As we approach the end of the year and think about the prospects for the new year, there is huge uncertainty in the global environment and how our region will fare in 2024. What we can do is formulate the best possible guess on how things may pan out, while being humble enough to admit that we may get some things wrong.
Despite the uncertainty, one thing is clear. We live in a dangerous world, replete with geopolitical flashpoints and potential economic downsides. Adding to the challenge are issues such as climate change and technological advances which bring us into uncharted territory and whose consequences are hard to assess. So far, so bad.
But, the main point we would make is that it would be wrong to be too despondent. The global scene is not all bad. Our region is also fortunate enough to enjoy some silver linings. If it pursues the right policies and manages its politics well, the region can outperform other regions and end the year in better shape than today.
How will the global risks pan out?
Geopolitical risks will emerge in unexpected places
The flash points of most impact to Southeast Asia are US-China tensions and how they are manifested in Taiwan and the South China Sea. Our call is that these trouble spots will be contained so long as the leaders of China and the US conduct their relations rationally, which is the case for now. The result is a period of managed contestation, as described below:
Neither power has given up on its interests or its insecurities vis-à-vis the other. For instance, China is not likely to step back on the pressure it puts on other claimant countries in the South China Sea such as the Philippines. The US is not going to stop curtailing China’s access ability to strategic technologies, nor is it going to stop building alliances in our region to contain China. So, the frictions will remain and we must find our way around this issue.
What helps is that the two big powers share an interest in avoiding escalation. Both nations face domestic challenges which they know they need to prioritise. Each power also realises that the other is formidable enough so that an outright confrontation would be hugely damaging and so is something to avoid. Consequently, China and the US are working on incorporating “guard rails” that reduce such risks. These include establishing regular communication channels and working together to resolve disagreements in areas where they have mutual interests, such as climate change and managing debt crises in emerging economies.
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In this period of managed contestation, there might still be times when the two brush against each other. But the guard rails will help ensure that such incidents do not escalate into an outright confrontation.
Unfortunately, there is still danger in this new world order because a political vacuum has emerged. The US and regional powers such as Russia and the European Union are distracted and no longer dominate their immediate neighbourhoods as before. Now, their current weakened states mean that they are unable to keep things orderly in their backyards.
So, it is not a coincidence that Azerbaijan and Armenia have gone to war in Russia’s backyard and Serbia and Kosovo, which are under European Union tutelage, are coming close to blows. In the Americas, Venezuela is threatening to annex much of Guyana. With the regional hegemon unable or unwilling to intercede as before, mischievous leaders spy a chance to settle old grievances or pursue military adventures to distract their populations from their domestic failures. That makes the world a less safe place.
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It also does not help that the US will be in election campaign mode for most of 2024. The campaign will be bitter, given the toxic political climate there. Although the betting is on another Biden-Trump rematch, politics is fluid and given the weaknesses of both candidates, there is at least a small chance that the Nov 24 contest will involve very different candidates.
The challenge for this region is the growing isolationist mood in the US. Without the US acting as a counter-balancing force in Europe and Asia Pacific, we could see Russia, China and ambitious middle powers feeling emboldened to push their agendas more forcefully.
We would watch the Korean peninsula closely. North Korean leader Kim Jong-un is not building nuclear weapons and missiles that can reach the US for no reason. He spies an opportunity in US distraction, Russian technological aid and bad US-China ties. He might calculate that a series of provocations could force the US to negotiate with him and allow him to secure a deal with him on terms he favours.
In the Middle East, there are so many fragile or failing states, and so many flashpoints which could easily be inflamed. It is not difficult to imagine an incident that could spark a wider war beyond the tragic situation in Gaza. At the very least, there is a chance that shipping routes in the region (including those affecting the transportation of oil) could be disrupted and that could produce dislocations in the oil market.
Global finance is also at risk from a changed asset pricing regime
There are two dimensions to the risks in the global financial system. One relates to legacy issues arising from the long period of ultra-easy money and the other emerges from a different financial dynamic that will shape asset pricing behaviour in future.
The dangers from legacy issues were evident in the Silicon Valley Bank crisis in early 2023 and also in the near meltdown in the UK gilt market in October 2022. This showed that imbalances deriving from misjudgements typically made when money is too easy can very easily erupt into a crisis from out of the blue.
Now that interest rates are much higher and central banks are also unwinding quantitative easing by cutting back on liquidity, companies that have borrowed excessively or entered into structured products on untenable assumptions will face their fate. Whether it is commercial real estate in the US or highly indebted emerging economies, we expect a few more financial shocks to come in 2024.
