The economists at DBS Group Research, Chua Han Teng, Radhika Rao and Irvin Seah are expecting a weaker global growth outlook and rising external headwinds to dampen Asean’s growth prospects via the trade and exports channel.
Economies that are highly dependent on trade such as Singapore, Vietnam, Malaysia and Thailand are likely to be more impacted, they add in their outlook report dated Dec 13.
In particular, goods export growth for the Asean-6, referring to Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam, is likely to cool in 2023 after a relatively stellar performance in 2022.
“Asean-6 exports (on a purchasing power parity or PPP-weighted basis) expanded at double-digit rates of 15.2% y-o-y (on a three-month moving average basis) through October 2022, outperforming the Asian region, but the expansion is cooling,” the economists write.
“This is seen in slowing electronics shipments and correcting commodity prices, as we head into 2023,” they add.
Goods exports for the Asean-6 are exposed to demands from the US, Europe and China. These three regions are sources of between 30% and 60% of each economies’ exports, the economists point out.
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“Contribution of the US and EU to individual Asean-6’s headline export growth in January to October 2022 vs 2021 has been resilient, while China’s share narrowed. While the upcoming slowdown risks in the West are well-documented, China’s reopening dynamic would be a wildcard,” they write.
“Assuming the Covid-related restrictions are completely unwound by 2H2023, China’s reopening tailwinds will benefit the Asean-6 bloc. Here too, the composition of the export basket will matter, with electronics-heavy counterparts likely to see a smaller boost than the raw material/ commodity players,” they add. “Signs of a slowdown in electronics/ semiconductors from South Korea and Taiwan are less than comforting.”
Over the medium-term, Asean looks set to make continued progress in trade integration with the Asean region over the medium-term.
The Regional Comprehensive Economic Partnership trade pact (RCEP), which the Asean-6 members, except the Philippines have ratified, would lend a helping hand. Other major economies, which are part of the 15 members in RCEP include China, South Korea and Japan, as well as Australia and New Zealand.
“The move towards a large unified market would bode well for Asean’s medium-term trade prospects amid improved efficiency and regionalisation of supply chains, coupled with modest gains from goods tariffs reduction,” note the economists.
China’s trade ties with the Asean-6 also look likely to grow in 2023. The group’s trade share with China is catching up with the sizeable intra-Asean trade share, which has stood sturdy at above 20% over the years, they add.
To this end, they see investment growth for the Asean-6 likely to be slower as the cost of financing has risen and there are “considerable demand uncertainties” on the horizon.
“Our base case forecasts see Asean-6 growth (PPP-weighted basis) easing to a still-respectable 4.8% in 2023 from 5.8% this year,” they write.
Headline inflation to average lower for Asean-6 except Singapore and Vietnam
With inflation standing at multi-year highs in 2022, the economists see headline inflation figures peaking in Indonesia, Malaysia, Singapore and Thailand.
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In 2023, the economists expect headline inflation to average lower in most of Asean-6 in 2023, except for Singapore and Vietnam.
“Correcting global commodity prices, easing supply chain bottlenecks, and a reversal in downside currency pressures vs the US dollar would provide some relief to regional headline inflation, considering that the weights of fuel and food account for at least 50%-60% of consumer price inflation baskets across the bloc,” they write.
Core inflation in 2023 should be “contained” by the easing cost pass-through, some let-up in pent-up demand and the feed-through from monetary policy normalisation that would anchor inflation expectations.
Most of Asean’s hiking cycles are likely to be in their last leg in early-2023 before settling into a pause as well.
“Policy makers would aim to balance between rising growth headwinds, yet err on the side on inflation, especially efforts to keep inflationary expectations anchored,” say the economists.
Soft patch ahead for Singapore
In Singapore specifically, the economists see a soft patch ahead for the country as the manufacturing sector has turned from a key driver to a drag.
“Growth momentum in the sector is waning due to China’s slowdown, a decline in global electronics demand, and tighter liquidity conditions,” the economists write, seeing China’s unwinding in Covid-19 measures in 2023 as “pivotal”. However, the rhetoric is still “hawkish”, they add.
“A gradual and calibrated approach in the normalisation process can be expected in the coming quarters. If further easing of China’s Covid measures do pan out, the pent-up demand could be significant for the region. That said, China’s Covid policy is a wild card, and we prefer to take a cautious view for now given the high degree of uncertainty.”
The sustainability in the recovery of the services sector is also in doubt.
“Firstly, the existing manpower crunch would put a lid on the near-term prospects of the cluster. The externally oriented services such as shipping, wholesale trade, and financial services could potentially be weighed down by a weaker global demand, higher risk premiums and margin erosion. Without the fresh influx of Chinese tourists, the reopening impetus will start to wane,” writes DBS’s Seah.
“A weaker employment outlook will also weigh down on the domestic service sector. Expect some signs of weakness in the services sector to emerge by mid-2023,” he adds.
Singapore’s economic growth momentum is also expected to slow further in 2023, with growth in the fourth quarter falling below 2% y-o-y with the risk of another sequential decline. The risk of the decline is attributed to a possible further drag from the manufacturing sector.
Singapore’s non-oil domestic export (NODX) figures for the month of October is a good bellwether, notes Seah. October’s NODX dipped into the red with a 5.6% y-o-y decline for the first time in almost two years, dragged by poor electronics exports sales and a deep decline in exports to China.
In November, Singapore's NODX contracted for the second straight month at -14.6% y-o-y with both electronics and non-electronics exports down on a y-o-y and m-o-m basis.
“We expected growth performance to slow to 2.2% in 2023, and a technical recession within the next three quarters should not be discounted,” Seah writes.
In 2023, the economist expects Singapore’s headline inflation to average 6.3% and core inflation to average at 4.2%. His reading takes into account the five rounds of tightening from the Monetary Authority of Singapore (MAS), base effect and the knock-on impact of slower growth. The factors will, however, be offset by the one percentage point hike in the GST to 8% in January 2023.
“Importantly, exchange rate appreciation alone cannot be the panacea. With risk on growth rising, MAS will become more data-dependent in future policy decisions,” he writes.
Key themes to look out for in 2023
In their report, the economists have identified key themes to look out for in 2023. These include the domestic growth momentum vs slowing trade, maintaining macro stability, as well as the impact of China’s economic reopening as the country is a key trading partner and investor for the bloc.
In 2022, Asean benefitted significantly from the shift to living with Covid-19 as an endemic and reopening their economies with most economies’ headline real GDP exceeding their pre-pandemic levels from 4Q2019. Thailand was the only exception. The country is set to reach the same levels by late 2022 and early 2023.
That said, the road ahead is likely to be “forked” in 2023 with domestic consumption-oriented economies as likely to have a higher buffer compared to economies that are export reliant.
Private consumption is also likely to normalise in 2023 with the reopening theme and pent-up demand, as well as on the back of nominal wage increases, subsidies to offset the increase of energy prices, and other factors.
International tourism and travel are likely to remain “supportive” in Asean in 2023, with Thailand being the primary beneficiary of the upturn in foreign tourism.
The reopening of China, with Chinese tourists also remain the key to a full recovery of the tourism sector in Asean. “Attention will be on any relaxation of China’s Covid-zero policy,” say the economists.
After three years of Covid-19 curbs, China, on Dec 27, announced that it will scrap its quarantine measures for its overseas arrivals from Jan 8, 2023. Only a polymerase chain reaction (PCR) test is required to be taken 48 hours before tourists’ arrival into the country.
