Economic outlook in 2023
The 2023 outlook both looks and feels like a recession waiting to happen even if the global growth forecast is currently still lurking in the positive territory of ~2% YoY. The economic and geopolitical landscape remains challenging and the near-term outlook is just as murky despite China’s earlier-than-expected re-opening. The major economies may face a synchronised downturn in 2023 but due to somewhat idiosyncratic risks, namely the aggressive frontloading of monetary policy tightening in the US, still elevated inflation, the Russia-Ukraine war contributing to higher energy prices in the Eurozone, and China’s resurgent Covid cases and soft property market. Elsewhere, the Emerging Market (EM) economies have been buffeted with USD strength, fickle portfolio flows, persistent geopolitical tensions between the major powers, and separate waves of supply-side and commodity-driven inflation shocks.
The IMF, World Bank, ADB and WTO have flagged a further broad-based deceleration into 2023 with downside growth risks from multiple headwinds including the tightening of financial conditions, after paring their 2022 growth forecasts Notably, the IMF tips global GDP growth to slow from 3.2% in 2022 to 2.7% in 2023, albeit warning that countries accounting for a third of the global economy likely to see a two-quarter growth contraction and with a 25% probability that global growth will fall below 2% next year and a 10-15% probability that it will slip below 1%. The OECD is less upbeat, calling for growth to ease to just 2.2%, down from 3.1% in 2022 and a sharp moderation from the 5.9% in 2021. The WTO also projects global merchandise trade volumes will moderate from around 3.5% in 2022 to 1% in 2023, down sharply from the earlier April estimate of 3.4%, but with downside scenario caveat of as low as -2.8%. As major economies see sharply slower growth and demand conditions, import demand may stall amid the still high inflation, rising interest rate environment and sporadic Covid outbreaks. We also cannot rule out other potential curve balls in the form of more supply chain shocks, especially in commodity markets, whether due to geopolitical instability or climate disasters.
With growth risks tilted towards the downside, the key question is whether the potential recession risks have been sufficiently priced into the financial markets? If so, will there be possible upside surprises. This encapsulates our “darkest before dawn” story of two halves that may illuminate the 2023 outlook with 1H23 potentially seeing subdued manufacturing and demand growth before stabilising in the second half or towards the end of 2023. As inflation rates stabilise and gradually ease in 2023, partly due to high base effects from 2022, global central banks that had aggressively tightened monetary policy to reach restrictive territory may have to contend with weighing the trade-offs between growth and inflation more acutely. While major central bank rhetoric appears to argue for persisting in restrictive territory for interest rates for longer due to core inflationary concerns, nevertheless we may see more policy divergence once the USD strength story peaks and EM market get a breather on the yield differential and FX fronts.
To recap, the US Federal Reserve has frontloaded its monetary policy tightening with embarked on Quantitative Tightening to reduce its balance sheet. Fed chair Powell is signalling that “the time for moderating the pace of rate increases may come as soon as the December meeting”, although he caveated that the “timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation and the length of time it will be necessary to hold policy at a restrictive level”. Other major central banks like the ECB and BOE etc are also proceeding with interest rates hikes, but we may be reaching an interesting turning point globally where market expectations that a taper or slowing of rate hikes is imminent. In particular, BOC, RBA, FOMC and even MAS have begun to consider the cumulative lag effects of earlier policy tightening and/or signal that inflation may start to peak and ease by 2H23. In contrast, the PBOC remains an outlier in terms of dovish monetary policy settings, preferring to prioritize growth since their domestic inflationary pressures are relatively manageable. BOJ surprised markets in December with its Yield Curve Control (YCC) tweak and BOJ governor Kuroda is stepping down in April which could pave the way for further policy normalization. As we move into 1Q23, the stalling growth momentum signals may become more acute and warrant a fair degree of caution on market valuations and rising volatility amid the repricing of risk assets before easing inflation and more supportive policy signals facilitate a turnaround.
For now, the US economy appears to be fairly resilient, with consumer spending still holding up well amid a tight labour market that has shown little signs of softening notwithstanding headline news about big tech companies announcing layoffs amid the global growth and demand slowdown. However, the US economy may stall in the coming quarters if the Fed remains more hawkish than markets have priced in. The recent crypto-currency fallout also appears to have limited contagion to other asset markets. But as recent oil market gyrations suggest, investors remain very sensitised to demand-supply shifts and also to OPEC+ signals as the latter’s output cuts/hikes can play a swing role amid the anticipated impact of the upcoming EU’s embargo on Russian oil and also the G7 proposal to cap Russian seaborne oil prices, especially how far the gap between the price cap and the market spot price is. With energy prices “weaponised” by geopolitics, oil importing countries remain susceptible to the hard realities of energy security. As such, while the attention is mainly focused on Russia-Ukraine throughout 2022, geopolitical hotspots elsewhere may feature in 2023 for its potential impact on economic resilience, cross-border trade and investment flows, transport and logistics, consumption and business decisions. Ditto for food security and cybersecurity concerns in a more fragmented and polarised world.
For Malaysia, we have held the view that Malaysia’s consumption may be slowing down, as the post-Covid rebound has been in part financed by EPF withdrawals that may not be sustainable. The upside surprises thus far in GDP prints in 2022 suggest that we have been too bearish, compelling us to upgrade our 2022 growth outlook from 5.7% to 6.9%. Going forward, however, the consumption support might not be as robust due to the relatively high household debt level and depletion of EPF statutory retirement funds.
Similar to our concerns about the longevity of the consumption boom, however, we think it is worthwhile to strike a more cautious note on the export outlook in 2023. This is especially so given the continued downdraft in the semiconductor sector. While Malaysia’s role in the testing and packaging part of the value chain, rather than the initial production side, may shelter it somewhat and with a time lag, the effect might come forth more strongly in 2023, especially if the down-cycle is prolonged.
Such cautiousness with regard to the 2023 outturn for both consumption and exports cycles underpins our view that the GDP growth overall is going to shift to a lower gear and come in at 4.6%, lower than the likely 6.9% in 2022.
The slower growth will present Malaysia’s new government a more challenging landscape, as well. Given the need to bolster popular support, the government may have little choice but to pursue a relatively loose fiscal policy. On the expenditure front, we are likely to see a suite of budget measures aimed at relieving the population of cost-of-living upticks, including via cash handouts. The prospect of subsidy cuts for fuel and food purchases looks to be dim as well, at least in the near term.
On the revenue side, the classic policy choice of whether to reinstate GST will come to the fore too, as the need to lessen the dependence on oil-related revenues remains perennial. Various PH officials had been rather adamant about not adopting GST before, but fiscal reality when it gets back into power might change things.
In the meantime, on the monetary policy side, concerns about inflation are likely to persist going into 2023, even if on a year-on-year basis the headline numbers might not be as bad. On a relative basis, the likelihood of subsidy cuts might have been reduced with the new government in power, but it would remain one of the key risks that Bank Negara would have to countenance. Hence we continue to see the risk that the central bank may have more compulsion for rate hikes. Set against the relatively strong economic backdrop for the past few quarters, we see it tweaking rate up to 3.25% in Q1 next year, rather than 3.0% as per before. In other words, it is thus likely to hike by 25bps each in the January and March 2023 meetings. We see BNM on pause thereafter, however. While the near-term growth looks rosy enough, Malaysia is unlikely to be unscathed in any sharp global slowdown that may materialise.