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

  • Economists told CNBC that Singapore and Thailand will most likely be the first to be hit if the U.S. heads into recession.
  • Singapore is "more vulnerable" to a U.S. recession compared to its regional peers because it's "very, very dependent," said Chua Hak Bin, a senior economist at Maybank.
  • Thailand will also be one of the first to be impacted due to its heavy reliance on tourism. A "wildcard" will be the timing of China's reopening, which could determine if the Thai economy comes "back in full swing," Chua said. 

Singapore is the most vulnerable and will be the first in Southeast Asia to get hit if the U.S. falls into a recession, says Chua Hak Bin of Maybank.Roslan Rahman | Afp | Getty Images

SINGAPORE — Asia will not escape unscathed if the U.S. falls into recession, but some countries in Southeast Asia will be more badly hit than others, economists warn.

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

The U.S. has already reported two consecutive quarters of negative growth in the first two quarters of 2022 — what some consider a "technical" recession. Still, there's little consensus on when a full-blown recession might happen. 

Economists told CNBC that Singapore and Thailand will most likely be the first to be hit if the U.S. heads into recession.

Singapore

Singapore is "more vulnerable" to a U.S. recession compared with its regional peers because it's "very, very dependent," said Chua Hak Bin, a senior economist at Maybank.

"I suspect [it] will be Singapore first," he said when asked which economies in Southeast Asia will be hit first if the U.S. falls into a recession. The island-state will likely be the first because of its export dependency and its small and open economy, Chua said.

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

"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 said.

1. Interconnected

GDP growth in the country has been "historically more correlated" with the U.S. business cycles due to its export-oriented economy, Maybank said in a late-August report.

Singapore doesn't have much of a domestic market and relies heavily on trade services for economic growth, Chua explained. This includes shipping activities and cargo operations. 

The country's trade-to-GDP ratio for 2021 was 338%, according to the World Bank. The trade-to-GDP ratio is an indicator of how open an economy is to international trade.

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Singapore's "correlation and dependence on external demand is very high," Chua said. If the U.S. were to slip into a recession, that "dependence and causality" will hit the more export-oriented economies, he added.

Singapore is extremely connected with the rest of the world and a "shock wave" in any country will definitely have a ripple effect across the city, Irvin Seah, senior economist from DBS Group Research told CNBC. 

Still, he doesn't expect Singapore to fall into a recession this year or next year.

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

However, Chua said the U.S. could possibly face a "prolonged" recession and whether Singapore is also headed for a long-drawn recession or not will depend on China's Covid reopening since China is the city-state's largest trading partner. 

2. Export-driven economy

Singapore is a big exporter of electrical machinery and equipment, but output in its electronics cluster fell 6.4% in July compared with last year, data from the Economic Development Board showed.

Output in the semiconductor sector dropped 4.1%, while other electronic modules and components segments shrank by 19.7% due to "lower export orders from China and [South] Korea," said the EDB, a government agency under Singapore's trade and industry ministry.

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

3. Tourism

China's zero-Covid policy has also hindered Singapore's tourism recovery since the pandemic, economists said.

Before the pandemic, some 3.6 million Chinese residents traveled to Singapore in 2019, accounting for 13% of total visitors, according to data from Singapore's tourism board. However, there were only 88,000 visitors between January and December last year. 

"When you look at visitor arrivals, it's still roughly less than one third of pandemic levels," Chua said. "China tourists are still absent."

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