolitical tensions, supply strains, and
food insecurities start to gradually subside.
Theme 2: Ukraine conflict could turn into a war of attrition
The Russia-Ukraine conflict exacerbated in Mar 2022, causing new bottlenecks in
the global supply chain and wide-ranging price shocks not seen in years. The
impact of the conflict on the global commodity market cannot be overstated, as
Russia is a major producer of oil, gas, and metals, and, alongside Ukraine, of corn
and wheat. The crisis will certainly drag down some of the global economic
recovery momentum that we have seen so far, as well as contribute towards the
elevated commodity price levels.
What is most concerning is the uncertain end-game. Russia’s carving out of
portions of Ukraine as a neutral zone to use as a bargaining chip for a peace deal
is a goal not shared by many. The continued delivery of weapons to the frontline
means that a quick resolution may not be the base case assumption anymore. In
fact, the longer the war continues, the more likely the war escalates into a broader
NATO-Russia conflict. The amplification of the crisis will only lead to more
sanctions which could cause more supply disruptions, lifting commodity prices
further and weakening economic growth. As we speak, the EU is already trying to
wean itself off Russian energy, a massive feat given that the union gets 40% of
its gas from Russia. Thus far, only a partial agreement has been reached.
Given the bleak prospects for a quick end to the conflict, we expect the conflict to
persist in 2H22F and 2023F, likely turning it into a long war of attrition. Outside of
Europe, the impact from the Russia-Ukraine crisis is not directly felt but the indirect
impact from the disruption in supply chains and high commodity prices is likely to
remain for some time. We project commodity prices to remain elevated, as the
sanctions on Russian exports put more strain on the alternative suppliers.
Meanwhile, the EU’s strategic motives for partial energy independence from
Russia will take at least 6-8 months, while slow supply-side reaction by producers
means that commodity prices are slow to move downwards, in our view.
On the plus side, ASEAN stands to lose very little if Russia’s economy falters from
the heightened sanctions. Trade linkages with Russia and Ukraine are limited,
with ASEAN countries having only 1-2% of their share of total trade coming
directly from both countries. Within this, the bulk of the goods are in mineral fuels,
iron & steel, fertilisers and wheat. Even then, the share has fallen further in recent
months as countries avoided trading with Russia for fear of retaliation by the
western nations. Nevertheless, the ongoing conflict only means prolonged supply
chain disruptions and high prices going forward.
Theme 3: Supply chain easing as demand falters
Supply chains disruptions continue to be a major drag on the global economic
recovery. Originally triggered by the global lockdowns for Covid-19, the delays are
now being exacerbated by the Russian invasion of Ukraine and China’s zeroCovid-19 policy.
In Europe, supply chain disruptions are largely caused by the European Union’s
(EU) embargo on Russian imports. Thus far, prohibited items include coal, iron,
steel, wood, cement, seafood, liquor, technologies used in oil refining, as well as
luxury goods. Due to the restrictions, Russian shipments are being held at
European ports awaiting inspections by customs, causing massive delays.
According to Eurostat, in 2021, Russia was the fifth largest exporter of goods to
the EU with a 5.8% share; more than 60% of the exports were energy related.
The future of the supply chain issues in Europe is highly uncertain. If the sanctions
on Russia escalate into a wider embargo, we could see continued supply
disruptions as well as high and volatile commodity prices for much of this year. As
a consequence, consumers’ spending power will be eroded, contributing to a
decline in business and consumer confidence and leading to a slowdown in global
economic growth. The International Monetary Fund (IMF), in its April World
Economic Outlook, already downgraded its euro area 2022F GDP growth forecast
to 2.8% (110bp lower than in its January estimate), with the biggest downgrades
for Germany and Italy given their sizeable manufacturing sectors and greater
dependence on Russian energy imports.
On the other side of the globe, China’s Covid-19 lockdowns are being lifted
gradually. Shanghai reported zero Covid-19 cases in Jun 22 for the first time since
March, and cities such as Beijing have seen partial reopening. Restrictions remain
tight, however, at the time of writing, as residents still have to get tested every 72
hours to take public transport and to enter malls and public places. Nevertheless,
the resumption of economic activities means that production capacity can return
to normal, easing the supply shortage we have seen since March this year.
Leading indicators such as the purchasing managers’ index (PMI) for China’s
National Bureau of Statistics (NBS) non-manufacturing PMI rebounded strongly
to 54.7 in June, up from its low of 41.9 in April, while Caixin manufacturing PMI
increased to 51.7 in Jun 2022 from April’s 26-month low of 46.0.
