Asia Pacific on dynamic growth path strewn with challenges: IMF

Asia Pacific on dynamic growth path strewn with challenges: IMF

Asia Pacific on dynamic growth path strewn with challenges: IMF
Image by abdulla binmassam from Pixabay
  • Asia Pacific would contribute more than 70% to global growth this year but still faces challenges from inflation, debt, and financial vulnerabilities, say IMF economists
  • China’s reopening will provide fresh momentum, but the biggest effect is from demand for consumption, not from demand for investment goods in China, but this time.

Asia Pacific remains a dynamic region despite a challenging year looming ahead for the world economy amid rising interest rates and Russia’s war in Ukraine weighing on activity while inflation remains stubbornly high and banking strains in the US and Europe add to uncertainty, International Monetary Fund economists say in a weekend blog.

“Asia’s domestic demand has so far remained strong despite monetary tightening, while external appetite for technology products and other exports is weakening,” wrote IMF Krishna Srinivasan and Alasdair Scot.

Srinivasan is director of IMF’s Asia and Pacific Department (APD) tasked with overseeing the institution’s work on all countries in the Asia Pacific. His co-author, Scott, is deputy chief of the Regional Studies Division in APD and mission chief for Laos.

The two economists say the region will contribute over 70% of global growth this year as its expansion accelerates to 4.6% from 3.8% last year. They said China’s reopening will provide fresh momentum.

“Normally the strongest effect would be from demand for investment goods in China, but this time the biggest effect is from demand for consumption. Other emerging economies in the region are on track to enjoy solid growth, though in some cases at slightly lower rates than seen last year,” they said.

Even so, they said, the dynamic growth outlook doesn’t mean policymakers can be complacent as some risks remain, such as public debt. Intensification of the recent global financial tremors could spark others.

Srinivasan and Scott said persistent inflation remains a challenge as global commodity prices have moderated after surging last year and supply chain pressures have eased. But inflation remains above central banks’ targets and core inflation has also proven sticky.

They said output gaps or Asian economies are either narrowing or have already closed, while levels of economic capacity themselves might have due to the effects of so-called economic scarring from the pandemic.

The effect of currency depreciation against the US dollar last year is still passing through to prices, suggesting the battle to contain inflation isn’t over. With real interest rates still low, central banks may need to keep interest rates higher for longer, they said. Significant uncertainty about the path of global and regional financial conditions presents another challenge.

“The recent turbulence in some US and European banks serves as a cautionary tale about contagion risks. We have seen how some banks in Europe and the United States have struggled with rising interest rates,” Srinivasan and Scott said.

They said Asian banks could be hit by increases in wholesale funding costs and sudden falls in market values of assets. Lenders in some emerging economies could face liquidity stresses after bank runs or retrenchment in external funding lines. Some countries and sectors are significantly exposed to a sharp increase in external borrowing costs.

Domestic vulnerabilities are evident, such as increased leverage even before the pandemic, the concentration of corporate debt in firms at risk of insolvency and in a few sectors, such as property, said Srinivasan and Scott.

Asian property prices are still historically high and further declines could pressure banks’ balance sheets, especially those exposed to mortgage lending and real estate developers.

They said there are heightened risks to economic growth, with China expected to rebound this year then likely slow in the medium term, implying the lowest such growth rates for Asia in decades. They see China’s growth likely shifting from investment to consumption, with significant implications for the region, especially for economies with sizable exports to China.

Greater geoeconomic fragmentation would also add to pressures on growth potential, they said.

The authors said policymakers should keep a close eye for stresses and develop contingency plans. Unless strains in financial markets increase and raise broad-based stability concerns, central banks should separate monetary policy objectives from financial stability goals.

More aggressive fiscal consolidation may needed to ensure sustainability over the medium term – but policymakers must strike a balance between supporting growth, protecting the vulnerable, and addressing debt concerns. The region must prioritize policy initiatives that foster innovation-driven economic development.

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