Asia’s Easing Economic Headwinds Make Way for Stronger Recovery
IMF Blog, February 21, 2023
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- Authors: Krishna Srinivasan, Thomas Helbling, Shanaka J Peiris
- Published: February 21, 2023
Growth outlook and regional dynamics
- Growth set to accelerate to 4.7 percent this year from 3.8 percent in 2022.
- Emerging and developing economies in the region poised to expand by 5.3 percent this year.
- China and India alone are expected to contribute more than half of global growth this year, with the rest of Asia contributing an additional quarter.
- Cambodia, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam have returned to robust pre-pandemic growth.
- China’s sudden re-opening is the most significant forecast revision since October and is positive for the region because about half of the region’s trade takes place between its economies.
- Spillover estimate: for every percentage point of higher growth in China, output in the rest of Asia rises by around 0.3 percent.
- Advanced economies in Asia show mixed prospects:
- Japan’s near-term outlook is stronger, supported by accommodative policies, border reopening and supply chain improvements, but growth would fall back in 2024 as conditions normalize and policy support eases.
- Manufacturing-export performance has started to cool due to slowing global trading partners; Korea, Singapore, and Taiwan Province of China face export headwinds from the technology cycle and sagging microchip prices.
Easing inflation and monetary policy considerations
- Headline inflation appears to have peaked during the second half of last year; core inflation remains more persistent and has yet to ease definitively.
- Expectation: inflation to return to central bank targets sometime next year amid easing financial and commodity headwinds.
- Global financial conditions have eased somewhat, and the US dollar has lost some strength.
- Asian central banks have been hiking interest rates to tackle above-target inflation; Asian currencies have rebounded, with most erasing about half of last year’s losses, easing pressure on domestic prices.
- Commodity and shipping price developments:
- Commodity prices soared following Russia’s invasion of Ukraine, squeezing Asia’s energy importers early last year.
- Soaring shipping costs raised the cost of imported goods, with particularly strong impacts on the Pacific Island Countries.
- More recently, steady declines in both commodity and shipping costs have taken pressure off current accounts and inflation.
- Policy advice and risks:
- Central banks need to stay alert because core inflation is still running above target and pandemic-related supply shocks and structural realignments complicate monetary calibration.
- Signals about second-round inflation effects are mixed, heightening uncertainty.
- Given two-sided risks to inflation in Japan, more flexibility in long-term yields would help avoid abrupt changes later.
- Renewed dynamism in the Chinese economy may put upward pressure on global commodity and service prices, especially in countries expecting resurgent tourism; central banks should reaffirm commitment to price stability and may need to hike rates further if core inflation does not show clear signs of returning to target.
Elevated debt, financial vulnerabilities, and policy priorities
- Medium-term outlook for China has been downgraded; a future slowdown there will weigh on growth prospects across Asia’s integrated supply chains and globally, increasing urgency for reforms to boost productivity and long-term growth across Asia.
- Fiscal considerations:
- Fiscal deficits during the pandemic and higher long-term interest rates over the past year added to public debt burdens.
- Several Asian countries face debt distress; authorities must continue with plans for gradual fiscal consolidation to avoid monetary-fiscal policy conflicts.
- Financial sector vulnerabilities:
- Many Asian countries face elevated financial vulnerabilities, with high leverage across household and corporate sectors and significant bank exposure to real estate downturns.
- Policy trade-offs exist between controlling inflation and ensuring financial stability.
- There is a need to strengthen resolution frameworks.
Source: Asia’s Easing Economic Headwinds Make Way for Stronger Recovery