External headwinds will test Asean’s mettle once again

ASEAN’s economic resilience will be put to the test once more this year amid multiple external headwinds from recessionary pressures in the United States and Europe as a result of rising interest rates as policymakers battle the scourge of inflation.

Much of the region held up valiantly in 2022 as the Covid-19 pandemic lingered and the Russia-Ukraine conflict led to a supply shock and sent prices of energy and food skyrocketing, prompting central banks to hike interest rates. Even as the strengthening US dollar snowballed across Asia, Asean currencies as a whole withstood the onslaught relatively well. This year, Asean’s mettle is set to be tested further.

Consumption in the US, the world’s largest economy, held up last year but the views at the start of 2023 on whether it will be able to nail a soft landing seem starkly mixed. Europe will take a while to recover from the sting of an unprecedented energy shock as it faces record inflation prints and tightening financial conditions.

In its recent forecast, the World Bank warned that any new adverse development amid fragile economic conditions – from inflation, abrupt spikes in interest rates and a resurgence of the Covid-19 pandemic to escalating geopolitical tensions – could push the global economy into recession. If this happens, it would mark the first time in more than 80 years that two global recessions have occurred within the same decade.

The macro landscape for Asean may be vulnerable but is less tenuous compared with its advanced Western counterparts. While price pressures persist, inflation has been relatively more benign. Much of this is owing to strong momentum recovery in pent-up activity from the easing of pandemic-led curbs. At the same time, government efforts such as price controls and subsidies have also helped mitigate skyrocketing prices.

There are pockets of hope on the external front, chiefly easing inflation on the horizon as a result of weaker demand and as bottleneck shocks come slowly undone. This could also shorten the rate hiking cycle by central banks, although policymakers in the region have generally raised rates gradually, versus the aggressive trajectory in advanced economies. As such, the possibility of inflation spinning out of control this year could possibly be ruled out.

A NEWSLETTER FOR YOU

Friday, 8.30 am

Asean Business

Business insights centering on South-east Asia's fast-growing economies.

Sign Up

The big game changer for the region – and the world – is the grand reopening of China’s economy this year, which will rev up activity for Asean and lead to a significant recovery in goods and services trade and commodities demand. Note that since 2020, Asean has surpassed the European Union to become China’s largest trading partner; hence, a recovery in Chinese demand bodes well for the region’s exports.

Tourism is set to be one of the biggest winners, particularly in countries such as Thailand and Vietnam, where Chinese tourists accounted for some 30 per cent of visitors pre-pandemic. For that matter, the return of Chinese travellers could potentially galvanise even economies that are not tourism-reliant.

Furthermore, the US-Sino tension has also led to some structural shifts with the US onshoring and offshoring of supply chains, which has benefited the region as a manufacturing and exports hub. While the export-oriented region has several fundamental factors working in its favour to help withstand the onslaught of external headwinds, many uncertainties loom. This would mean Asean’s true mettle will be tested this year.