Economic recovery, friendshoring and other trends set to dominate in 2023

Optimism is starting to shine through as China pivots away from ‘zero Covid’, inflation eases and interest rate increases abate. Worrying trends such as ageing populations and high healthcare and energy costs remain, but there is reason to believe this optimism is more than wishful thinking

James David Spellman

Published: 5:45pm, 31 Dec 2022

Why you can trust SCMP

Optimism is breaking through the storm as fierce headwinds abate. Is it wishful thinking? A year ago, inflation raged worldwide. The US Federal Reserve led central banks in abandoning an era of easy money by aggressively raising interest rates while curtailing asset purchases. They had pumped so much liquidity into markets that rates turned negative.

The plot darkened when Russia invaded Ukraine on February 24. The dire consequences have been roiling grain and energy markets ever since while reordering superpowers’ geopolitical priorities.

Meanwhile, Beijing’s “zero-Covid” policy accelerated the slowdown in China’s maturing economy, already beleaguered by the real estate bubble, collapsing demand for imports, trade restraints on its exports and local governments’ US$8 trillion debt burden. Earlier this month, Beijing abandoned its harsh pandemic policy. Infection rates and deaths are rising, but the lack of data makes it hard to assess the economic perils ahead.

Now, global inflation shows signs of waning. Central banks are telegraphing smaller rate increases through mid-2023 unless a “hard landing” forces a reversal. The Fed’s recent 50-basis-point increase illustrates the retreat.

But inflation is wily, and the US economy remains strong. Equity traders are skittish but bond dealers less so, and US Treasury and corporate bond yields have fallen since late-October highs.

A day doesn’t seem to pass without another forecaster revising upwards their outlook. A few months ago, their grim scenarios predicted an inevitable recession worldwide, especially for a Europe crippled after Russia choked off gas supplies. Central banks, however, aren’t persuaded.

01:32

Chinese heater factories are making a killing as Europe prepares for winter amid gas shortage

Asia now appears likely to be among the fastest-growing regions in 2023. These export-driven economies will advance at a sluggish to moderate pace, with India expected to be the world’s second-fastest.

China’s loosening of pandemic controls after an abrupt and difficult contraction will lead to a sharp rebound by next winter, some contend, followed eventually by gradual deceleration in productivity growth. The country will then settle at “sub 4 per cent growth” for a long stretch.

This slowdown means a weaker tailwind ahead for global expansion. It also means China’s growth must rely increasingly on domestic demand to offset weaknesses in exports.

Other trends shaping 2023 include:

Macroeconomic trends matter – lower debt, scarce energy, disruptive technologies and costly health care. The sharp decline in global debt as a share of GDP is a reason for optimism in 2023. So, too, are the “excess savings” of households in rich countries, fuelling spending as inflation erodes real incomes. Asia will benefit from both fundamentals.

Like the rest of the world, Asia will also need to continue addressing the challenges of scarce energy, disruptive technologies and costly health care. Energy is likely to be more expensive and less accessible. Enormous investments are incrementally reducing fossil fuel dependence, but the leaps in renewables needed to achieve energy independence are likely a decade or two away.

08:42

The surprising hurdle slowing China’s switch to green energy

Challenges in technology include regulations forcing standardisation, more rigorous barriers to both protect national defence systems and leverage home-grown advantages and disruptions from metaverse opportunities. There will be pluses and minuses for Asia.

Rising healthcare costs, gaps in services delivery, the waves of Covid-19 outbreaks and utilisation of technologies to better diagnose and treat patients will remain challenges for an ever-changing, expanding and more costly necessity.

Inertia remains. Decade-long trends will persist, most notably the ageing of Asia’s population. The number of older Asians is expected to rise sharply in the coming decades. Those constraints will worsen labour shortages and raise social costs while shaping economic outlooks and domestic priorities.

China turns inward, tempering “wolf warrior” diplomacy. China will continue to assert its power through military exercises and agreements that tighten bonds with Saudi Arabia and Russia, among others, but in a way that does not threaten the West to react with more aggressive trade retaliation and manoeuvres of force.

President Xi Jinping reshuffled his foreign policy team in October to bolster his “wolf warrior” diplomacy, but domestic concerns are forcing Beijing to turn inward to engineer a robust rebound. Like any for-profit business, China needs manufacturing orders and access to foreign markets.

Stakes too high for China to risk Wolf Warrior diplomacy in Southeast Asia

“Friendshoring” accelerates. Manufacturers are setting up plants outside China, as a supply chain heat map shows, with China losing out to Vietnam, Malaysia, Bangladesh, India and Taiwan in sectors ranging from apparel to minerals to technology. Apple plans to make MacBooks in Vietnam by mid-2023.

Europe’s business leaders see China as more politicised now than in 2019 and 23 per cent are considering moving operations out of China, a shift from 2019 when their commitment was “increasingly firm”.

Regional interdependence deepens. Trade within Asia has grown ninefold in the past two decades, from US$38 billion in 2000 to US$349 billion in 2018. That trend will intensify. Asia’s leaders want to offset Beijing’s clout, but they will need to address significant intra-market barriers such as high tariffs and technical roadblocks.

More deals with allies. China, alongside the West and Russia, is scrambling to tighten its embrace of Africa and the Middle East with security and trade pacts, moves based on Cold War calculus. Doing so enables Beijing to triangulate against Washington and Moscow, demonstrating its power and independence. Other countries in Asia will be more entangled in these entreaties while ironing out their own deals.

Ahead, then, is the intractable, the inspiring and the unforeseen. There will be lacklustre equity gains, inevitable shocks and a growing sense that we might have weathered what only months ago seemed a daunting recession.

James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC