This article first appeared in Forum, The Edge Malaysia Weekly on December 19, 2022 - December 25, 2022

The general consensus at this point is that a broad global economic slowdown next year seems more likely to be on the menu. Recent macroeconomic data trends and leading economic indicators have all pointed to a weaker economic momentum moving ahead, while business and consumer sentiment have also shown notable deterioration. As many have feared, the world could be in for another rough ride next year — a mere three years after being hit by the Covid-19 pandemic.

Nevertheless, there have been some slivers of hope lately that things may not turn out to be as dire as initially feared. Some of these notable positive developments have shown signs that some of the acute pressure points weighing on the economic momentum are gradually subsiding.

First, the cost of living crisis could ease next year as global commodity and food prices have started to moderate in the second half of 2022 from their peak earlier this year. Largely attributed to the Russia-Ukraine war, the resultant surging inflation, erosion of purchasing power and consumption spending have been one of the main drivers of the current economic slowdown. The lower commodity and food prices will help alleviate inflationary pressures next year. This will reduce the dampening effect it has on consumption demand, and in turn lessen the drag on next year’s economic growth.

The easing inflation pressure also means the aggressive and potentially destabilising policy rate hikes will not be a mainstay in 2023. The aggressive monetary policy tightening globally — led by the US — to tame surging inflation has played a major role in the current downturn. Given that the US holds significant sway on the international capital markets and fund flows, the sharp and rapid rounds of interest rate hikes by the US Federal Reserve have not only had global ramifications but also brought along recessionary risks.

That said, the recent US inflation print has shown signs that it has gone past its peak with the Fed recently adopting a slightly less hawkish tone as a result. This hints at a slower pace and smaller quantum of rate hikes moving ahead, which will help lower the risk of any negative shocks emanating from the financial markets next year. The easing inflation pressure could also mean that financial conditions next year may not be as tight as initially expected, which will help provide some breathing room for the global economy. The markets have already begun to price in the slower rate hikes moving ahead, evident by the decline of the benchmark 10-year US Treasury yields to 3.68% as at end-November (from 4.1% as at end-October).

China’s easing of its strict pandemic rules also lend upside potential to global demand. China’s economy has been battered by its continued insistence on zero Covid, which is a significantly more difficult task now with the emergence of more transmissible Covid-19 variants. The more frequent and extensive lockdowns this year come at a huge cost to not just the world’s second largest economy, but also creates a ripple effect in other countries.

All these stand to change as China made a major policy shift in early December, signalling its intention to pivot away from zero Covid and to gradually embrace a return to pre-pandemic normal. China eased a range of Covid-19 restrictions, including scrapping the requirement for a negative virus test to enter most public venues. While numerous other restrictions remain in place, such as China’s closed borders, this still marks a major turn in the country’s Covid strategy and paves the way for more loosening of restrictions in 2023. China’s total exit from its zero-Covid policy is highly unlikely at the moment given concerns about the risk it poses to the elderly population where booster shot coverage is relatively low at around 50%, according to the local authorities. Nonetheless, not imposing full lockdowns in itself means the country avoids incurring significant costs to the economy compared with before. The slightly more relaxed approach would still provide much-needed relief that the economy needs, which in turn provides a small support to global growth in 2023.

Despite these positive developments, will the global economy be able to avoid a downturn in 2023? My answer is still: probably not.

We cannot deny what the hard economic statistics are showing us: the economy is certainly heading towards a difficult year ahead while risks remain heavily tilted to the downside.

However, the easing of some main pressure points behind the current downswing is still a positive sign for 2023’s outlook. To quote a popular proverb, let’s prepare for the worst but hope for the best. If the environment continues to improve, the hope is that a soft landing can be achieved next year and any downturn would likely be less protracted.

Wishing all of you a joyful holiday season and a happy new year.

Woon Khai Jhek, CFA, is a senior economist and head of the economic research department at RAM Rating Services Bhd

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