Press Release: Asia Remains World’s Most Dynamic Region, Although Pockets of Overheating Pose Risks

IMF News, April 28, 2011

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Economic growth in the Asia and Pacific region is expected to remain robust this year and next.
Growth is expected to be close to 7 percent in 2011 and 2012, as the region continues to lead the global recovery.
Output gap is closing in much of emerging Asia, where growth is expected to reach around 8 percent, led by China and India.
For Hong Kong SAR, growth in 2011 is expected to be close to 5.5 percent.
Both exports and domestic demand are fueling rapid economic growth in the region.

The earthquake-related tragedy in Japan in mid-March caused terrible losses of life and property.
The government’s response helped to contain the economic impact, and spillovers to activity in the rest of Asia should be limited.
The situation is, however, still uncertain.
New downside risks include unrest in the Middle East and North Africa and uncertainties about the effects of the tragedy in Japan.
Fiscal and financial vulnerabilities in advanced economies could affect Asia mainly through the trade channel.

For the region as a whole, CPI inflation accelerated to about 4.5 percent in February 2011, largely due to the rise of fuel and food prices.
Fuel and food price increases are beginning to feed into core inflation and to affect the poor.
Headline inflation is generally expected to increase further in 2011, before decelerating modestly in 2012.
Signs of overheating are building up in some of the region’s asset markets.
Example: In Hong Kong SAR there is the risk of a property bubble developing; the government is taking proactive policy steps, such as putting in place a range of prudential measures.

The need to tighten macroeconomic stances in Asia has become more pressing than it was last year.
Further monetary tightening and macro-prudential measures will be necessary in several economies that face growing overheating pressures in order to:
- contain credit dynamics;
- bring interest rates more closely in line with robust growth;
- mitigate risks to the financial sector.
“In many economies, exchange rate flexibility is a key line of defense against overheating.”
Several economies have scope for more fiscal consolidation, which would:
- help contain demand;
- build the fiscal space that would allow governments to respond more effectively to future shocks.

A key challenge for Asia’s policymakers is to achieve balanced, sustainable, and more inclusive growth over the medium term.
Need to reduce inequality through inclusive labor markets to guard against risks to social stability.
Need to develop new engines of growth by strengthening private domestic demand.

IMF press release, April 28, 2011.