A U.S. recession will likely hurt Asia. Here are the countries that are most vulnerable

SINGAPORE — Asia won’t escape unscathed if the U.S. falls into recession, however some international locations in Southeast Asia might be extra badly hit than others, economists warn.

The tug-of-war between inflation and recession within the United States continues because the Federal Reserve sticks to its hawkish stance on rate of interest hikes. 

The U.S. has already reported two consecutive quarters of adverse development within the first two quarters of 2022 — what some think about a “technical” recession. Still, there’s little consensus on when a full-blown recession may occur. 

Economists instructed CNBC that Singapore and Thailand will more than likely be the primary to be hit if the U.S. heads into recession.

Singapore is “more vulnerable” to a U.S. recession in contrast with its regional friends as a result of it is “very, very dependent,” mentioned Chua Hak Bin, a senior economist at Maybank.

“I suspect [it] will be Singapore first,” he mentioned when requested which economies in Southeast Asia might be hit first if the U.S. falls right into a recession. The island-state will doubtless be the primary due to its export dependency and its small and open financial system, Chua mentioned.

Selina Ling, chief economist at OCBC Bank agreed with that evaluation.

“At first glance, I would suspect the more open and trade-dependent Asian economies like [Singapore], Taiwan and South Korea and maybe Thailand would be the usual suspects,” she mentioned.

GDP development within the nation has been “historically more correlated” with the U.S. enterprise cycles as a consequence of its export-oriented financial system, Maybank mentioned in a late-August report.

Singapore would not have a lot of a home market and depends closely on commerce companies for financial development, Chua defined. This consists of transport actions and cargo operations. 

The nation’s trade-to-GDP ratio for 2021 was 338%, in response to the World Bank. The trade-to-GDP ratio is an indicator of how open an financial system is to worldwide commerce.

Singapore’s “correlation and dependence on external demand is very high,” Chua mentioned. If the U.S. have been to slide right into a recession, that “dependence and causality” will hit the extra export-oriented economies, he added.

Singapore is extraordinarily related with the remainder of the world and a “shock wave” in any nation will certainly have a ripple impact throughout town, Irvin Seah, senior economist from DBS Group Research instructed CNBC. 

Still, he would not anticipate Singapore to fall right into a recession this yr or subsequent yr.

The Maybank report mentioned that if the U.S. heads into recession, the downturn is “likely to be shallow rather than deep.”

However, Chua mentioned the U.S. may presumably face a “prolonged” recession and whether or not Singapore can be headed for a long-drawn recession or not will rely upon China’s Covid reopening since China is the city-state’s largest buying and selling associate. 

Singapore is an enormous exporter {of electrical} equipment and gear, however output in its electronics cluster fell 6.4% in July in contrast with final yr, knowledge from the Economic Development Board confirmed.

Output within the semiconductor sector dropped 4.1%, whereas different digital modules and parts segments shrank by 19.7% as a consequence of “lower export orders from China and [South] Korea,” mentioned the EDB, a authorities company beneath Singapore’s commerce and trade ministry.

“China is the biggest export market for many ASEAN countries … But exports to China have been terrible,” Chua mentioned referring the the 10-member Association of Southeast Asian Nations. “Because Singapore is so heavily dependent on exports, [it] will feel it.” 

Seah, the economist from DBS, mentioned he doesn’t “discount the possibility” that Singapore will expertise at the least one quarter of adverse quarter-on-quarter development. However, financial circumstances are normalizing for the nation, he added.

“We are definitely much stronger today compared to during the global financial crisis period,” he mentioned. 

Thailand will even be one of many first to be impacted if the U.S. falls right into a recession, predicted the economists who spoke to CNBC.

The nation depends closely on tourism for its financial development. Tourist spending accounted for roughly 11% of Thailand’s GDP in 2019 earlier than the pandemic. The nation welcomed virtually 40 million guests that yr and generated greater than $60 billion in income, in response to World Bank knowledge.

There have been solely about 428,000 international vacationers arrivals in 2021, and its financial system grew by just one.5% — one of many slowest in Southeast Asia, in response to Reuters.

Thailand could possibly be subsequent to fall right into a recession after Singapore, in response to Chua. However, a “wildcard” would be the timing of China’s reopening — which may decide if the Thai financial system comes again “in full swing,” he added.

Chinese vacationers haven’t returned to the Southeast Asian nation and that has left Thailand’s financial system in “an even more precarious state,” mentioned DBS Bank’s Seah. 

“As long as Chinese tourists are not returning, Thailand will continue to struggle. Growth has been weak, inflation is high, [and] the Thai baht is under pressure.”

The Thai baht is at present hovering at round 36 baht per U.S. greenback, and is down 20% in contrast with three years in the past, earlier than the pandemic.

Thailand’s inflation charge hit a 14-year excessive of seven.66% in June, in response to Refinitiv knowledge.

The Bank of Thailand has solely hiked rates of interest as soon as thus far since 2018.

“Headline inflation is very high in Thailand, but core inflation is not as high, by correlation is not as high. Of course growth has been a lot weaker, so they don’t feel any urgency to tighten as aggressively,” Maybank’s Chua mentioned.

He identified that Indonesia and the Philippines would doubtless be much less impacted by a possible U.S. recession as a consequence of their “domestic oriented economies.”

“Indonesia and the Philippines have been more insulated from slowing external demand and US recession, with both economies continuing to expand even in 2008/09 during the global financial crisis,” the Maybank report mentioned.

According to knowledge from the World Bank, GDP development in Indonesia and the Philippines have been greater in comparison with Singapore and Thailand throughout the international monetary disaster in 2008 to 2009.

— CNBC’s Abigail Ng and Weizhen Tan contributed to this report.