News analysis

Asia likely to avoid deep downturn in a US recession, say analysts

Resilient consumer demand in developed markets among factors that may soften blow

While the risk of a recession in the United States keeps mounting, chances are that Singapore and most Asian economies will avoid a deep and prolonged downturn.

A growing number of economists and policymakers worldwide now see higher odds of a recession in the US, and possibly in Europe as well, in the next six to 12 months.

But some are also pointing out mitigating factors that may soften the blow, including resilient consumer demand in developed markets backed by excessive savings.

Asian economies, including Singapore, could get more help from a possible counter-cyclical economic recovery in China and the low interest rate policy in Japan that favours growth versus countering inflation.

The latest warning on the US outlook came from Federal Reserve chief Jerome Powell, who finally admitted on Wednesday that the steep interest rate hikes needed to rein in inflation could tip the US economy into recession.

His testimony before the US Senate Banking Committee noted that the Fed is not trying to provoke a recession.

However, he acknowledged that Russia's invasion of Ukraine and Covid-19 lockdowns in China have disrupted global supply chains and boosted prices of everything from food to energy, making it more difficult to reduce inflation without causing a downturn.

On the same day, Deutsche Bank chief executive Christian Sewing said he sees a 50 per cent likelihood of a recession globally. Citigroup also made a similar prediction.

Most analysts agree that the ripple effects of an economic slump in the developed world will certainly result in a steep decline in demand for Asian exports, the lifeline for most economies in the region.

Global goods demand is already showing signs of weakening, with Asia's real exports growth - adjusted for the effects of price changes - decelerating to just 1.6 per cent year on year in April, from 9.4 per cent in November last year, according to Morgan Stanley.

Singapore's non-oil domestic exports reflect a similar trend, growing 6.4 per cent in April, down from a 24.2 per cent surge in November last year, Enterprise Singapore noted.

Singapore's Ministry of Trade and Industry has maintained its 3 per cent to 5 per cent economic growth forecast for this year, but warned last month that expansion will likely come in at the lower half of the forecast range.

Mr Chetan Ahya, chief Asia economist at Morgan Stanley, said the recent deceleration in Asia's exports reflects a normalisation in demand patterns, with consumers reallocating spending towards services.

"As overall growth softens, external demand conditions are likely to become more challenging for Asia," he added.

However, Mr Ahya pointed out that the severity of the export decline will depend on the depth and duration of the slowdown in the developed economies.

And there are signs that a recession in the US, for instance, if it does come to pass, will be only a modest one.

Nomura International economist Aichi Amemiya said the US recession, which may start as soon as the fourth quarter, is likely to be shallower as robust consumer balance sheets and excess savings should limit how quickly growth decelerates.

"The combination of significant balance sheet strength and excess savings suggests the downshift into recession will likely be more gradual for consumers relative to previous cycles," he noted.

Analysts said potentially resilient US consumer demand may put a floor under the drop in exports from Asia.

Another major source of demand for Asia's exports may come from China, where the economy is showing signs of a recovery from a sharp dip in the second quarter.

Moody's Analytics said the expectation that massive Covid-19 testing across China's major cities will limit outright shutdowns in the second half of this year may provide policymakers the room for substantial stimulus and push growth higher in the two final quarters of this year.

Mr Steven Cochrane, chief Apac economist at Moody's Analytics, said China's low inflation environment also provides the space for it to take up outright policy easing and strengthen domestic demand.

Mr Ahya said the recovery in China may help to provide an important and timely offset right around the time when developed market growth is expected to slow.

"Though a developed market recession would undoubtedly weigh on Asia's growth outlook, we think Asia's downturn could be relatively shallow," he said.

Some analysts also believe that economies like Singapore can afford to put fiscal policy at play to support aggregate demand, especially during the time when monetary policy will be constrained by high inflation.

HSBC economist Yun Liu said the recently announced additional support package worth $1.5 billion shows that, even as the Monetary Authority of Singapore has been one of the region's most aggressive central banks in tightening monetary policy to contain inflation, the Government can still help to cushion the impact of surging inflation on vulnerable groups disproportionately hit by high prices.

"The message is clear: The additional fiscal package is to help alleviate inflation pain, but not to stoke more inflationary pressure," she noted.

Join ST's Telegram channel and get the latest breaking news delivered to you.

A version of this article appeared in the print edition of The Straits Times on June 24, 2022, with the headline Asia likely to avoid deep downturn in a US recession, say analysts. Subscribe