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The fact that the Federal Reserve is now pivoting away from further rate hikes and may even cut rates next year will not alter this picture: On average, interest rates are going to be much higher and liquidity much tighter than they have been in the past decade and a half. Moreover, central banks will be less willing to backstop financial misadventures.
Thus, beyond the immediate risks, we also see a different financial dynamic operating in financial markets. The benign era of asset pricing has ended. From around the early 1980s, the strong tailwinds of falling bond yields, China’s opening and rapid globalisation pushed up asset prices. Now we have higher-for-longer long-term rates, slowbalisation, geopolitical risks, and central banks being more circumspect about intervening.
Even with the financial market corrections of the past year, it is surprising to see how many investors believe that some assets such as real estate will just keep rising over time. Financial markets may not have fully factored this new regime into existing asset prices, especially real estate. Thus, the scope for more market corrections remains significant.
But not everything is gloom and doom in the global economy
Despite the bad news, the global economy may not do too badly. Most international financial institutions are forecasting a slow first half and then a gradual recovery in the second half of 2024. We disagree with the gloomier predictions:
The reasons why many large economies demonstrated greater-than-expected resilience to the step-jump in global interest rates remain in force — tight labour markets producing wage growth and a sense of job security, industrial policies by governments that are spurring a wave of capital spending, game-changing new technologies also adding to investment spending, and a remaining though dwindling cache of savings from the Covid era.
China does remain a wild card, though. However, it is clear from the recent Politburo meeting, and the Central Economic Work Conference that followed, that China’s leaders are now committed to stronger — though still calibrated — support for the economy. The meetings reflected an appreciation of the underlying causes of the slowdown and a better understanding of the policy shifts needed to address them.
Based on what we know, the economy should maintain growth of around 4.5%–5%. The risk arises from the opacity in the data and the many shifts in the behaviour of Chinese consumers, private businessmen and home buyers which are not fully understood. Our bottom line — while
Chinese growth may hold up overall, there will be many episodes of financial stress next year that will keep markets on edge.
As for how China will affect the rest of the world, there are two things to watch for. One is that supply chain reconfiguration that is gathering pace, which will produce more relocation of production to places such as Southeast Asia. In addition, there is a growing fear that China may export its excess capacity and cut prices to do so, which could result in deflationary pressures being transmitted from China to the rest of the world.
The world economy will also be shaped by adjustments to climate change and new technologies
The COP28 conference on climate change has ended with a commitment of sorts to phase down the use of fossil fuels. Although some observers are not satisfied with the outcome, the message is clear — there will be more regulatory and policy pressures for companies to adopt climate strategies, which will move from the periphery to the centre of corporate behaviour — and ordinary citizens will increasingly be affected by these changes.
In addition, we are seeing technological changes accelerating, well ahead of our capacity to manage their implications. Advances in separate areas are helping to bootstrap further improvements in other areas. For example, more powerful computers and AI are helping to speed up progress in biomedical areas as well as in materials sciences. Just as AI-related changes such as ChatGPT emerged suddenly to take the world by storm, it is quite possible that we soon see similar revolutionary changes in other areas — perhaps progress in nuclear fusion or cancer therapies. Regulatory efforts will also be stepped up, for instance in the AI space because of the growing fears about how AI can be misused.
Conclusion: Southeast Asia has the benefit of some tailwinds
The regional economies have demonstrated a higher degree of economic resilience in recent years. Improvements in monetary and fiscal policies, coupled with more rigorous financial supervision and a more robust supply side of the economy resulting from deregulation and infrastructure building, place the region in a better position. That is why the region has become the main winner from the ongoing supply chain reconfiguration, attracting large inflows of foreign investment.
In the coming year, the region will have to continue managing big power frictions through hedging strategies such as refusing to take sides and maintaining relations with both big powers. Given the growing risk of protectionism and inward policies, they will have to step up efforts to gain protection from protectionism. They will do this through regional, sub-regional and cross-border integration. The negotiations over a Malaysia-Singapore special economic zone are an example of what smaller nations can do to insulate themselves against less benign global trends.
Ultimately, while there will be challenges in the global economy, the region is in a position to meet those challenges so long as domestic political risks can be contained and sound, rational policies are implemented. So far, the portents are good in this regard.
Manu Bhaskaran is CEO of Centennial Asia Advisors
