Transcript of Asia and Pacific Department Press Briefing
IMF News, April 25, 2022
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- Published: April 25, 2022
Key messages and regional outlook
- Asian GDP is expected to grow by 4.9 percent in 2022, which is 0.5 percentage points less than projected in January and slower than last year's growth rate of 6.5 percent.
- Inflation in Asia is expected to increase to 3.4 percent in 2022, which is 1 percentage point higher than expected in the January forecast.
- The region faces a stagflationary outlook: growth lower than previously expected and inflation higher.
- Major contemporaneous shocks shaping the outlook:
- Russian invasion of Ukraine: higher commodity prices and slower growth in European trading partners.
- New COVID waves, most notably in China, adding headwinds.
- Global financial conditions tightening and monetary policy normalization in advanced economies.
- Policy space is limited in many countries; policymakers must balance supporting incomplete recovery, responding to rising inflation, and managing high debt levels.
Country and subregion forecasts and notable specifics
- Asia (aggregate)
- 2022 GDP growth: 4.9 percent (downgrade of 0.5 percentage points from January).
- 2022 inflation: 3.4 percent (increase of 1 percentage point from January).
- China
- 2022 Growth Forecast: 4.4 percent (revised down from 4.8 percent in the January Update).
- Revision reflects: sizable negative impact from the war in Ukraine and localized COVID outbreaks and lockdowns; partly offset by policy stimulus.
- India
- 2022 Growth Forecast: 8.2 percent (0.8 percentage points lower than the January Update).
- Headwinds: higher oil prices expected to weigh on growth, increase current account deficits, and push up inflation.
- Japan
- 2022 Growth Forecast: 2.4 percent (downgrade of 0.9 percentage points).
- Inflation remains subdued; BOJ can be more accommodative than the Fed and the ECB.
- Korea
- 2022 Growth Forecast: 2.5 percent (down from 4 percent in 2021; downgrade of 0.5 percentage points).
- Bank of Korea increased rates four times since August '21, bringing the policy rate to 1.5 percent.
- Australia
- 2022 Growth Forecast: marginally revised up by 0.1 percentage point.
- Reasons: stronger than expected 2021 Q4 GDP growth and surge in export commodity prices offset negative spillovers from the war and expected monetary tightening.
- ASEAN countries
- Aggregate downgrade of 0.2 percentage points.
- Positive terms of trade for some commodity exporters partly offset inflation pressures and tighter financial conditions from global monetary normalization.
- Sri Lanka
- Rise in food and fuel prices and hit to tourism have exacerbated pre-existing vulnerabilities and debt sustainability pressures, leading to social unrest and policy instability.
- Authorities have requested a Fund program; technical level discussions have started.
- IMF assessment: debt in Sri Lanka is assessed as being unsustainable; progress toward debt sustainability and engagement with creditors required for Fund lending.
- Small states and Pacific islands
- Large net importers of oil and food expected to be hit especially hard.
- Growth revised down by 0.8 percentage points on average; downgrade is 2.3 percentage points if Papua New Guinea (a net oil and gas exporter) is excluded.
- Food and fuel price increases particularly painful given large share in consumption baskets.
Inflation, monetary policy, and exchange-rate considerations
- Inflation drivers in Asia:
- Rising food and fuel prices due to the war in Ukraine.
- Some domestic demand-driven inflation in select countries.
- Policy responses:
- Monetary tightening will be needed in most countries; speed depends on domestic inflation developments and external pressures.
- Communication by central banks is emphasized to stabilize expectations.
- Example: Bank of Korea raised policy rate to 1.5 percent after four increases since August '21.
- Japan: inflation remains below the BOJ's 2 percent target on a sustained basis; BOJ's accommodative stance considered appropriate given Japan’s fundamentals.
- Exchange-rate impact:
- Japanese yen depreciation reflects higher fuel and commodity prices and divergent monetary policy paths; effects are mixed for households and exporters.
- Renminbi internationalization:
- Renminbi share of global payment transactions: 2.2 percent.
- Renminbi share of global reserves: 2.8 percent.
- Role has increased from a low base; further internationalization is market-driven and linked to China’s capital account liberalization.
Risks, uncertainty, and supply chains
- Risks tilted to the downside include:
- Further escalation in the war in Ukraine.
- New COVID waves.
- Faster or larger than expected tightening in U.S. monetary policy.
- Larger than expected slowdown in China due to prolonged or more widespread lockdowns or a longer slump in the property market.
- Supply chains:
- Disruptions have persisted since 2020 and have been amplified by the war in Ukraine and COVID lockdowns in China.
- Asia’s internal trade accounts for half of Asia's overall trade; deep integration in intermediate inputs.
- Normalization of supply chains depends on resolution of the war and the pandemic, and on continued reforms and integration among Asian economies.
- Some rebalancing of supply chains away from China may occur and could be beneficial but requires credible reform efforts in participating countries.
Medium-term priorities and policy recommendations
- Fiscal policy
- Aim to protect the vulnerable from rising food and fuel prices, preferably through targeted assistance.
- Design fiscal consolidation in a medium-term framework emphasizing revenue-based consolidation.
- Tax adjustments should place a larger burden on those better off; protect the most vulnerable.
- Fiscal support composition matters: prioritize measures that increase domestic consumption and support rebalancing (not just size).
- Monetary policy
- Tightening likely needed in most countries; speed and timing should reflect country-specific inflation dynamics and external pressures.
- Clear and credible central bank communication is important to stabilize expectations.
- Structural and long-term growth
- Support long-term growth to limit pandemic scarring, especially in economies with larger expected scarring.
- For China: address declining productivity, increase market neutrality between private and state firms, open domestic markets to competition, and prioritize fiscal support that boosts domestic consumption.
- For India: address labor market and land market bottlenecks, improve educational outcomes, and increase female labor force participation to raise growth potential.
- Social protection
- Targeted support for vulnerable households in the face of higher food and fuel prices; temporary and well-targeted measures preferred.
Transcript of Asia and Pacific Department Press Briefing (April 25, 2022), IMF Communications Department