Asia Sails Into Headwinds From Rate Hikes, War, and China Slowdown
IMF Blog, October 13, 2022
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- Authors: Krishna Srinivasan, Shanaka J Peiris
- Published: October 13, 2022
Overview
- Growth forecasts for Asia and the Pacific have been cut to 4 percent this year and 4.3 percent next year, compared with a 5.5 percent average over the last two decades.
- Asia’s rebound early in the year is losing momentum after a weaker-than-expected second quarter.
- Three persistent headwinds are identified: tightening financial conditions, Russia’s invasion of Ukraine, and China’s strict zero-COVID policy coupled with real estate sector turmoil.
Key headwinds and transmission channels
- Sharp tightening of financial conditions:
- Raising government borrowing costs.
- Likely to become more constricting as major advanced-economy central banks continue to raise interest rates.
- Rapidly depreciating currencies could further complicate policy challenges.
- Russia’s invasion of Ukraine:
- Continues to trigger a sharp slowdown in Europe and reduce external demand for Asian exports.
- China slowdown:
- Zero-COVID policy and lockdowns, plus deepening real estate turmoil, have caused an uncharacteristic and sharp slowdown that weakens momentum in connected economies.
Growth forecasts and regional outlook
- China:
- Near-zero growth in the second quarter.
- Full-year growth of 3.2 percent, recovering modestly in the second half.
- Accelerates to 4.4 percent next year, assuming pandemic restrictions are gradually loosened.
- Japan:
- Growth unchanged at 1.7 percent this year.
- Slows to 1.6 percent next year, weighed down by weak external demand.
- Korea:
- 2022 growth revised up to 2.6 percent due to a strong second-quarter.
- Revised down to 2 percent in 2023 reflecting external headwinds.
- India:
- Expands by 6.8 percent this year.
- Slows to 6.1 percent in 2023 due to weakening external demand and tightening monetary and financial conditions.
- Southeast Asia and select countries:
- Vietnam: expected 7 percent growth this year and a slight moderation next year.
- Philippines: forecast 6.5 percent expansion this year.
- Indonesia and Malaysia: growth will top 5 percent this year.
- Cambodia and Thailand: will expand faster in 2023 on a likely pickup in foreign tourism.
- Myanmar: growth this year expected to stabilize at a low level amid continued unrest and suffering.
- Asian frontier and vulnerable markets:
- Sri Lanka: experiencing a severe economic crisis; authorities have reached an agreement with IMF staff on a program to help stabilize the economy.
- Bangladesh: war in Ukraine and high commodity prices have dampened recovery; authorities have preemptively requested an IMF-supported program and access to the Resilience and Sustainability Trust to meet large climate financing needs.
- High-debt economies such as Maldives, Lao P.D.R., and Papua New Guinea, and those facing refinancing risks like Mongolia, are facing challenges as global conditions change.
- Pacific Island Countries:
- Growth expected to rebound strongly next year to 4.2 percent from 0.8 percent this year as tourism-based economies benefit from eased travel restrictions.
Inflation and exchange rates
- Inflation:
- Now exceeds central bank targets in most Asian economies.
- Driven by global food and energy prices, currencies falling against the US dollar, and shrinking output gaps.
- Core inflation has also risen; persistence driven by inflation expectations and wages must be closely monitored.
- Exchange rate movements:
- US dollar strengthened against most major currencies as the Federal Reserve raises interest rates and signals further hikes.
- Most Asian emerging market currencies have lost between 5 percent and 10 percent of their value against the dollar this year.
- The yen has depreciated by more than 20 percent.
- Recent depreciations have started passing through to core inflation across the region, potentially keeping inflation high for longer.
- Commodity price shocks:
- Spikes in global food and energy prices early this year threatened to abruptly raise the cost of living, with particularly strong implications for lower-income households.
Policy recommendations and priorities
- Monetary policy:
- Central banks need to persevere with policy tightening until inflation durably falls back to target.
- Exchange rates should be allowed to adjust to reflect fundamentals, including the terms of trade and foreign monetary policy decisions.
- If global shocks raise borrowing rates unrelated to domestic policy and/or threaten financial stability or inflation expectations, foreign-exchange interventions may be useful for countries with adequate reserves, alongside macroprudential policies.
- Countries should urgently consider improving liquidity buffers, including by requesting access to precautionary instruments from the Fund for those eligible.
- Fiscal policy:
- Continue gradual fiscal consolidation to moderate demand alongside monetary policy, focused on the medium-term goal of stabilizing public debt.
- Measures to shield vulnerable populations from rising costs should be well-targeted and temporary.
- In countries with high debt levels, support needs to be budget-neutral to maintain the path of fiscal consolidation.
- Credible medium-term fiscal frameworks remain imperative.
- Structural and longer-term policies:
- Address scarring from the pandemic: elevated corporate leverage that may weigh on private investment, and education losses from school closures that could erode human capital without remedial measures.
- Urgent need for ambitious structural changes to boost productive potential and address the climate crisis.
- Strong international cooperation is needed to prevent greater geoeconomic fragmentation and ensure that trade aids growth.
IMF Blog: Asia Sails Into Headwinds From Rate Hikes, War, and China Slowdown