1. Global monetary tightening is peaking, but sticky inflation means higher rates for longer.

The US and Eurozone central banks have shown a continued hawkish tilt, even in the wake of the SVB collapse and Credit Suisse takeover. Clearly central banks believe that the financial stresses we have experienced recently can be managed. Thus, expect continued but measured rate hikes across the US, Europe, and Asia, as inflation remains a core priority.

While we think central banks are broadly right, we have one major concern: the current regime with sticky inflation means higher rates will persist for longer, given that central banks have inflation control as their top priority. This financial picture is in stark contrast to the 15 years of ultra-low rates, quantitative easing and support provided by central banks when financial markets went into a tailspin.

Continuing the fight against inflation, while protecting growth and preserving financial stability in this new regime is not easy. There is thus a chance that central banks mis-calibrate policy and cause unintended damage, to stability, growth, or inflation. For example, in the US, not tightening sufficiently would mean that the Fed would fail to quell inflation, while tightening too much might tip the US economy into a recession. Recall how in 2011, the European Central Bank raised rates to normalise monetary conditions after the 2008 financial crisis prematurely and missed the warning signs of the European sovereign debt crisis.

The net effect: while financial markets will gradually stabilise after the shocks of the past few weeks, we should be ready for more episodes of financial stress.

Table 1: Monetary policy trajectories in select Asian economies:

2. China’s rebound has been disappointing and may continue to disappoint.

Demand is recovering too slowly in the world’s second biggest economy, as consumers and businesses have been slow to regain their confidence after three years of severe pandemic controls.

• Retail sales grew by a modest +3.5% y/y in Jan-Feb 2023 (December 2022: -1.8% y/y).
• Businesses are also not raising fixed asset investment (FAI) as boldly as hoped. FAI grew +5.5% y/y YTD in Jan-Feb 2023 (December 2022: +5.1% y/y YTD)..
• Car sales sank in the week ended 10-March from the previous week, registering 23% below the weekly average level in 2019..

Worse still, there are deeper problems: weak labour demand, a fragile property sector, and diminishing support from external demand.

• Despite the economic recovery, the urban unemployment rate ticked up to 5.6% in February 2023 (January 2023: 5.5%), the highest level since November 2022. More worrying is youth unemployment which remains persistently high at 18.1%.
• The property sector is a drag on the economy. Confidence remains damaged, which is why new mortgages have continued to fall. Notice how people are repaying mortgage loans early rather than taking on new loans for property purchase – a clear indicator of damaged confidence. New medium-to-long term household loans (a proxy for mortgages) came in at CNY86.3bn in February 2023, down from CNY223.1bn in January 2023.

• Finally, exports are continuing to fall – down 6.8% y/y in Jan-Feb 2023 (December 2022: -9.9% y/y), its fourth consecutive period of decline.

In short: yes, China will recover but the rebound will fall short of expectations. In the end, the Chinese authorities will have to ramp up stimulus in order to achieve policy goals.

3. Select Asian economies, especially Southeast Asia, expected to do well with recoveries in tourism and foreign direct investment (FDI).

While exports continue to fall, there are some signs that the worst may be soon over. The trade-reliant economies of Malaysia, Singapore and Vietnam have seen some improvement in exports performance in February 2023 – in contrast to the larger, more domestically oriented ones, such as India and Indonesia, where trade slowdowns have persisted even as domestic growth has held up.