Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: Strong Growth for Asia with Risk of Overheating

April 16, 2011

  • 7 percent growth predicted for Asia in 2011 and 2012
  • Increasing overheating pressure in goods, asset markets
  • Heightened need for macroeconomic policy tightening

Economic growth in Asia is expected to slow to a more sustainable rate of nearly 7 percent in 2011—12, but new risks to the region have emerged including the growing danger of overheating, says the Director of the IMF’s Asia and Pacific Department, Anoop Singh.

Strong Growth for Asia with Risk of Overheating

Stock exchange in Haikou in China’s Hainan Province. Overheating pressures have emerged in goods and asset prices across Asia (photo: Zhao Yingquan/Corbis)


Speaking to reporters during the Spring Meetings of the IMF and the World Bank in Washington DC, Singh said the recovery in Asia had matured.

“Both exports and domestic demand fueled rapid economic growth, which reached about 8½ percent in 2010. Growth should remain robust at close to 7 percent in 2011/2012.”

Growth within the region will also be varied, with China and India likely to lead the rest of the region with their economies growing at 9½ and 8 percent respectively.

Threat of inflation

But Singh also sounded a note of caution, saying that pockets of overheating pressures had emerged across Asia in both goods and asset prices.

“Headline inflation has accelerated in the last six months and initially that reflected commodity prices, but we do see these pressures now spilling over into core inflation and inflation expectations,” said Singh.

The IMF expects inflation in many Asian economies to increase further this year before slowing modestly next year as global commodity prices stabilize and macroeconomic policies are tightened.

“But the inflation risk for Asia is clearly on the upside,” said Singh.

New risks emerge

He also identified new risks that had emerged in the region, including possible disruptions to the global supply chain caused by the disaster in Japan, and the threat posed by rising commodity prices.

“A more prolonged disruption of industrial production in Japan could have effects on other economies in the region, and elsewhere in the world, that are linked to Japan through the global supply chain,” he said.

“Asia could also be affected if second-round effects from higher oil prices resulted in a global slowdown that hurts external demand,” he added.

Need for monetary tightening

Against this background of strong growth, possible closing output gaps, and overheating, Singh said the need to tighten macroeconomic policy stances has become more pressing now than six months ago.

“Certainly further monetary tightening, which is ongoing in Asia, is necessary in economies that are facing these generalized inflation pressures, as interest rates remain below levels that are consistent with stable growth and low inflation.”

Singh added that exchange rate appreciation would help tighten monetary conditions, while some economies in Asia needed more fiscal consolidation.

The IMF expects foreign capital to continue flowing into the region this year and next, although at a more moderate pace than last year. But Singh added a further note of caution saying that risks remain of global tensions that could cause more volatility in inflows.

“Macroprudential measures targeted at reducing the risks from volatile capital flows can be helpful, and they are being taken forward. They are complements to macroeconomic policy adjustments, but of course they are not substitutes,” he said.

Toward sustainable, inclusive growth

Looking ahead, an important priority for many Asian economies is to strengthen the path toward strong, sustainable growth over the medium term. Singh warned that many of the global imbalances which existed during the pre-crisis period, continued to exist.

He said that without corrections to these underlying distortions—including undervalued exchange rates in key emerging market surplus economies, and insufficient domestic savings in advanced deficit countries—global growth could be threatened.

The IMF economist said that a further imperative was to achieve more inclusive growth as large numbers of workers in Asia remain in vulnerable segments, and income inequality in the region remains high.

“Narrowing income inequality through inclusive labor markets and stronger social protection would not only reinforce social stability, but also facilitate rebalancing toward internal demand, “ he said.