Wednesday, February 1

Economy in 2023: Recession in the loom?


Normalisation of monetary and fiscal policies that delivered unprecedented support during the pandemic is cooling demand as policymakers aim to lower inflation back to target. — Bernama photo


AFTER more than two years of battling a pandemic that has disrupted lives globally, the world is finally easing out of its grips.

However, while this is supposed to be an optimistic time as the economy finds its footing again, the impact of the pandemic and several other factors including China’s zero-Covid lockdown and the conflict in Ukraine remain as hurdles to the global economy’s recovery; with some economists warning that the global economy might be heading towards a recession next year.

“The global economy is experiencing a number of turbulent challenges. Inflation higher than seen in several decades, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering Covid-19 pandemic all weigh heavily on the outlook.

“Normalisation of monetary and fiscal policies that delivered unprecedented support during the pandemic is cooling demand as policymakers aim to lower inflation back to target.

“But a growing share of economies are in a growth slowdown or outright contraction,” the International Monetary Fund (IMF) highlighted in its latest World Economic Outlook report.

“As storm clouds gather, policymakers need to keep a steady hand.

“The global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.

“Our latest forecasts project global growth to remain unchanged in 2022 at 3.2 per cent and to slow to 2.7 per cent in 2023 – 0.2 percentage points lower than the July forecast – with a 25 per cent probability that it could fall below two per cent.

“More than a third of the global economy will contract this year or next, while the three largest economies – the US, the European Union, and China – will continue to stall.

“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” IMF economic counsellor Pierre-Olivier Gourinchas cautioned.

Latest PMI indicators are starting to signal economic contraction gathering pace in some of the largest world economies – US, EU and UK.

“Global manufacturing PMI has slipped further into contraction territory at 48.8 in November, while global services PMI declined further to 48.1, as new order intakes and international trade flows continue to deteriorate.

“Meanwhile, tight labour market conditions in many countries are boosting wages, consequently lending support to domestic demand and growth.

“However, this also contributes to broad-based and entrenched inflation.

“Following the rising economic uncertainty and persistent inflationary pressures, major central banks are anticipated to continue their course of tighter monetary policy action going forward.

“Financial conditions are also being tightened due to ongoing reductions in bank balance sheets. In addition, the uncertain development of commodity prices and the risks associated with the weak property sector in China also pose as headwinds to growth,” Hong Leong Investment Bank Bhd’s research team (HLIB Research) pointed out in its 2023 outlook report.

On the other hand, RHB Bank Bhd’s research team (RHB Research) believe that the US is unlikely to head into a recession in 2023 as the path of US GDP growth is a print of around 1.4 to 1.9 per cent y-o-y in 4Q22 versus the Bloomberg consensus estimate of 0.2 per cent y-o-y, which it believed would not materialise.

“In 1H23, we expect a modest deceleration followed by a recovery in 2H23. Meanwhile, the analyst community has been pushing out further into the future to 2023 and 2024 its recession view compared to its earlier view of an imminent recession in 2022.

“We term this as “herding behaviour” and we would fade these pessimistic forecasts for 2023.

“Our 2022 and 2023 US GDP growth forecast remains unchanged at 2.2 per cent y-o-y and 2.0 per cent, respectively. The Bloomberg consensus estimate for 2022 and 2023 US GDP growth is 1.8 per cent y-o-y and 0.4 per cent, respectively,” RHB Group chief economist and head, market research Dr Sailesh K Jha said in RHB Research’s Global Market & Economic Outlook report for 2023.

“The easing of financial conditions in 4Q22 as exemplified by an acceleration in global money supply suggests that global economic activity – which includes the US – could remain resilient in 1Q23, to which the US Federal Reserve’s (FED) policy response will be to continue to hike the Federal Funds Rate (FFR) in 1Q23 to five to 5.25 per cent.

