Coface Asia Pacific Macro Intelligence

Published on 13 Feb 2023

Increase, commodity, inflation, rate

Global prospects are becoming more murky. Recession chances in major industrialized nations are increasing. Recent Bloomberg surveys indicate the likelihood of a recession in the United States and the Eurozone over the next year at 60% and 80%, respectively. The appearance of a 'hard-landing' shock in advanced countries would have ripple consequences throughout Asia, presenting threats to the region's current economic recovery.

While global trade volume growth slowed in September, industrial production in Asia lost impetus. The source of growth has shifted from foreign to local demand, as evidenced by the transition from manufacturing to services in economic expansion. The majority of Asian industries seeing growth in the third quarter were service-based. This change lead to decreased export growth and an increase in inventories. China's consumption remains a weak link despite the zero-Covid approach, and the country's development prospects are dimming. We reduced China's GDP prediction for 2022 to 3.2%. Yet, there are still a few bright spots.

The reopening of borders and removal of restrictions on migration could promote economic expansion in regions such as Southeast Asia, where services and tourist activities are expected to rebound.

We are now living in a world with increasing inflation and interest rates. As a result, the APAC region faces formidable headwinds in the coming quarters, with the global electronics slowdown and new US export controls on advanced semiconductors and chip-making tools posing a risk of disruption to global electronics supply chains, which will have repercussions for economies such as Taiwan, South Korea, and Japan.

Asia's inflation has not yet shown signs of abating

According to Coface's estimations, inflation in emerging Asia surged in September, hitting a 5% annual rate for the first time since 2011. This indicated that the inflation peak may be postponed by a few months, which would have repercussions for companies since it is unsustainable to continually pass on increased prices to consumers. Moreover, rising material prices have spread to a broader variety of products and services, accelerating the core inflation rate. Persistently high inflation would increase consumers' inflation expectations, so limiting private spending, especially on non-essential expenditures.

Inability to contain consistently high inflation will keep the Federal Reserve firmly on the 'tightening' pedal, which in turn will continue to exert pressure on Asian central banks to increase interest rates and become more selective with loans.

Asian manufacturers see increasing margin pressure

The pressure on the profit margins of American manufacturers continued to relax at the conclusion of the third quarter, as seen by September PMI data. In contrast, European and Asian makers of goods reported an intensification of margin pressures in September, as the gap between PMI output prices and input costs widened following many months of contraction.

The ability to reduce margin pressures in the face of deteriorating global demand has been hampered by rising energy costs, notably natural gas prices. Companies that rely on natural gas as a key input will continue to bear a hefty raw material cost burden, whereas those that rely on petroleum may not see significant relief from spot crude prices as a result of OPEC+'s decision to reduce output to support prices in response to forecasts of lower demand.

Asia rate tightening gaining momentum

In Asia-Pacific, monetary tightening is advancing in response to broadening inflation. Concerns regarding capital outflows and local currency devaluation were foremost in the minds of Asian central banks, as the US Federal Reserve was projected to hike its interest rate to around 4.5% by the end of the year. An aggressive Federal Reserve encouraged Asian central banks to implement larger-scale raises, with Vietnam implementing a 100bps boost (the first since 2020) and Indonesia delivering two 50bp-hikes in September and October after a 25bp increase in August.

Hong Kong has increased its policy rate by the highest this year, with a total increase of 300 basis points, followed by Australia and New Zealand.

Tougher economic circumstances

Our findings, based on the Goldman Sachs Financial Conditions Index (FCI), indicate that Asia's financial conditions tightened more in September. The data for the first half of October suggests that the trend will continue. Bond yields, corporate yields, trade-weighted exchange rates, and stock markets, all of which influence financial conditions, were influenced by the Federal Reserve and Asian central banks' tightening attitude.

Financial circumstances were tightening across the area. Japan remained the outlier despite tremendous pressure on the currency, but any emerging evidence of greater wage growth might drive a policy move.

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