Asia Economics Analyst
Ten questions for 2023
Table of Contents
We wish our readers a happy and healthy new year. In our first Asia Economics Analyst of the year, we offer our answers to ten economic and market questions for the Asia-Pacific region and individual countries in 2023. We also review our questions and answers from one year ago.
China's reopening should result in a burst of growth over the coming year (we estimate 7.2% GDP growth on a Q4/Q4 basis) and benefit regional economies, with Hong Kong and Thailand likely to see significant boosts from mainland tourists. While domestic inflation pressures are likely to increase, we do not think they will constrain the PBOC significantly this year.
Asia-Pacific manufacturing and trade should bottom out in early- to mid-2023; along with China's reopening this should help regional growth in the back half of the year.
Inflation is peaking, in our view, though it will remain high in many economies (particularly smaller open economies) through mid-2023. Strong growth and resilient core inflation in India could push the central bank to tighten more than markets expect in H1. Very late in the year, with pressures having eased, we think the Bank of Korea could be among the first to cut rates. The Bank of Japan may tweak policy further, but we think yield curve control could stay in place this year.
With our global view of Fed hikes ending in H1 and the US narrowly avoiding recession, and regional growth improving later in the year, we think many regional currencies—including the CNY and JPY—could rally further against the USD.
While the majority of our 2022 answers worked out broadly as anticipated, we underestimated the inflationary pressure that would hit the region—exacerbated by Russia's invasion of Ukraine in late February—and the extent of the policy tightening that would result in some countries. We also were surprised by the extent of CNY weakness—reflecting an even worse economic outcome in China than our below-consensus view to start the year, as well as rapid USD appreciation on the back of the fastest pace of Fed hikes in decades.
Questions for 2023
In our first Asia Economics Analyst of the year, we offer our answers to ten economic and market questions for the Asia-Pacific region and individual countries in 2023. These highlight some of our key macroeconomic views—for more detail on our outlooks across the region and globally, please see the 2023 outlook page on our research portal.
1. Will China grow strongly above-trend after exiting zero-Covid policy in 2023?
Yes. China's abrupt U-turn on Covid policy has led to a large wave of infections in recent weeks and a drop in mobility and economic activity. We retain a below-consensus forecast of -4% annualized for Q4 GDP growth (and +2.6% for full-year 2022). Looking forward, though, it appears the peak in daily cases is already past, based on news reports as well as related information such as Internet search frequency for virus-related topics, and there is evidence that mobility is beginning to recover (Exhibit 1). This adds to our conviction that economic activity should rebound in coming months. Policymakers also look to be very focused on reviving economic activity in 2023. We forecast moderate sequential growth in Q1, given what appears to be still-weak activity in early January, and a sharp rebound in Q2 (Exhibit 2), driving full-year 2023 GDP growth to 5.2% (and Q4 2023 GDP growth to 7.2% yoy, far above the 5% forecast of the limited sample of Bloomberg consensus contributors). Signs that activity is picking up sharply soon after Chinese New Year could potentially pull some of this boost forward into Q1.
Exhibit 1: In China, mobility appears to be increasing again from low levels
Source: Wind, Goldman Sachs Global Investment Research
Exhibit 2: Our 2023 China GDP forecast features a weak Q1 but a strong Q2-Q4 compared to market consensus
Source: Bloomberg, Goldman Sachs Global Investment Research
2. Which regional economies will benefit most from China's reopening?
Hong Kong and Thailand should see sharp increases in inbound tourism and spending as mainland Chinese tourists resume outbound travel. We expect to see meaningfully higher growth in both economies in coming quarters. Exhibit 3 shows our estimates of the potential cumulative impact on regional activity from China's reopening across three channels: 1) goods trade, 2) tourism, and 3) energy prices. While goods trade should rise, the biggest potential positive impact is from cross-border tourist spending, particularly in Hong Kong (given its proximity) and Thailand (given its large tourism sector). Thailand's current account deteriorated sharply during the pandemic, with the plunge in tourism a key driver (Exhibit 4). Other southeast Asian economies should benefit materially from a resumption in Chinese tourism to some degree as well. The rise in China's energy demand from the resumption in travel could push up global oil prices meaningfully, offsetting part of the positive effect on regional growth.
