IMF Logo

IMF Logo

IMF Survey: Asia Faces Risk of Overheating, Needs Quality Growth

February 17, 2011

  • Quicker normalization of fiscal, monetary stances needed
  • Stronger currencies recommended as part of policy response
  • Future growth should be balanced and inclusive

Asia continues to lead the global recovery following the financial crisis, but a top IMF economist has warned that the risks of overheating are emerging within the region.

Asia Faces Risk of Overheating, Needs Quality Growth

Post-crisis, the recovery should be balanced, sustainable and “of the right quality,” says the IMF’s Anoop Singh (photo: IMF)

Asia in Recovery

Speaking at a symposium organized by the Carnegie Endowment for International Peace in Washington DC, Anoop Singh, the head of the IMF’s Asia and Pacific Department, said that as well as normalizing fiscal and monetary policies to deal with the risk of overheating, governments in the region need to ensure that the subsequent growth momentum remains balanced, of “the right quality, and sustainable.”

“It is not enough for us to have a strong recovery. It must be sustainable and it must have the right quality,” he told an audience of journalist and experts.

“Asia has significantly lowered poverty in the past decades and, looking ahead, the growth momentum must remain inclusive, and address rising concerns in some countries about income disparities. In the near term, rising global food prices are are an important issue in many countries,” he added.

Threats to Asian growth

Emerging markets have led the global recovery out of crisis for the first time ever, but a number of developments, including rising inflationary expectations, higher property prices, and strong credit growth, have raised concerns across many parts of Asia.

Rising inflation is typically one of the clearest signs that an economy is overheating and in recent months, inflation in many countries in the region has climbed, fuelled by higher food prices. But food inflation is just one part of the story

“Our sense is that core inflation is also rising in some parts of the region, and we see risks of spillovers into generalized inflation,” said Singh who also pointed to the growth in real wages off the back of falling unemployment and signs of skills shortages in the region.

Property price rises stoke fears of bubble

Although some upward pressures have abated in recent months following measures to cool property markets, surging property prices have been another cause for concern in a few regional economies. There is the risk in some countries of property bubbles developing,” said Singh.

He also pointed to the implications of surging capital flows into Asia over the past year, which he said would need to be managed carefully. In 2009 and the following year, capital flows into Emerging Asia reached more than $200 billion, following a net exodus of foreign capital, in 2008.

Singh warned that portfolio flows, in particular, had been increasing into Asia and “could quickly overwhelm their absorptive capacity.”

Policy responses

Singh called on authorities around Asia to pursue more rapid normalization of both fiscal and monetary stances. He said the response would be clearly helped by more flexible currencies.

“If you look at normalizing macroeconomic policies, monetary and fiscal, there needs to be a faster and quicker normalization of these policies and it is difficult to do that without more flexible currencies in many countries,” he said.

Also speaking at the symposium—moderated by Yukon Huang—were Frederick Jaspersen, director of the Latin America department at the Institute of International Finance, and Carnegie’s Uri Dadush.

Dadush warned that conditions for overheating in many emerging markets were “blatantly in place today, in a way that is almost unprecedented.”

He called on authorities to take preemptive action to avert a possible future crisis.

“We are at a very early stage in the recovery cycle, and financial crises take time to build... so it is important that policy makers take preemptive measures today to avoid big, big problems down the road,” he said.