Multinational companies based in China have already seen higher production
capacity. In addition, port congestion has also improved, as demand slowdown
from China and the US has allowed carriers and port operators to catch up with
orders and allow delivery of cargoes to speed up, according to June supply chain
report by Project 44. This allowed the logistics companies to match the expected
wave of additional pent-up demand from China’s latest reopening.
Going forward, we expect supply chain constraints to gradually taper off towards
end-2022F due to the balance of three factors. On the negative side, we believe
sanctions on Russia can only get worse at this point, leading to suppliers
scrambling for alternatives. On the positive side, the tightening of the monetary
policy around the world in an effort to pare down the rise in inflation will likely result
in weakening demand. This will translate into softer trade volumes and a chance
for supply to catch up with demand. Third, we project China’s post lockdown
‘revenge spending’ to be temporary, as consumers may maintain a cautious
approach given the lack of clarity on its government’s ‘zero-Covid’ exit strategy
and lingering possibility of another wave of infections.
Theme 4: Inflation could worsen if protectionism rise
Commodity prices peaked in Mar 22 following the Russian invasion of Ukraine,
but the subsequent developments, including European sanctions on Russia, have
kept prices elevated. Oil prices remain comparatively high, with Brent oil’s YTD
average at US$103 per barrel vs. US$71 in 2021, while prices as at end-2Q22
were above US$110 per barrel.
Similarly, staples too are not immune to the effects of supply disruptions. Goods
like grains, vegetable oils and meats are among the worst affected foodstuffs.
According to UN Food and Agriculture Organization (FAO), May data shows a
mom decline in average food price index but prices such as poultry were higher,
exacerbated by the surge in demand, slow and inelastic supply, as well as bouts
of protectionism.
Protectionism, especially on food items, is a threat. Domestic scarcity and the
increase in input prices for production have led to a spike in prices and lower
supplies. According to International Food Policy Research Institute, at least 15
countries have some form of restrictions on food exports, including Malaysia which
has banned chicken exports.
Among the regional economies, inflation and food security pose an existential
problem. For lower-income economies, the proportion of food in the consumption
basket is larger, eating away at their real disposable incomes. Even in more
developed countries with limited agricultural output, such as Singapore, reliance
on food imports is high, leaving it vulnerable to the export bans of other countries.
Going forward, we believe several key developments will determine prices:
• Oil prices are set to remain elevated into 2023F. OPEC+ has committed to
raise production but the EU’s recent 6th sanction package, including its partial
ban on Russian oil imports, could add to volatility. The US Energy Information
Administration (EIA) in its June forecast projects 2022F Brent price to average
US$103 per barrel, with 2023F trailing at US$97 per barrel.
• High prices for fertiliser, key for agricultural production, may cause food supply
disparity. Countries may scramble to raise their own domestic food production,
utilising more fertilisers and pushing prices higher. However, higher costs may
also deter production in less developed nations. On a net basis, global farming
output may not rise overall in 2H22 and 2023.
• The risks are skewed towards ongoing protectionism. Although protectionism
could be temporary and sporadic, it might lead to more volatility in prices, which
could compound the shortages and exacerbate the situation.
• Food and energy price increases are likely to impact other costs. Inflation in
services, in particular, is seeing an increase in momentum, especially for those
related to food and transport, such as restaurants and airfares.
• On the downside, we expect a global increase in interest rates to lead to a
sustained and gradual slowdown in economic activity, capping the demandpull inflation.
On balance, global prices may have peaked but will remain elevated for some
time, in our view. As a result, the price momentum on a mom basis may remain
strong in early-2H22F, as current price shocks trickle down to the rest of the
economy before easing in the latter part of the year and into 2023F, in our view.
However, on a yoy basis, inflation should already start to trend lower, partly
attributable to the base effects from the rise in oil prices last year. That said, risks
to inflation still remain on the upside – China may reinstate another hard lockdown
if Covid-19 cases flare up, weather issues could disrupt food production, or
geopolitical conflict could broaden.
For the four regional economies, the impact of inflation will differ depending on the
governments’ ability to manage prices. Malaysia appears to have the highest
control, with generous subsidies on fuel and cooking oils, alongside extensive
price caps and anti-profiteering measures. As a result, we project the country’s
inflation to be milder compared with its peers. In Indonesia and Thailand,
subsidies are more limited, especially for the latter as a net oil importer, causing
larger spikes in prices. Singapore’s appreciation of its Singapore dollar allows it
to dampen imported inflation. Nevertheless, price shocks, especially due to
unexpected events (such as the ban on chicken exports by Malaysia), would still
impact its domestic prices. Regardless, future price readjustments cannot be ruled
out, especially if the burden of government subsidies becomes too heavy to bear.
