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Jun 2023

Asia will weather the inflationary storm

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Source: Asia Insurance Review | Nov 2022

From the perspective of a trade credit insurer, a volatile economy is still an opportunity. Despite rising inflation and the threat of a global recession, Allianz Trade’s Ms Francoise Huang remains positive on her outlook for 2023.
By Ahmad Zaki
The US Federal Reserve’s hiking of interest rates to combat inflation, combined with Europe’s energy crisis will lead to a recession, said Allianz Trade senior economist for APAC Francoise Huang.
“In terms of inflation for these markets, we’re seeing peaks in the first half of next year, and then gradually coming down, although it will still remain at a high level,” she said.
A short and shallow recession is expected, followed by a mild recovery, which will see both markets have negative GDP growth over the year.
This recession will also hit Asia, although to a much lesser extent. Inflationary pressures across the region will also fluctuate, with China remaining largely unaffected, due to household confidence already being very low because of the nation’s zero-COVID policy.
“This policy will likely remain in place until Q2 next year,” she said, stating that it will take until then for vaccination rates to reach the targeted 80%, and the government feel comfortable lifting restrictions.
Ms Huang believes that GDP growth in China could hit 4.5% next year, compared to the 2.5% this year, and is one of the only nations slated to have improved growth in 2023.
In contrast, in late September, the World Bank indicated that China’s economic growth was set to fall behind the rest of Asia for the first time since 1990. The bank expects the Chinese economy to grow 2.8% this year –half of the previous forecast. The bank cut its forecast for APAC to 3.2%.
The rest of Asia
The more developed economies in Asia, such as Japan, South Korea, Singapore and Australia, recovered from the pandemic slightly faster than other nations, which also meant that they were able to react to rising inflation earlier.
“We’re seeing their inflation rates already peaking, such as in South Korea,” she said.
The other markets in Asia and Southeast Asia, which were more affected by the Delta variant, only started recovering recently. This also meant that they are only just starting to feel the inflationary pressures, especially as household economic activity starts to normalise.
However, Asia Pacific is likely to avoid any significant recession, although GDP growth will definitely be lower in 2023, compared to this year.
Supply chain disruption
Supply shocks and increased consumer demand was one of the factors that has led to the current inflation rates.
“During the lockdown, people couldn’t spend on restaurants or bars or theatres, so they spent it on buying things online. Demand for goods remained as strong as pre-pandemic levels, but the supply chain was not quite able to keep up,” said Ms Huang. This led to higher prices, both in terms of goods and shipping costs, some of which was offloaded to the end-consumer.
This was in large part due to ships not being where they needed to be, especially in the early parts of the pandemic, and nations across the world having different lockdown schedules. This led to various container ships being stranded, either unable to leave, or unable to enter.
“We were also in an environment where global trade rebounded much faster than we expected it to,” she said. After the pandemic hit in early 2020, it only took about 10 months for global trade to return to pre-pandemic levels, about twice as fast as it took after the 2008 global financial crisis.
The year 2021 saw the supply-and-demand balance improve, as manufacturing capacity increased and companies replenished inventories. As life returns to a pre-pandemic state, households are able to spend their money on things other than goods. This might lead to an imbalance in the other direction, where demand is lower, but supply is high, although this would be a relief to the growing inflationary pressures.
Insolvency rates returning to normal
In an unexpected result of COVID-19, the massive amount of state support funnelled to businesses meant that insolvency rates were lower in 2020 and 2021, when compared to pre-pandemic levels. “It was very counter-intuitive, but a pleasant surprise for us,” she said.
This trend has begun to reverse in 2022, and insolvency rates are expected to return to normal by 2023, as government support is withdrawn. A 

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