“In other developed markets, we expect the European Union (EU) to avoid a recession in 2023. We maintain our 2023 GDP growth forecast of 1.5 per cent y-o-y versus the Bloomberg consensus estimate of -0.1 per cent. The price cap on Russia’s liquefied natural gas (LNG) is unlikely to be effective as implementation is difficult. In addition, we expect US LNG supply to the UK to increase, of which some portion will end up in the EU. Hence, in our view, supply-side shocks via the LNG channel to EU growth are likely to be limited in 2023.

“On the demand side, we continue to believe that if a recession becomes imminent in the EU, a counter-cyclical fiscal policy will be implemented to avert a significant deceleration in GDP growth,” he added.

In Southeast Asia, RHB Research believed that GDP growth will slow to trend in 1H23, followed by a recovery in 2H23.

“Resilient labour market conditions, tail winds from past loose fiscal and monetary policies, and resilient US growth are likely to keep the region well supported in terms of economic activity in 2023.

“The main area of weakness in 1H23 will be real exports, where we expect further weakening before recovering in 2H23. Real exports in Southeast Asia will mirror the deceleration we are expecting in US private consumption growth in 1H23 followed by a recovery in 2H23,” Sailesh added.


Malaysia’s growth remains susceptible to higher risk aversion in global financial markets, further escalation of geopolitical conflicts and re-emergence of supply chain disruptions. — Bernama photo


Malaysia’s economy to expand by four to five per cent

AS for Malaysia, after going through a turbulent last couple of years, analysts are now cautiously optimistic about its prospects next year, particularly given its current political landscape and the full reopening of its economy.

This year, with the full relaxation of most, if not all Covid-19 restrictions, Malaysia’s economy has begun to gain back its pre-pandemic momentum albeit at a slow pace due to the current unstable macro landscape.

According to Bank Negara Malaysia (BNM), Malaysia’s economy is expected to continue to expand at a more moderate pace, in the fourth quarter of 2022 (4Q22).

The expected slower pace of growth reflects the more challenging global environment as well as absence of base effects. Nevertheless, growth for the whole year of 2022 is expected to remain robust given the strong outturns in the first three quarters of the year, it stated.

Looking ahead, the Malaysian economy is expected to expand by four to five per cent in 2023.

BNM Governor Tan Sri Nor Shamsiah explained, “The Malaysian economy will continue to be supported by firm domestic demand amid continued improvements in the labour market.

“Growth would also benefit from the realisation of large infrastructure projects as well as higher tourist arrivals. However, Malaysia’s growth remains susceptible to a weaker-than-expected global growth, higher risk aversion in global financial markets, further escalation of geopolitical conflicts and re-emergence of supply chain disruptions.”

The central bank also noted that headline and core inflation are expected to remain elevated amid both demand and cost pressures, as well as any changes to domestic policy measures in 2023.

“Additional upward pressures to inflation will remain partly contained by the existing price controls, subsidies, and the remaining spare capacity in the economy. The balance of risk to the inflation outlook in 2023 is tilted to the upside and continues to be subject to domestic policy measures on subsidies, as well as global commodity price developments arising mainly from the ongoing military conflict in Ukraine and prolonged supply-related disruptions,” it said.

Meanwhile, analysts believe that domestic consumption will continue to be Malaysia’s key economic driver.

“We forecast Malaysia’s GDP growth to moderate to 4.0 per cent y-o-y in 2023 (2022e: 8.2 per cent y-o-y) as the base effects and initial boost from pent-up demand wane.

“Our projection sits at the lower-end of the government’s official target of four to five per cent as we expect growth to also be weighed down by further tightening of global monetary policies and its resulting weaker global growth environment, higher risk aversion in financial markets and geopolitical tensions.

“Nevertheless, Malaysia’s growth is expected to be supported largely by domestic demand, benefitting from the improvement in labour market conditions, and a continued influx of tourists following the ongoing recovery in the tourism industry,” HLIB Research remarked.

“The realisation of multi-year projects is also anticipated to spur the investment landscape. Malaysia’s diversified export base is also expected to cushion the slowdown in global trade activity,” it added.

The research team further pointed out that private consumption is expected to remain the key driver of growth in 2023 (six per cent y-o-y; 2022e: 10.1 per cent y-o-y), albeit at a slower pace, on the back of continued improvements in labour market conditions and income prospects.

