Recession risks in some Western economies

First, the bad news: the biggest drag on global growth will come from weakness in North American and European economies, which make up about half of the world's economic output.

Amid continued interest rate hikes by the U.S. Federal Reserve, to tackle still-high inflation rates, the U.S. is likely to eke out 0.3 per cent in real GDP growth, down from an estimated 1.7 per cent in 2021.

With unemployment at a near 50-year low while wage growth and consumer spending still remains relatively robust, the Fed will likely remain "hawkish" this year to manage the risks of high inflation, which eased to 7.1 per cent in November 2022. Recession becomes "almost inevitable" when inflation rates are above 5 per cent, former U.S. Treasury Secretary Larry Summers observed.

The Fed and other major central banks are likely to keep interest rates significantly higher than the immediate pre-COVID-19 levels in 2023, although the pace of rate hikes is expected to be slower compared to last year's aggressive tightening.

Meanwhile, Eurozone economies may have already fallen into recession at the end of 2022, amid record-high energy prices that drained consumers' purchasing power and dampened spending. For 2023, the Eurozone's growth may stagnate compared with 3 per cent growth in 2022, according to Maybank's forecasts.

ASEAN emerging as a defensive harbour

The Asia region, which accounts for more than 30 per cent of global GDP, could play an outsized role in supporting the global economy this year. 

India will continue to stand out with GDP growth of 6.6 per cent, slowing a little from 6.9 per cent from a year ago, the World Bank forecasted.

Meanwhile, Maybank economists expect the ASEAN-6 economies - Singapore, Indonesia, Thailand, Malaysia, Philippines and Vietnam - to slow to 4.3 per cent in 2023 from 5.6 per cent.

While these markets are not completely shielded from the external headwinds, they are partially decoupled from a potential U.S. recession amid the global downturn. Notably, the region is benefitting from growing intra-regional trade driven by various free-trade agreements, as well as the relocation of global supply chains from China, whose factories were impacted by the zero-COVID policy, to alternative manufacturing hubs like Vietnam. Meanwhile, elevated commodity prices could continue to boost resource-rich countries like Indonesia and Malaysia this year.

As for Singapore, the country's open economy is more exposed to external inflation and counts the U.S. as its largest trading partner. Maybank economists expect Singapore's GDP to fall to 1.5 per cent from 3.5 per cent in 2022 as manufacturing contracts. Nevertheless, the robust tourism and consumer-facing sectors as well as capital inflows into the economy should mitigate the downside.

All eyes on China

China's economy will be closely watched as a potential key driver of global growth.

The government has already been stimulating growth through monetary easing policies and measures to prop up the troubled property market. But the biggest boost could come from China's easing of COVID-19 restrictions on travel and quarantine, which were announced in major cities in early December.

The hope is that a faster-than-expected normalisation could propel China's GDP growth above the projected 4 per cent in 2023 - compared to an expected 3.3 per cent in 2022 - and boost global trade at the same time.

ASEAN is likely to be the region that benefits first and most from a recovery in China's trade flows as China is its largest market, accounting for 16.3 per cent of its total exports.

The region's tourism will also get a boost if China visitors return in 2023: China accounted for 22 per cent of ASEAN tourist arrivals prior to the pandemic.

Will inflation normalise?

Most economists are expecting global inflation to peak this year as the economy slows.  However, inflation is expected to remain at higher than historical average levels. In the U.S., services inflation could stay elevated marked by a demand shift from goods to services post COVID. The still-tight labour market is also pushing up wages, leading to more sticky inflation. While inflation in Europe may cool with softer energy price increases, lingering uncertainties related to the Russia-Ukraine war will impose supply constraints and lead to persistent price pressures.

Meanwhile, inflation could remain higher than normal in Asia with external price pressures a key contributing factor. Another factor to consider is China's re-opening, which could also push up inflation as the country accounts for nearly 20 per cent of world oil imports.

Light at the end of the tunnel

Macroeconomic uncertainties will likely be a dominant theme in 2023. Still, there is hope that the global economy may turn the corner as inflation and interest rates pass their peak and eventually trend lower, while the further re-opening of China will contribute towards the recovery of global growth.