Asia Likely to See Dynamic Economic Growth, but With Policy Challenges

IMF Blog, April 13, 2023

Source details

Canonical URL: Asia Likely to See Dynamic Economic Growth, but With Policy Challenges

Region projected to contribute about 70 percent to global growth this year.
Regional expansion expected to accelerate to 4.6 percent from 3.8 percent last year.
China’s reopening identified as providing fresh momentum, with the biggest effect this time coming from demand for consumption rather than investment goods.
Other emerging economies in the region on track to enjoy solid growth, though in some cases at slightly lower rates than seen last year.

Inflation remains above central banks’ targets despite moderation in global commodity prices and easing supply chain pressures.
Core inflation (excluding food and energy) has proven sticky.
Output gaps in Asian economies are either narrowing or have already closed.
Economic capacity levels might have fallen due to economic scarring from the pandemic.
Currency depreciation against the US dollar last year is still passing through to prices; impact could be greater because of already-high inflation, especially for emerging economies.
With real interest rates still low—and negative in some countries—central banks may need to keep interest rates higher for longer.
Policy recommendation: Unless strains in financial markets increase and raise broad-based stability concerns, central banks should separate monetary policy objectives from financial stability goals and use tools such as lending and discount facilities to ease liquidity constraints while tightening policy to address inflationary pressures.

Recent turbulence in some US and European banks highlighted contagion risks and cautions about spillovers.
Banks in Asia—particularly in advanced economies—could suffer losses from increases in wholesale funding costs and sudden declines in the market values of assets.
Lenders in some emerging economies could face liquidity stresses following sudden deposit withdrawals or retrenchment in external funding lines.
Some countries and sectors are significantly exposed to a sharp increase in external borrowing costs, though these risks have recently diminished somewhat.
Domestic vulnerabilities include increased leverage prior to the pandemic and concentration of corporate debt in firms at risk of insolvency and in a few sectors, such as property.
Real estate prices in Asia remain historically high even after recent cooling; further declines could pressure banks’ balance sheets, especially those exposed to mortgage lending and real estate developers.
Asian financial systems described as well capitalized with strong liquidity buffers, but financial supervisors must remain alert.
Policy recommendation: The best remedy for financial stress is prevention—policymakers should monitor stresses closely and develop contingency plans.

Public debt levels in the region have increased significantly compared to before the pandemic.
Most governments are expected to tighten budgets this year and next.
Projected consolidation may not be enough to stabilize debt, and rising interest rates would make the debt burden heavier.
Policy recommendation: Fiscal consolidation may need to be more aggressive to ensure sustainability over the medium term, while striking a balance between supporting growth, protecting the vulnerable, and addressing debt concerns.

Heightened risks to economic growth in coming years noted.
China is expected to rebound this year but is likely to slow over the medium term, implying the lowest such growth rates for Asia in decades.
China’s growth is likely to shift from investment to consumption, with significant implications for economies with sizable exports to China.
Greater geoeconomic fragmentation would add to pressures on growth potential.

Region should prioritize policy initiatives that foster innovation-driven economic development.
The green transition highlighted as offering a wide range of innovation opportunities that can become new growth drivers if leveraged effectively.
Policy recommendations: Invest in research and development; promote entrepreneurship; strengthen education and digitalization to foster sustainable, long-term growth.

Krishna Srinivasan, Alasdair Scott — April 13, 2023.