“Unemployment rate has continued to trend downwards (3.6 per cent; peak: 5.3 per cent), while private sector wage growth gathered further pace (3Q22: 7.9 per cent y-o-y; 2Q22: 7.8 per cent y-o-y).

“The vibrant economic and social landscape following the easing of containment measures, particularly in tourism-related industries, should also support consumption activity in upcoming months,” it explained.

It also pointed out that the special financial aid planned to be distributed in January next year to civil servants and pensioners is expected to lend additional support to household disposable income.

“Following better labour market conditions and supportive domestic policies, MIER’s consumer sentiment index has climbed to 100.0 in 3Q22 (2Q22: 85.9). However, we expect sentiment to turn more cautious due to growing uncertainties in both the domestic and global front,” HLIB Research said.

On the other hand, UOB Kay Hian’s research house (UOBKH) believe that Malaysia’s domestic consumption will slow down appreciably by end-2023 to reflect the cumulative inflationary and interest cost impact in raising the cost of living, the waning effect of the previous government-mandated Employees Provident Fund’s (EPF) special withdrawal scheme in April 2022, the expiry of car sales tax exemption (delivery deadline by March 23 for qualified purchases), and possibly (a minor factor) the unity government’s more restrictive spending compared with previous regimes.

“The GDP growth outlook is highly dependent on the government’s ability to ensure manageable cost of living for the people by maintaining subsidies.

“Hence, we expect the unity government to maintain prudence and pragmatism in re-tabling 2023 Budget (expected in December 2022), by preserving the previous UMNO-led government’s subsidy bill of RM55 billion (3.8 per cent of our estimated nominal GDP and 15 per cent of the federal government’s 2023 Budget).

“Much of the subsidies relate to petrol pump and electricity tariffs. However, we expect more significant cuts in the government’s non-essential development and operating expenditures,” it opined.

On the performance of corporate Malaysia, analysts are more optimistic about the outlook for Malaysia’s equity market next year.

In its 2023 outlook report, the research team at MIDF Amanah Investment Bank Bhd (MIDF Research) opined: “Going into 2023, assuming baseline scenario in which, the US Fed is pivoting (hence result in unwinding pressure on equity required return), risk of US recession is not insignificant (despite being either one or two years away), no escalation in the Russia-Ukraine war beyond the borders of Ukraine (but the situation could change rather drastically), and the authorities in China would be adept in handling its domestic economic situation (thus limiting the risk of cross border contagion), we foresee a situation whereby the equity market would becoming more bullish principally due to the unwinding or subsiding pressure on required return as the upside risk diminishes with the end of tightening cycle.

“On the flip side, the market would also be expected to tread cautiously due to the heightened risk of an impending US recession, the unsettling situation in Ukraine which could change rather drastically, as well as uncertainty surrounding the real situation of China economy.

“In gist, the market is foreseen to be climbing the proverbial wall of worry in 2023.”

It added, “In 2023, we expect the equity market to be supported by a less hostile monetary environment.

“However, equity valuation would continue to remain subpar relative to its historical range due to the limiting factors discussed in above (i.e. risk of US recession, unsettling situation in Ukraine, and China economic uncertainty).

“In addition, we also foresee a downside risk to the prevailing consensus earnings forecast for 2023 which remains undented since the beginning of 2022 despite the emergence of multiple headwinds thenceforth.”


A timely China’s reopening will help to fill the demand gaps for natural resources and manufactured goods left by the US and Europe on the back of the slowdown in their economies. — AFP photo


China’s reopening a boon or bane?

EARLIER in December, following mass protest in the country, China announced that it has scrapped its strict zero-Covid policy and will begin reopening its economy in January 2023.

According to news reports, travel overseas for Chinese citizens will become easier as the National Health Commission announced that Covid would be formally downgraded to a Class B infectious disease on January 8 which means quarantine would be axed and the number of flights into China is also expected to increase.