Exhibit 3: We estimate a significant potential boost should Chinese tourism return to pre-Covid levels
Source: Goldman Sachs Global Investment Research
Exhibit 4: Thailand took the largest current account hit during the pandemic
Source: Haver Analytics, Goldman Sachs Global Investment Research
3. Can regional trade and growth bottom out in 2023?
Yes. Regional goods trade decelerated significantly in the second half of 2022 (Exhibit 5). This reflected 1) a rotation in global demand back towards services as economies reopened, 2) the general deceleration in global growth in recent months, 3) inventory building in key DM customer economies e.g. the US, 4) weakness in tech sectors in particular. We expect the inventory overhang to be worked off in H1 2023 and the negative FCI impulse for many DM economies to fade, allowing exports and manufacturing to pick up modestly later in the year.
Exhibit 5: North Asia export growth has decelerated
Source: Haver Analytics, CEIC, Goldman Sachs Global Investment Research
4. Will inflation peak in the region by the end of Q1?
Yes. Median CPI inflation in the region has surged from near-zero in the early days of the pandemic to almost 6% yoy in recent months (Exhibit 6), and core CPI inflation is above central bank targets in most economies (Exhibit 7). Furthermore, there is risk that China's reopening could boost commodity (especially energy) demand and prices, contributing to regional inflation pressures. But sequential inflation has slowed a little in late 2022, with supply chain pressures having eased considerably. So we expect year-over-year CPI inflation to moderate over the first half of 2023, even if it remains uncomfortably high for a number of central bankers (particularly in smaller open economies).
Exhibit 6: Regional inflation appears to be peaking
Source: Haver Analytics, Goldman Sachs Global Investment Research
Exhibit 7: Underlying inflation remains above targets across the region (ex-China/HK)
Source: Haver Analytics, CEIC, Goldman Sachs Global Investment Research
5. Where is inflation pressure likely to remain particularly sticky?
We expect core inflation to remain uncomfortably high in India through at least the first half of 2023. While headline CPI inflation has eased somewhat in recent months, core ex-petrol/diesel/gold/silver has been grinding higher since early in the pandemic (Exhibit 8). Core services inflation appears likely to remain resilient. Recent PMI data also suggest that economic momentum is holding up well, with the December manufacturing and services surveys both improving to near decade highs, which should keep pressure on from the demand side. Given that regional rate hikes have been highly correlated with inflation overshoots (Exhibit 9), we continue to forecast a slightly higher terminal rate for the RBI (6.75%) than consensus.
Exhibit 8: Underlying inflation continues to grind higher in India
Source: Goldman Sachs Global Investment Research, Haver Analytics, RBI
Exhibit 9: Rate hikes have been broadly correlated with inflation overshoots
Source: Haver Analytics, Goldman Sachs Global Investment Research
6. Will China's reopening generate a significant inflation problem in China (or outside it)?
No. Clearly, reopening has been associated with higher inflation in many countries. A cocktail of supply-side disruptions both in domestic economies and from abroad, alongside an abrupt rebound in demand and stimulative policy, led to large inflation surprises in 2022. However, only some of these elements are likely to be present in China in 2023. Supply-side bottlenecks in production and transportation appear to have eased, and China's policymakers are not enforcing significant quarantines or absence from work for those afflicted by Covid. Externally, we do not anticipate a repeat of the Russia-Ukraine commodity price shock in 2023. On the policy front, while macro settings are clearly supportive, we do not expect a consumer-focused stimulus of the sort that contributed to the overshoot in US goods demand. Finally, inflation is starting from a very low level in China, with the CPI ex-food and energy up just 0.6% yoy.
