Despite a challenging few years, countries across the Asia-Pacific region are entering 2023 with some momentum. Easing pandemic conditions and improved mobility have boosted domestic demand and retail sales. The region has also enjoyed strong export growth, most notably across South-East Asia.
The diversification of global supply chains away from an over-reliance on China has seen a number of beneficiaries, particularly in South-East Asia and India. Asia also has a gigantic pool of tech talent leaving countries well poised to tap cutting edge growth industries.
But 2023 will be characterised by stronger headwinds that are predicted to slow growth. With the European Union entering recession and low growth forecast for the United States, countries across the region will no longer enjoy the export boom of recent years.
Inflation and the response of central banks will also cast its shadow, disproportionately hitting balance sheets in countries where households and businesses are highly leveraged.
This year will also see the continuation of geopolitical concerns dampening market enthusiasm. An escalation of the war in Ukraine could deepen the impact on commodity prices. North Korea has rejected overtures from South Korea and is likely to continue with its nuclear development and testing.
China’s domestic economic problems could, conversely, see it adopt a more conciliatory approach to diplomacy and ease geopolitical tensions somewhat.
The Economist Intelligence Unit forecasts regional growth of 3.5 per cent in 2023 which is marginally slower than 2022 and significantly short of the pre-pandemic trend of 4 to 5 per cent.
Rising cost of debt
With the exception of China and Japan, central banks across the region increased their policy rates over 2022 to tackle inflation and support local currencies, and the impact of these increases will mostly be felt in 2023.
Countries with high levels of household debt – such as South Korea and Australia – will be hard hit, with the EIU giving below-consensus GDP growth forecasts of 1.3 per cent and 1.5 per cent for Australia and South Korea respectively. The high household debt levels of Malaysia and Thailand will also drag on these economies somewhat.
Higher debt servicing costs will “add to the squeeze caused by the higher consumer and producer prices generated by the war in Ukraine,” EIU said, and hit consumer spending and business investment.
Conversely, the gigantic emerging markets of Indonesia and India both have low household debt levels, as does the advanced economy of Singapore, and these markets are less likely to be impacted by forced household deleveraging.
Uncertainty across South-East Asia
Investors have been keenly watching South-East Asian nations as manufacturers seek alternative destinations to China. The region has seen a boom in physical and digital infrastructure, while mega-regional free trade agreements have helped smooth supply chain linkages.
But political risk will increase uncertainty, and conditions will depend on how countries navigate their own individual challenges. Thailand faces a highly contentious election this year, and if forces loyal to exiled former prime minister Thaksin Shinawatra gain the upper hand, controversy and discord are likely to follow.
Malaysia saw an indecisive outcome to its November 2022 election, with hopes that a “unity” government led by Prime Minister Anwar Ibrahim may bring new energy and reforms, but also fears long-running instability will continue.
The large and diverse country of Indonesia is also gearing up for an election in 2024, and electing leaders in over 270 provincial, district and city governments simultaneously in November 2024 will be no mean feat.
“With negotiations and coalition-building dominating the political agenda, the Jokowi government may become a lame-duck sooner than expected, even though his term continues until October 2024,” writes Hana Satriyo for The Asia Foundation.
India to gain ground
India may be a beneficiary of instability in South-East Asia and investor concerns about China, which may enable it to draw greater numbers of global manufacturers looking to relocate.
India has a large and youthful labour market, and EIU notes “incremental progress in addressing weaknesses in terms of transport infrastructure, taxes and trade regulation.” The EIU now ranks India above China in its global business environment rankings.
Investment has accelerated in India’s electronics sector, which the country has previously struggled to cultivate, aided by government support. Electronics exports rose by around 50 per cent to $14 billion in 2021, and had matched that value over the first nine months of 2022.
Taiwan’s Foxconn, an Apple supplier, is among others planning significant expansion in India. India’s presidency of the G-20 in 2023, and its likely conclusion of bilateral trade agreement negotiations with Australia and the UK, will further strengthen its hand.
China’s long road back from Covid-zero
Continued weakness in China’s property market, and the impact of weak international consumer demand on Chinese exports, will continue to put pressure on China’s economy, according to the Asian Development Bank’s Asian Development Outlook.
While easing pandemic measures have given much of the region a running start into a difficult year, China is only beginning this journey, and a smooth transition back to normality is far from certain.
The EIU cautiously forecasts China’s economy to grow more quickly in 2023, but also notes several significant members of Xi Jinping’s new leadership team, notably the incoming premier Li Qiang, lack experience running the organs of China’s central government.
Challenging domestic circumstances could persuade China to ease its increasingly combative approach to international relations, which has impacted China’s economy due to sanctions, trade tariffs and heightened geopolitical risk, and led to a rising aversion from international firms to expand business operations in China.
“While China is not about to conduct a foreign policy U-turn, especially with Mr Xi still in charge, we believe that it will seek more favourable international conditions in 2023 as it manages domestic challenges,” says the EIU.
The return of big-spending Chinese tourists will be widely welcomed across the region, but so far, numbers have been anecdotally lower than expected even during the lunar new year.
Experts pin hope on technology
Asia has a gigantic pool of tech talent, producing a large proportion of the world’s STEM graduates according to the McKinsey Global Institute. Project Syndicate reports Asia has accounted for 52 per cent of global growth in tech-company ventures, and 87 per cent of patents filed, over the past decade.
The region shows strong development in next-generation electric-vehicle batteries, innovation in consumer electronics, 5G development, and digital information-technology services. Vulnerability to the effects of climate change is also driving an enormous push in technological solutions and renewable energy.
But technology gaps in the region remain significant and intra-regional collaboration and investment will be critical. The just-signed Regional Comprehensive Economic Partnership is likely to foster closer ties.
Global market researcher Forrester argues wise technology selection may help investors in the region build resilience and set the stage for future growth, pointing to digital industrial platforms, industrial metaverse initiatives, process intelligence, and automation and robotics as key areas to watch.
And with organisations in Australia, Singapore and India investing, supporting and championing cybersecurity startups and investment, there will be strong growth in cybersecurity startups which have previously been notoriously scarce in the APAC region, Forrester says.
The Fiduciary Investors Symposium in Singapore from March 7-9 will explore the importance of Asia in the global economy and the risks and opportunities in the region. To view the stellar lineup of speakers and to register click here.