July 29, 222 (MLN): The International Monetary Fund (IMF) has lowered its growth forecast for Asia and the Pacific to 4.6% in 2023, down by 50 basis points.
Economic growth in Asia and the Pacific is projected to decelerate to 4.2% this year, 0.7 % points less than the fund forecasted in April and slower than the 6.5% growth in 2021.
In a blog post Krishna Srinivasan, Director of the Asia and Pacific Department (APD) at IMF said on Thursday that China, Asia’s largest economy, saw a significant deceleration in the second quarter as the zero-COVID policy prompted lockdowns for major cities and supply-chain hubs. Accordingly, IMF’s full-year growth forecast is lowered to 3.3% from 4.4% in April, and 4.6% growth is expected next year, a reduction of 50 basis points.
The global economic outlook has darkened, and growth across Asia and the Pacific is poised to slow further amid the continuing impact of Russia’s invasion of Ukraine and other shocks.
IMF highlighted certain risks in its April forecast which includes tightening financial conditions associated with rising central bank interest rates in the United States and commodity prices surging because of the war in Ukraine. The risks are materializing at the moment.
That in turn is compounding the regional growth spillovers from China’s slowdown, he added.
But despite China’s recent slowdown, signs of a rebound in economic activity are emerging as some pandemic restrictions on mobility are now being gradually eased. The resilience of manufacturing and rebound in tourism is supporting a gradual rebound in Malaysia, Thailand, and the Pacific island countries.
With regards to the financial condition, he noted that most emerging market economies in Asia, excluding China, have experienced capital outflows comparable to those in 2013, when the Federal Reserve hinted it might taper bond buying sooner than previously expected, causing global bond yields to rise sharply. The outflows have been especially large for India, $23 billion since Russia’s invasion of Ukraine.
Outflows have also occurred from some advanced Asian economies such as Korea and Taiwan Province of China, as the Fed signals continued rate hikes and geopolitical tensions reverberate.
He also pointed out that Asia’s share of total global debt has increased from 25% before the global financial crisis to 38% post-COVID, raising the region’s susceptibility to changes in global financial conditions.
Sri Lanka is an extreme case where the run-up in debt became unsustainable and the economy lost access to global capital markets, leading to a default on its external obligations, he said.
Pertaining to inflation, he was of the view that Asia’s growing inflation pressures remain more moderate compared with other regions, but price increases in many countries have been moving above central bank targets.
several economies will need to raise rates rapidly as inflation is broadening to core prices to prevent an upward spiral of inflation expectations and wages that would later require larger hikes to address if left unchecked.
At the same time, further rate rises will squeeze budgets for consumers, companies, and governments that took on substantial debt during the pandemic.
“Countries should not wait until it is too late—either to adjust their policy mix where necessary or to rebuild their external financing buffers where appropriate,” he suggested.
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