We expect both headline and core CPI inflation to accelerate meaningfully in China this year—the latter by more than a percentage point (to 1.9% yoy in Q4)—but with a likely CPI inflation target of 3% (really a ceiling in practice), we don't think inflation will be a major constraint on PBOC policy in 2023. Similarly, we expect China's reopening to boost commodity—particularly energy—demand and thus spill over into higher global inflation. For example, a return to normal travel and transportation behavior in China could boost oil consumption by 1.5-2m bpd. But against a backdrop of somewhat slower growth in many economies, we do not anticipate oil prices to regain their 2022 highs.
7. Will the Bank of Japan exit ‘yield curve control’?
No, though we could see further tweaks to monetary policy settings. At the Monetary Policy Meeting (MPM) on December 20, the Bank of Japan (BOJ) surprised the market by widening the 10-year yield band to ±0.5%, from ±0.25% previously. By widening the 10-year yield band the BOJ has responded to government concerns that its lack of flexibility in managing yield curve control (YCC) has amplified yen depreciation. Coming ahead of an imminent (March-April) transition of the top three officials at the Bank of Japan, this action has fanned market speculation that even more fundamental changes could be in store in 2023. That said, we do not think the government viewed this as signaling the imminent start of a more fundamental shift in the BOJ's easing stance—government officials have strong concerns about a global economic slowdown during 2023, and wage growth seems likely to fall short of levels desired by the government and the BOJ (Exhibit 10). A key issue for the BOJ is the sustainability of YCC in an environment where the US Federal Reserve is still hiking rates; strong pressure could potentially force an exit in coming months, but once the Fed has paused, upward pressure on Japanese yields might recede. In our view, further tweaks to the YCC band or NIRP are a possibility, but we do not expect a complete exit from YCC in 2023.
Exhibit 10: Real wage growth remains very weak in Japan
Source: Ministry of Health, Labour and Welfare
8. How many Asia-Pacific central banks will be able to cut rates in 2023?
Very few. As noted, while inflation should recede somewhat, we expect underlying inflation pressures (core/trimmed inflation) to remain above central bank targets through much of the year. This will also be occurring against a backdrop—in our view—of relatively high and sustained policy rates from the US Federal Reserve. So, while we expect tightening cycles to conclude in the first half, we currently forecast only two central banks to cut in Q4 (Exhibit 11 shows a diffusion index of hikers/cutters across the Asia-Pacific region). The Bank of Korea looks most plausible to us, as it started its hiking cycle relatively early and quickly, and we anticipate inflation pressures to ease significantly in 2023 (Exhibit 12). It's also possible we could see cuts in south/southeast Asia or ANZ, though at the moment we have penciled in only one cut from RBI at its last meeting of the year.
Exhibit 11: Very few APAC central banks are likely to cut in 2023
Source: Goldman Sachs Global Investment Research
Exhibit 12: Korean inflation should fall significantly in 2023
Source: Goldman Sachs Global Investment Research
9. Where are rates most mispriced in Southeast Asia?
We think that the market is underestimating terminal rates in Thailand and that Singapore’s rate differential vis-a-vis global rates has more room to decline. Bank of Thailand policy rates are currently at 1.25%, up only 75bp from the lows during the COVID pandemic. The market is pricing another 50-75bp more hikes this year to a terminal rate of 1.75% to 2%. However, we think that BoT could hike policy rates more significantly to 2.50% in 2023, as markets may be underestimating the impulse to GDP growth and core inflation from rebounding international tourism and a more favorable external impulse. In Singapore, we previously highlighted that SGD rates typically trade below global rates (as proxied by a basket), given that the SGD is generally on an appreciation path vs. its SGD NEER basket. However, in 2022, SGD rates were trading above global rates due to an exceptionally strong USD in tandem with tightening global financial conditions. Going into 2023, with the MAS SGD NEER appreciation slope likely to stay at around 1.5%/annum, we think SGD rates will continue to outperform global rates as the weakening dollar loosens Singapore interbank liquidity conditions.
