On May 14th, legislative elections were held in Thailand to renew the 500 members of the House of Representatives. The "democratic" parties have presumably won more than 300 seats. The two main opposition parties, Pheu Thai and Move Forward, have won more than 290 seats. The opposition parties are discussing to recommend one nominee for the position of Prime Minister.
Economic indicators for the month of April 2023 suggest that China’s economic recovery is rapidly running out of steam. Granted, health restrictions were lifted recently (December 2022) and there are still some major post-Covid catching-up effects that are bolstering household demand. However, growth in other demand components has weakened.
The current inflationary momentum could encourage the BoJ to reassess its yield curve control policy, or even start a tightening in monetary policy. However, the timing and size of any such adjustments are difficult to predict and may not occur before next year.
In Q1 2023, Chinese economic growth stood at +2.2% quarter-on-quarter (compared to +0.6% in Q4 2022) and +4.5% year-on-year (compared to +2.9% in Q4 2022). Activity has indeed recovered rapidly since the abandonment of all the health restrictions last December. The real GDP growth rate in year-on-year terms is expected to accelerate further in Q2 2023.
A rebound in Japanese activity is expected in the first quarter of 2023, linked to the improvement in business and household confidence surveys. The composite PMI returned above the expansion threshold in January and continued its moderate improvement, reaching 52.9 in March. Household confidence – at its highest for a year – also recovered slightly in March, but it is still very low.
Chinese economic growth has re-accelerated since the end of January, mainly driven by services and household consumption. The recovery in manufacturing activity is more moderate. In the real estate sector, the crisis is lessening. These improvements will continue in the short term. However, constraints on economic growth remain significant; they principally stem from the weakening global demand and geopolitical tensions as well as from financial difficulties for property developers, local governments and their financing vehicles. Beyond this, the question arises of a lasting loss of confidence in the Chinese private sector.
In 2022, economic growth slowed but was still buoyant. The outlook for 2023/2024 is favourable even though real GDP growth should slow by around 1 percentage point. In the short term, the main risks are linked to rising prices, which could force the Central Bank to tighten its monetary policy further. The occurrence of the El Niño phenomenon is also a potentially negative factor. Despite the slowdown in growth and the rise in interest rates (48% of loans are at a variable rate), banks and companies remain much stronger than at the end of 2019. In its latest stress tests, the Central Bank reaffirmed that, despite the deteriorating economic and financial environment, public banks would not need any capital injection to meet capital requirements.
Over the past twelve months, the economic situation in Pakistan has deteriorated dramatically. The government has been facing a balance-of-payments crisis and, as a result, has had to take extensive measures to try to contain the drop in its foreign exchange reserves and fulfil the IMF’s requirements in order to receive the funds needed to avoid defaulting on its external debt.Restrictions on imports, the sharp rise in policy rates, the depreciation of the rupee and the dramatic cut in budget spending have significantly hindered economic growth and triggered a very sharp rise in inflationary pressures. Since February 2023, the external position has improved very slightly. However, it is still very fragile and the default risk remains very high.
Korean economic growth lagged behind in Q4 2022, and the slowdown is expected to continue in 2023. Exports will suffer from slowing global demand, while domestic demand will be penalised by rising interest rates and persistent inflation. The risks of financial instability remain limited, but have increased in recent months. Household debt is high at almost 110% of GDP, and households are very exposed to rising interest rates. In fact, 76% of loans to households are being taken out at a variable rate. Potential credit risks though remain limited to the most vulnerable households.
China’s economic activity started to rebound in late January, driven primarily by services and household consumption. Meanwhile, the crisis in the property and construction sectors has subsided. In the manufacturing sector, the growth recovery has remained moderate, hindered by the fall in automobile production and weakening exports. Economic momentum will remain strong in the short term. However, a number of significant downside risks to growth persist.
With alarming inflation across the country, the new governor of the Bank of Japan (BoJ), Kazuo Ueda, will have a baptism of fire when he takes up his role. Even though price increases are expected to slow down during Q1 2023 thanks to government energy subsidies, core inflation has continued to rise this winter. Price dynamics are posing a major challenge and may force the BoJ into making changes to its interest rate control policy, despite bond yields falling off as a result of the recent US bank failures. The Japanese economy stagnated in Q4 2022, buoyed by foreign trade and private consumption during Q4 2022, but slowed by public and private investment. We expect growth to continue in 2023 (1.2%) at a similar pace to 2022 (1.1%), before a more sluggish growth takes hold in 2024 (0.8%)
Japan's economic growth stalled significantly in January. Chinese New Year on 22 January likely contributed to the sharp drop in industrial production, which was down 5.3% m/m.
Economic indicators for the first two months of 2023 show a rebound in activity following the abandon of China’s zero Covid policy in early December and the end of disruptions caused by a spike in contaminations in December-January.
