Economy

Soft landing for U.S. economy; mainland China’s growth normalises

The global economy performed better than expected in 2023, with recessionary fears easing over the course of the year. In Asia Pacific, the monetary tightening cycle has ended, with Japan the lone exception. The region’s labour market remains robust while inflation has eased substantially, boosting consumption demand. As a result, regional GDP growth is estimated to have accelerated to 4.3% in 2023, up from 3.2% in 2022.

Asia Pacific is forecasted to continue to see moderate GDP growth in 2024, albeit at the slightly slower rate of 3.5%. A slight slowdown in job creation is expected this year, leading to a mild upswing in unemployment rates in countries such as India, Australia and Korea.

Although the pace of the growth normalisation in mainland China remains a concern, the introduction of fiscal and monetary stimulus is expected to boost demand. Support for the property market will be a major focus for policymakers looking to propel an economic recovery, with the sector accounting for 30% of national GDP¹.

India is expected to witness a slight slowdown in manufacturing amid weaker global demand, although domestic demand will remain solid, aided by solid business and financial market sentiment.

Export growth in the region will be led by demand for semiconductors. Thanks to stronger U.S. demand for high-end chips in recent months, Korea, Singapore and Taiwan have reported signs of a rebound in export growth after logging considerable y-o-y contractions in the first three quarters of 2023. CBRE expects Singapore and Korea to record modest export growth of 2.3% and 1.3%, respectively, in 2024. Overall export demand in other segments will remain sluggish.

Figure 1: Real GDP growth (y-o-y in %)

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Asia Pacific to enter interest rate cut cycle by mid-2024

Although Asia Pacific is widely expected to enter the downward interest rate cycle in mid-2024, the precise timing and magnitude of rate cuts will depend on the Fed’s policy stance, growth outlook and inflation.

While the market is pricing in a dovish pivot by the Fed in H1 2024, the Fed is playing down the odds of a rate cut in Q1 2024. CBRE’s analysis of the Fed’s rate cut cycles since 1980’s reveals that the Fed Funds Target Rate has peaked after rate hikes for a range of seven to 15 months in the last three cycles. This was followed by cuts of over 200 bps within a year. If history is any guide, this indicates that the Fed could start cutting interest rates in Q2 2024, depending on the pace of the decline in inflation. CBRE forecasts the Fed Funds Target Rate to fall by 125 bps to a range of 4-4.25% by the end of this year. The long-term Fed rate target is 2.5%, meaning that interest rates will not return to ultra-low levels.

CPI-inflation has eased closer to Asia Pacific central banks’ target levels and is expected to decline further in 2024, providing a solid foundation for rate cuts.

In most developed Asia Pacific economies including Australia, Hong Kong SAR, Singapore and Korea, 10-year government bond yields have fallen from their October 2023 peaks to incorporate rate cut expectations. The decline is likely to continue into 2024 and somewhat alleviate pressure on commercial real estate refinancing and investment.

While mainland China will also provide liquidity to the market via cuts to banks’ required reserve ratios and loan prime interest rates, the magnitude of cuts will be less than the 20bps reduction in 2023.

Japan will remain an outlier, with further monetary tightening expected in 2024, which may include tweaking or abandoning the yield curve control policy. An exit from negative interest rates is possible if wage growth rebounds and inflation does not fall to the BoJ’s 2% target.

Figure 2: Fed Funds Target Rate and US inflation rate (%)

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Figure 3: Policy Interest Rates

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Upcoming elections set to impact geopolitical landscape

This year features a packed electoral calendar with over 40% of the world’s population going to the polls in their respective markets.

Within Asia, January’s Taiwan presidential election will have the strongest bearing on Sino-U.S. relations. Lai Ching-te’s victory could see mainland China retaliate by introducing more hardline policies against Taiwan, raising cross-strait tensions.

Elsewhere, legislative elections are due to be held in Korea in April. Should the governing People Power Party secure more seats in parliament, the coming years will see the introduction of more business-friendly policies such as tax cuts for companies, property transactions and financial investments. However, as of January, votes are split among candidates and President Yoon Suk Yeol’s approval rating remains low.

Indian Prime Minister Narendra Modi will seek his third straight term in elections due to be held between April and May. A Modi victory may provide longer term stability to the economy as he looks to continue with the country’s structural reforms.

Should these elections pass without incident and result in the creation of a more stable political environment, corporate and investor sentiment will improve.

Figure 4: Upcoming major elections in 2024

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