Exhibit 13: Singapore rates look mispriced
Source: Bloomberg, Goldman Sachs Global Investment Research
Exhibit 14: Regional currencies have rallied against the USD over the past two months
Source: Bloomberg, Goldman Sachs Global Investment Research
10. Will regional currencies rally in 2023?
Yes. Asia-Pacific currencies have already come back significantly from their 2022 lows (Exhibit 14). In the short run, we think the USD could strengthen modestly if the Fed delivers more rate hikes than the market is currently pricing (we expect three, to a terminal rate of 5-5.25%). But after the Fed finishes its hiking cycle, we expect to see further broad USD depreciation. We expect both the CNY and JPY, among other regional currencies, to end the year stronger against the US dollar.
A brief recap of our questions and answers from 2022
While the majority of our questions and answers worked out broadly as anticipated, we underestimated the inflationary pressure that would hit the region—exacerbated by Russia's invasion of Ukraine in late February.
1. Will the Covid-19 Omicron variant prompt a wave of restrictions across the region similar to the Delta variant?
Our answer: No.
Verdict: Correct. Most regional economies reopened in the first half of the year, declining to tighten significantly despite significant Omicron waves.
2. Will Asia still see a positive export impulse in 2022?
Our answer: Yes.
Verdict: Technically correct -- global growth and trade weakened more than we expected this year, but given a strong start goods exports still ended up in the low single digits in volume terms.
3. Which economies can outperform on the growth front in 2022?
Our answer: We expect the “late reopeners” in South and Southeast Asia to grow fastest in coming quarters.
Verdict: Correct. ASEAN economies were the notable outperformers in the region in 2022, with India also posting very solid growth.
4. Will inflation pressures accelerate significantly further?
Our answer: No.
Verdict: Incorrect. Headline inflation in particular rose more than we anticipated outside China.
5. How many regional central banks will tighten in 2022?
Our answer: We expect a large majority (about two-thirds) to hike this year.
Verdict: Correct. Indeed, hiking was slightly broader than we expected, though Japan kept monetary policy on hold and China eased modestly.
6. Can the Reserve Bank of Australia really stay on hold in 2022?
Our answer: Yes.
Verdict: Incorrect. As per question 4, inflation pressures built much more than we anticipated and we abandoned our dovish RBA call early in the year.
7. When will China remove quarantine requirements on travelers arriving from abroad?
Our answer: Not before Q4, and quite possibly not in 2022.
Verdict: Correct. Though China has signaled an imminent reopening of international borders, quarantine requirements for international travelers remained throughout 2022.
8. How much macro stimulus will China's policymakers deliver, and will this be enough to avoid a "hard landing" in the property sector?
Our answer: We expect easing focused on credit and fiscal measures that cushions but does not fully absorb the downturn in housing.
Verdict: Partly correct. The housing downturn clearly dragged on growth, but somewhat more than we anticipated. While the composition of easing was broadly as we anticipated, the augmented fiscal deficit widened even more than we expected.
9. Will the RMB depreciate significantly in 2022?
Our answer: No.
Verdict: Incorrect. Ultimately, deteriorating growth/rate differentials overwhelmed a still-strong current account and the CNY depreciated significantly, initially vs the USD (alongside broad USD strength) and later on a trade-weighted basis.
10. Will global reflation lift the Japanese economy and assets in 2022?
Our answer: Yes.
Verdict: Partly correct. Japan does appear to have grown above trend (current tracking: 1.2% for 2022 GDP growth), but not as fast as we anticipated. Equities were flattish and the yen depreciated significantly.
Exhibit 15: Our 2023 growth forecasts are above consensus in China, Japan, and the US
Source: Bloomberg, Goldman Sachs Global Investment Research
Exhibit 16: We expect CPI inflation to decline in 2023 but remain relatively high in many economies
Source: Central banks, Bloomberg, Goldman Sachs Global Investment Research
Exhibit 17: We expect most regional central banks to hike further in the first half of 2023
Source: Haver Analytics, Wind, Goldman Sachs Global Investment Research
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