Transcript of the Regional Economic Outlook on Asia and Pacific Press Briefing
IMF News, May 3, 2023
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- Published: May 3, 2023
Regional growth outlook and drivers
- Asia and the Pacific: growth is expected to increase to 4.6 percent this year, up from 3.8 percent in 2022.
- The region combined accounts for about 70 percent of global growth in 2023.
- Two countries, India and China, account for about 50 percent of global growth.
- The IMF revised Asia’s upward growth mainly due to China; the revision for China in 2023 was 0.8 percentage points (from 4.4 to 5.2 percent).
China: reopening, composition, and risks
- China is expected to expand by 5.2 percent in 2023.
- Q1 2023: strong rebound in consumption; recovery expected to be led by services (PMI surveys show relatively strong expansion, though manufacturing PMI surprised on the downside).
- Composition shift: this recovery is consumption-led (not investment-led), implying stronger spillovers to countries exporting consumer goods and to tourism-dependent neighbors.
- Property sector: recovering more slowly and expected to remain subdued; weaker developers and incomplete pre-sold housing remain sources of downside risk.
- Long-term growth: revised to 3.4 percent; with reforms, long-term growth could be 1 percentage point higher.
Inflation and monetary policy in Asia-Pacific
- Headline inflation has been easing but remains above target in most economies in the region.
- Core inflation is becoming a more important and stickier driver of headline inflation.
- Drivers of stickiness: closing output gaps and exchange-rate depreciation passthrough to domestic prices.
- Policy guidance: monetary policy in the region needs to remain tight until inflation falls durably back to target — “tighter for longer.”
- Exceptions: China and Japan, where output is below potential and inflation expectations have stayed muted.
Fiscal policy, public debt, and non‑public debt vulnerabilities
- Public debt in Asia has risen compared to pre-pandemic levels.
- Most governments in the region are expected to tighten budgets this year and the next.
- Projected consolidation may not be sufficient to stabilize debt given higher interest rates; fiscal consolidation may need to be more aggressive to ensure sustainability over the medium term.
- Policymakers must balance fiscal consolidation with supporting growth and protecting the vulnerable.
- Elevated corporate and household debt create pockets of financial vulnerability; careful monitoring of market risks and corporate credit exposure is essential.
Financial risks and banking stress
- Global banking stress (U.S. and Europe) had limited direct impact on Asian markets so far.
- Direct exposures of Asian banks and investors to Silicon Valley Bank were minimal.
- Asian bank equity prices have largely recovered losses from the global selloff.
- Market repricing of the federal funds rate led to lower U.S. Treasury yields, which contributed to falling Asian local-currency bond yields and a strengthening of Asian currencies.
- Emerging pockets of private-sector stress: increased leverage and real estate sector risks.
- Asian financial systems: generally well capitalized and with strong liquidity buffers, but financial supervisors must remain alert.
Country-specific highlights and outlooks
- China: 2023 growth expected at 5.2 percent; consumption-led recovery provides stronger spillovers to tourism destinations and consumer-goods exporters; property sector risks persist; policy space exists for accommodative monetary and fiscal support.
- India: IMF forecast lowered to 5.9 percent from 6.1 percent for 2023 (modest revision reflecting slowing consumption); strong services exports are an upside.
- Japan: IMF views Japan as an exception to regional monetary tightening given output below potential and muted inflation expectations; recommends greater flexibility in yields if policy normalization becomes necessary.
- Sri Lanka:
- 2022 growth contracted by 8.7 percent.
- 2023 growth projected to contract by 3 percent before a mild recovery.
- IMF-supported program focuses on macro stabilization, revenue-based fiscal consolidation, reinning in inflation, governance and corruption diagnostics, protection for the poor and vulnerable, and a path toward debt sustainability; restructuring of private, official, and possibly domestic debt is part of restoring sustainability.
- IMF noted the program follows an assessment that debt was unsustainable and that debt agreements with creditors are necessary next steps.
- Hong Kong:
- Q1 GDP growth announced at 2.7 percent.
- IMF’s 2023 growth projection for Hong Kong is 3.5 percent (an upgrade relative to the previous October projection).
- Fiscal position: fiscal reserves close to 30 percent of GDP; authorities are unwinding pandemic support and intend to restore fiscal balance.
- IMF supports continuity of the Linked Exchange Rate System, citing strong fundamentals and fiscal framework.
- Risks: external downside risks from global slowdown or tighter financial conditions; upside from pent-up domestic and regional demand as reopening continues.
Trade tensions, fragmentation, and long-term risks
- Risks from fragmentation and technological decoupling:
- If fragmentation proceeds, long-run losses could reach 7 percent of global output.
- Technological decoupling could add about 5 percent of output loss.
- Combined losses could be as high as 12 percent of global output if both occur.
- Historical tariff impacts: tariffs between 2017 and now contributed to a 0.4 percent decline in global GDP in 2022.
- Policy implication: fight fragmentation through multilateralism to avoid large permanent losses.
Policy recommendations and monitoring priorities
- Monetary policy: keep policy tight until inflation is durably back to target; exceptions where output below potential and muted inflation (China, Japan).
- Fiscal policy: pursue credible consolidation to stabilize public debt, while protecting the vulnerable; revenue-based consolidation emphasized in cases like Sri Lanka.
- Real estate and private-sector leverage: proactively address weak developers, resolve incomplete pre-sold housing, and monitor nonperforming loans as forbearance is phased out.
- Financial supervision: strengthen capital and liquidity buffers, escalate supervision where smaller banks and local government pressures are concentrated, and prepare for orderly restructuring where needed.
- International cooperation: resist fragmentation and technological decoupling; preserve multilateral trade and technology links to avoid large, lasting output losses.
Transcript of the Regional Economic Outlook on Asia and Pacific Press Briefing — May 3, 2023, IMF Communications Department.