IMF Survey: Asia Must Protect Growth, Guard Against Inflation, says IMF

September 24, 2011

  • Asian policymakers face a complicated trade-off between safeguarding growth and mitigating inflation risks
  • Asia has not decoupled, and remains vulnerable to shocks from developed economies
  • Rebalancing Asian economies toward domestic demand would also help promote inclusive growth

Against the background of a threatened global slowdown, Asian policymakers face the challenge of safeguarding growth while remaining vigilant against the risk of inflation, the head of the Asia and Pacific Department for the IMF said.

Asia Must Protect Growth, Guard Against Inflation, says IMF

Electronic billboard in China. Boosting domestic consumption would contribute to more inclusive growth says IMF (photo: Claro Cortes IV/Reuters/Corbis)


“The challenge is to ensure overheating threats are addressed,” said Anoop Singh.

Speaking to journalists during the 2011 IMF–World Bank Annual Meetings, Singh said he expected growth in emerging Asia to remain robust at 7½–8 percent next year, and for inflation to recede modestly, after peaking in 2011.

The region’s policymakers now faced a “balancing act,” he suggested.

“They have got to safeguard growth and ensure they protect themselves from the downside risks from the advanced economies … at the same time, we are impressed Asian economies remain determined to contain inflation.”

Monetary policy against rising inflation

Anoop Singh said for some countries in the region, where the threat of inflation was greater and monetary conditions still accommodative, there should be a move toward a more neutral monetary stance.

He contrasted these cases with economies where inflation was within central banks’ target levels, and where “a pause in monetary tightening may be warranted until the global uncertainties have somewhat abated.”

Anoop Singh also supported the continued normalization of fiscal policies by many countries in the region.

What about in the event of a global downturn?

In the event of a big, negative, external shock, “clearly Asian economies have the scope to reverse course and to use a range of measures, including fiscal policy, as they did in response to the global crisis of 2008,” said Singh.

Growth in Asia has moderated since the second quarter of 2011, mainly as a result of weakening external demand, but domestic demand has generally been resilient. Nevertheless, risks for the region have increased in recent weeks.

“There is no doubt that any further escalation of the euro area’s financial turbulence and a renewed slowdown in the United States would have substantial trade and financial spillovers to Asia,” said Singh.

“What we learn from some of our models is that were there to be a drop of 1 or 2 percent in growth rates in advanced economies, the effect on Asia would be significant … and this would come from both financial and trade channels, “ he said.

In the event of a global downturn, China’s role is likely to be important as the world’s second largest economy has some room to return to fiscal stimulus and encourage consumption. But, warned Singh, the impact of any such measure would likely be less than a few years ago.

“We cannot, and should not, expect China or Asia to be able to respond in a way that would very significantly offset the effects from Europe,” he said. China’s economy, while large, is simply not big enough.

Greater demand would also mean more inclusive growth

Anoop Singh commended policymakers in the region for their commitment to encouraging domestic demand, and said this would clearly help the collective action plan to maintain global growth in the current environment.

He said, for example, that boosting household incomes through exchange rate and appreciation, financial sector reform, and prioritizing social safety nets—would help increase private consumption and build on Asia’s success in reducing poverty.

“Not only would these measures increase domestic demand … most importantly, if done correctly, they would reduce income inequalities across the region, thereby making Asian growth more inclusive,” Singh stated.

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