Growth in Asia Expected to Moderate Further in 2012
IMF Survey online
October 12, 2012
- Asia expected to grow by 5½ percent in 2012 and nearly 6 percent in 2013
- Main risks are external: euro area crisis and failure to address U.S. fiscal cliff
- Key near-term challenge is to support noninflationary growth while maintaining financial stability
- Further reforms needed to sustain growth momentum over the medium term
Growth in Asia during the first half of this year has slowed to its lowest rate since the start of the global financial crisis, and only a modest and gradual pick up is expected next year, the IMF said.
“The key factor has been a sharp slowdown in exports, primarily Asia’s exports to Europe,” said Anoop Singh, head of the IMF’s Asia and Pacific Department, at a press briefing held during the Annual Meetings of the IMF and the World Bank in Tokyo, Japan.
Domestic factors have also contributed to the slowdown in the region, Singh said. These include policies to engineer a soft landing in China, a drop in investment adding to supply constraints in India, and some loss of consumption momentum in Japan.
According to the Regional Economic Outlook Update for the region, issued on October 12 in Tokyo, GDP growth across Asia is forecast to average 5½ percent in 2012, from 6 percent in 2011. Going forward, growth is expected to pick up gradually to about 6 percent in 2013, helped by resilient domestic demand, easy financing conditions, and the slow expected improvement in external demand from advanced economies.
“This overall performance will be modest by recent Asian standards, but enviable by world standards,” Singh pointed out. “Asia will remain the global growth leader, expanding over 2 percentage points faster than the world average next year,” he added.
Risks to growth
But the outlook is subject to considerable risks. The key near-term risks are mainly external—a further escalation of the euro area crisis and failure to address the U.S. fiscal cliff.
“A food price shock is yet another external risk, but the sharp increase in global food prices over the summer has so far been smaller and less broad-based than during the 2007–08 episode,” Singh noted. “Also, local prices of rice—a key commodity across most of Asia—have been relatively stable, and inflation expectations have remained generally well anchored,” he added.
Near-term risks from within the region appear comparatively smaller. For example, a hard landing in China stemming from a sharp correction in the real estate market constitutes an important downside risk for Asia, but Singh explained that this is currently a remote possibility.
Key policy challenges
Singh pointed out that the main near-term challenge for policymakers is to support noninflationary growth and maintain financial stability, while guarding against downside risks.
“Overall, the region has the macroeconomic policy space to respond aggressively to downside risks although the specific conditions facing Asian economies and the policy room available to them vary,” he said.
On the monetary side, Singh added that the accommodative stances adopted by central banks around the region are broadly appropriate because they help provide some measure of insurance against downside risks to growth.
On the fiscal front, Singh said that higher structural deficits than before the crisis imply a need to rebuild fiscal space in many Asian economies.
Strengthening sources of growth
Looking ahead, Singh said that the best form of insurance against external risk remains strengthening domestic sources of growth. “In that regard, economic rebalancing remains a policy priority for much of Asia,” he added.
Singh suggested further reforms on multiple fronts to avoid sustained growth slowdowns in the region, such as reorienting government budgets toward investments in social safety nets and critical infrastructure, reforming goods and labor markets, or adjusting to demographic change by boosting labor force participation.
“Collective actions will also make the difference, such as the maintaining and furthering of the open trade and investment regimes that have been instrumental to Asian economies’ success,” he said.