In a report, the research team at Kenanga Investment Bank Bhd (Kenanga Research) noted that China had unveiled measures that limit lockdowns, allow home quarantine (compared to centralised quarantine facilities), scrap the health QR code for entering public places, using public transport and travelling, and accelerate vaccination for the elderly.

Prior to this, the quarantine on arrival for inbound international travelers had been cut to five days (from seven days), followed by three days of isolation at home. The local governments in certain major cities had also started to discontinue mass testing.

“China’s gradual abandonment of the zero-Covid policy could also be inferred from media reports that the Chinese leadership is setting a five per cent GDP growth target for 2023, which represents a significant improvement from 3.2 per cent in 2022 based on the current consensus estimates,” it noted.

With the reopening of China’s economy, the research team believe that Chinese demand is expected to cushion the slowdown in the US and Europe.


It pointed out that a timely China’s reopening will help to fill the demand gaps for natural resources and manufactured goods left by the US and Europe on the back of the slowdown in their respective economies (the US due to steep monetary policy tightening, while Europe due to an energy crisis triggered by the Russia-Ukraine war).

“The revived demand from China will significantly cushion the impact of an external slowdown on mostly export-dependent developing economies including Malaysia,” it said.

However, there are concerns on China’s transparency in regards to the way it has handled its Covid cases prior to its reopening.

News reports have indicated that Covid has spread ferociously in the wake of restrictions being lifted

“There are concerns over China’s ability to deal with the inevitable surge in infections upon reopening, which could worsen the supply-chain issue in China that will reverberates throughout the world,” Kenanga Research warned.


Tourism to rise from China’s reopening

With the reopening of China’s market, tourism-related industries are expected to gain drastically from the reentry of Chinese tourists.

Before the pandemic, China has been Malaysia’s third biggest tourist source country after Singapore and Indonesia since 2012.

According to data by Tourism Malaysia, Malaysia received approximately 3.1 million visitors from China in December 2019 but the numbers plunged to approximately 405,149 in 2020 following the mass lockdown and closure of borders.

In 2023, analysts project that tourist arrivals in Malaysia will likely jump four-folds to 9.6 million, from an estimated 2.5 million a year ago.

Kenanga Research explained that this is expected to be driven by the return of both business and leisure air travel globally as the pandemic comes to an end, the revocation of all on-arrival quarantine and testing requirements in Malaysia from August 1, 2022, and the eventual gradual reopening of China which historically contributed to an estimated 12 per cent of total tourist arrivals in Malaysia.

“This should underpin growth in Malaysia Airports Holdings Bhd’s (MAHB) passenger throughput and Capital A Bhd’s (Capital A) passenger demand in 2023,” it said.

“We project MAHB’s system-wide passenger throughput to rise by 29 per cent to 101 million in 2023, but it’s still a long way from matching the pre-pandemic level of 141 million recorded in 2019.

“Already, the total passenger traffic of its entire network of airports has continued to gain traction in September 2022, recording 8.2 million, bringing 9M-YTD numbers to 58 million (165 per cent) or 74 per cent of our FY22 full-year passenger throughput forecast.

“We expect the traffic to grow gradually in subsequent months driven by domestic seat capacity nearing 90 per cent of pre-Covid level from July and international seat capacity is expected to recover to at least 50 per cent of pre-Covid level during the same period.

“AirAsia and Scoot Airlines were the first international airlines to resume services to Kota Kinabalu International Airport on April 16 and 29, respectively, after a two-year lull. Among the airlines that have resumed services are Thai AirAsia, AirAsia X, Vietjet Air and AirAsia covering Bangkok, Incheon, Hanoi and Hat Yai. Royal Brunei Airlines has resumed services to Kota Kinabalu from Bandar Seri Begawan, utilising Airbus 320neo with two-time weekly frequencies.”

It also said that there has been similar trend for Capital A’s passenger demand in 2023, paving the way for its system-wide revenue seat km (RPK) to grow 52 per cent to 35 billion in 2023, after recovering by 19 billion to 23 billion in FY22 based on our forecasts.