Surveys of Japanese services companies (Services PMI, Economy Watchers Survey) offer little visibility, having fluctuated up and down for several months. Manufacturing sector indices show a clearer trend, with gradual deterioration in activity despite the significant reduction in tensions in production chains closely linked to Japanese manufacturers. The manufacturing PMI remained below the expansion threshold in January at 48.9, having been in near constant decline for the last 10 months.
In China, the official PMIs published on January 31st and the most recent mobility indicators show that domestic demand is rebounding faster than expected following the end of the zero covid policy and the re-opening of the country. This trend should strengthen further in the coming months assuming the epidemic curve continues to improve. We now expect economic growth to be slightly over 5% in 2023, up from 3% in 2022.
Inflation continues to weigh on consumer confidence, while a large proportion of Japanese households will see further increases in the price of electricity next March, with most suppliers having announced price increases from this month.
In Q4 2022, China’s economic growth slowed to 2.9% year-on-year (y/y) from 3.9% in Q3. In quarter-on-quarter terms, activity stagnated. Our Pulse below highlights a broad-based weakening in economic activity during the last quarter of 2022.
The sudden and ill-prepared abandonment of the zero-Covid policy at the start of December 2022 has plunged China into further turbulence. The large epidemic wave has hindered production in the manufacturing sector and again delayed the recovery in private consumption and activity in the services sector. However, assuming that the pandemic starts to ease off in February 2023, domestic demand should finally rebound, helped by additional monetary and fiscal support measures. On the other hand, exports are likely to remain affected by the weakness in global demand. While the current account surplus should narrow in 2023, how capital flows will develop is more uncertain.
The Indian economy coped well with the external environment in 2022, but slowed down mainly because of inflationary pressures. Over the fiscal year which will end in March 2023, the budget deficit could exceed the initial target, but the overrun should be marginal and the debt-to-GDP ratio should continue to fall. The government’s refinancing risks remain contained. On the other hand, the tensions on external accounts are likely to remain relatively strong, mainly as a result of the fall in exports in an unfavourable international context. Nonetheless, the central bank should be able to contain the depreciation of the rupee. While foreign exchange reserves have fallen significantly, they are still sufficient to cover the country’s external financing needs.
Malaysia’s economy held up well in 2022. Economic growth may have exceeded 8% and public finances strengthened thanks to the sharp rise in oil revenues. Furthermore, although external accounts weakened due to capital outflows and increased imports, the current account balance remained in surplus and the ringgit depreciated moderately against the dollar over the year as a whole. The outlook for 2023 is less favourable. Economic growth is expected to decelerate given the monetary tightening and the global economic slowdown. Public finance risks are still contained even though debt remains above pre-crisis levels. The new government should present its 2023 budget in parliament at the end of February. Its budgetary strategy should be in line with that of the previous government
The government of the Philippines maintained health restrictions linked to the pandemic for longer than the average period in emerging countries, with some regions still under lockdown until April 2022. The rebound in activity is not yet finished, and the strength of consumer spending, still supported by remittances, should help to offset the effects of higher inflation and the slowdown in global growth. Economic growth is expected to slow in 2023, but should remain solid. However, the after-effects from the crisis and health measures are weighing on the medium-term outlook.
Vietnam benefited from a solid recovery in its economic growth in 2022, supported by the dynamism of both the export sector and domestic demand. However, the country has also become increasingly vulnerable to the deterioration of the international environment. Exports fell in Q4 2022 and these difficulties are expected to persist in the short term. Inflation accelerated in 2022, the dong depreciated under the effect of US monetary tightening and capital outflows, and the Central Bank began to increase its policy rates. In addition, there was a confidence shock caused by reports of fraud in the local bond market. Against this backdrop, liquidity tensions emerged in the financial sector
Confidence amongst Japanese consumers fell sharply this autumn, reflecting the difficulties they are experiencing in the face of inflation rising to its highest level for more than thirty years (3.8% y/y in October). According to the Cabinet Office, consumer confidence has fallen back to its level from the summer of 2020, when the pandemic was in full swing.
The depreciation of the yuan since the beginning of the year and portfolio investment outflows have been largely due to diverging trends in Chinese and US interest rates. They also reflect a loss of investor confidence and the deterioration in China’s economic growth outlook. Meanwhile, China’s external financial position is still very strong.
Along with the United Kingdom, Japan has had the least vigorous recovery out of all of the G7 countries during the last two years. The country even recorded a 0.3% q/q contraction in real GDP in Q3 2022, pulled down by slowing residential investments and net exports. Even though consumption expenditures grew during Q3 (+0.2% q/q), it is still well below its 2019 levels. The end of Covid-19 restrictions, which were completely lifted in October, will provide additional growth during the last quarter of the year, but the overall increase for 2022 will be rather sluggish (+0.9%). We are expecting a further slowdown in business activity in 2023 (+0.3%), which implies a return to pre-pandemic levels during 2024 at the earliest.
