A plethora of risks hangs over major economies, threatening consumption
Amid inflation, higher debt costs, falling values of real estate and stock markets, austerity may become a dominant theme among consumers in 2023
FOR most of 2022, economists and strategists fretted that the rapid pace of interest rate hikes in the US has magnified the downside risk to economic growth. Between March and December, the Federal Reserve mounted seven rate hikes, or a total increase of 425 basis points, in its drive to quell inflation. The Fed funds rate has risen from just above zero in March to between 4.25 and 4.5 per cent in December – and the Fed is not done yet. The Fed funds rate is expected to settle at around 5 per cent in 2023.
The policy rate path in the US this year has been unprecedented. According to Statista.com, the Fed raised rates by 425 basis points between 2004 and 2006, but it took two years to do so, instead of 10 months.
At the start of 2022, the concern had been whether the Fed could successfully pull off a balancing act of reining in inflation while engineering a soft landing. Today, the consensus expectation for a recession has broadened; the debate now centres on when a recession would begin to show and how deeply it may bite in the US and the rest of the world.
In recent remarks, World Bank president David Malpass said he was “deeply concerned” about the risk of global recession: “It might bring years of slow growth and widespread asset repricing. This is a true long-term crisis facing people in developing countries.” International Monetary Fund (IMF) managing director Kristalina Georgieva earlier expressed similar concerns, even as she urged central banks to continue efforts to dampen inflation: “We cannot afford inflation to be a runaway train.”
Global growth expectations have been significantly reduced. The World Bank has forecast growth of 2.9 per cent for 2022, compared to its forecast of 4.1 per cent in January. The IMF seems a tad more optimistic with its expectation of 3.2 per cent for global growth, but it warns that risks to the outlook remain “unusually large and to the downside”.
Singapore has reduced its gross domestic product forecast to between 0.5 and 2.5 per cent for 2023, down from about 3.5 per cent in 2022. The official forecast is more downbeat than private sector economists, among whom the median forecast is for 1.8 per cent growth in 2023, based on the Monetary Authority of Singapore’s survey of professional forecasters conducted in November. But that, says Oxford Economics, may be “too upbeat”. The firm expects net trade to be a major drag on Singapore’s growth.
To be sure, there are numerous “known unknowns” that could upend forecasts. For instance, hopes are anchored on an economic recovery in China, as it pivots away from its zero-Covid policy. But its pivot is unlikely to be smooth. Already, Covid infections are expected to surge; deaths are expected to rise; and there is concern over how its healthcare system would cope as vaccination rates remain low among the elderly. As China ramps up economic activity, inflation could also be exacerbated as demand for commodities hots up.
Elsewhere in the world, a strong US dollar raises concern over developing economies’ debt burden; a resurgent dollar has already negatively impacted emerging economies’ terms of trade. Further economic weakness and deterioration in governments’ balance sheets could worsen capital outflows.
The big unknown is how consumption, a lagging indicator, would be impacted. In major economies, consumers are buffeted on many sides by higher mortgage costs; elevated inflation for food, energy and rentals; falling real estate values and declining stock markets. All these factors sap whatever wealth effect that may have remained since the Covid outbreak. In Singapore, even though real estate prices appear resilient so far and household balance sheets seem healthy, the one percentage point rise in the goods and services tax next year could not come at a worse time. Amid ongoing volatility in the macro environment, austerity may well be a dominant theme among consumers in 2023. This does not bode well for global growth.
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