“Beyond 2023, we project MAHB’s system-wide passenger throughput to rise by another 15 per cent to 116 million in 2024, but it’s still a long way from matching the pre-pandemic level of 141 million recorded in 2019. Similarly, we project Capital A’s RPK to rise 18 per cent to 52 billion in 2024, but it still falls short of 63 billion prior to the pandemic in 2019,” it noted.


Given PH’s strong aversion to the consumption tax (evident by their move to abolish it in 2018), it believed it would take a while before talk on this resurfaces again. — Bernama photo


Re-tabling of Budget 2023 to set the stage for Malaysia’s year ahead

THE upcoming year will also begin on a new note, with the re-tabling of Budget 2023 under the new government.

To recap, October’s RM372.3 bllion Budget 2023 has yet to be passed in Parliament and hence, the new Budget 2023 is expected to be re-tabled soon.

On Thursday, the Ministry of Finance (MoF) confirmed that the new Budget 2023 will be presented in the Dewan Rakyat on February 24, 2023.

HLIB Research expected that there could be a possible cut in development expenditure (DE) as Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim has signalled for more transparency and lower leakages.

It believed that there is a possibility that DE may be scaled down from RM95 billion (under Budget 2023-1.0) to RM85 billion (similar level of RM72 billion in 2022 + RM13 billion estimated 1MDB bond repayment).

“Hypothetically, should DE reduce by our postulated quantum, the fiscal deficit target for 2023 would lower from -5.5 per cent to -4.9 per cent.

“Broadly, a reduction in DE is negative for construction – there is a 77 per cent correlation between DE and nominal construction GDP,” it said.

The research team also expected targeted subsidies to address the rising cost of living, especially to the lower income group.

Aside from that, notable pledges by PH include reductions in PLUS toll charges gradually and ultimately eliminate tolls, structure a minimum wage policy plan, 100 per cent stamp duty exemption for first-time home buyers (less than RM500,000) to cover sub-sales, increase healthcare spending to 5 per cent of GDP within five years, increase investments in RE to achieve 50 per cent of country’s energy mix and table the Climate Change Act and Transboundary Haze Act.

As for BN, these include: Assistive Basic Income (ABI) scheme which auto credits cash into households earning less than RM2,200 per month by 2025, two per cent income tax cut for M40, tax cut for companies that uphold gender and ethnic diversity, doubling healthcare allocation by 2027 – similar to PH, East Malaysia as the new economic giants, and RE to represent 30 per cent of electricity generation by 2030.

“Given a different government post GE15, it would only be natural to expect changes to the re-tabled Budget 2023.

“However, as most political parties in this unity government are similar to the pre-GE15 one (BN and the Borneo bloc), chances are that the changes won’t be too drastic.

“Continued cash handouts (BKM or whatever new abbreviation it may be rebranded to) is almost certain, although increasing its allocation could prove challenging given tight government coffers. As the unity administration is still in its early days, unpopular moves involving subsidy rationalisation (though needed) that directly hit the rakyat are unlikely to be featured in the budget but some signalling is probable,” HLIB Research said.

On GST, it noted that given PH’s strong aversion to the consumption tax (evident by their move to abolish it in 2018), it believed it would take a while before talk on this resurfaces again.

And while construction is traditionally a budget favourite, the possibility of a reduction in DE (vis-à-vis the high allocation in Budget 2023-1.0) could be negative for the sector.

“Initiatives for the property sector will probably be targeted to the B40 and M40 buyer group (such as tax relief for first time homebuyers, while not ruling out another HOC),” it added.

“Further expansion/extensions on the benefits accorded to EV car buyers is very likely. We believe a tax/excise hike can be averted for casinos (last hike in 2019 and still recovering from the pandemic), NFOs and tobacco (both still face a sizable illegal/illicit market) – we view the special draw cuts for NFOs as an isolated case rather than a prelude to more witch hunting for the sins.

“On the ESG front, we may see details on Carbon Tax (taking cue from the impending VCM launch), incentives for more RE capacity and push for higher female board representation,” HLIB Research said.