Engines Not Yet in Sync: A Multispeed Recovery in Asia

IMF Blog, October 21, 2020

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The IMF’s forecast for the Asia-Pacific region has been downgraded to -2.2 percent in 2020—the worst outcome for this region in living memory.
India’s economy contracted 24 percent on a year-over-year basis in the second quarter and is expected to recover slowly in the coming quarters.
China’s growth has been revised up to 1.9 percent in 2020.
Advanced economies in the region (Australia, Korea, Japan and New Zealand), while still in recession, are expected to do somewhat better in 2020, reflecting a faster pickup in activity following earlier exit from lockdowns.
The region is expected to grow by 6.9 percent in 2021.
Even with 2021 growth, output will be lower at the end of 2021 than pre-pandemic projections.
Potential output by the middle of the decade could be some 5 percent lower than before the pandemic.

A recovery started in the third quarter, but growth engines are not all firing with the same power across countries, leading to a multispeed recovery.
Drawn-out recovery risks include declining labor force participation and weak confidence dimming private investment.
China provided a boost to the region by recovering earlier from the pandemic’s blow.
Prospects for a global trade-led recovery look dim due to weak global growth, closed borders, and tensions around trade, technology, and security.
Diversifying away from over-reliance on exports toward domestic demand will take time and is especially difficult for the smallest economies (such as the Pacific islands) and those reliant on tourism.

Early public health response, when infection rates were still low, was essential to flattening the virus curve.
Relaxing containment measures only after the virus has been suppressed—and with appropriate post-lockdown policies (such as testing and contact-tracing) in place—is associated with better economic outcomes.
Fiscal support has been critical to reduce economic costs and underpin recovery; Asia has provided significant policy stimulus.

Rising income and wealth inequality, already increasing before the pandemic, are likely to rise further unless decisive policy action is taken.
Asia’s labor market indicators have deteriorated more than during the Global Financial Crisis, especially for women and younger workers.
Redistributive policies in Asia are limited and the informal sector is large, making it difficult to reach and support the most vulnerable.
High indebtedness makes the region vulnerable to financial turbulence:
- Unprecedented portfolio capital outflows at the beginning of the pandemic have stabilized, but net outflows remain large compared to pre-pandemic levels.
- A renewed bout of tighter global financial conditions could worsen credit risks, aggravate weak public and private sector balance sheets, and potentially push vulnerable countries into a debt crisis.
The health crisis remains far from over; sustaining strong health policies is the first priority.

Sustain strong health measures: timely testing, effective contact tracing, increases in hospital capacity, and improved healthcare systems remain priorities, especially for emerging markets and low-income countries in the region.
Plan now to secure and quickly distribute vaccine supplies when they become available, with multilateral support as needed.
Do not withdraw fiscal and monetary support prematurely—that is, before the recovery gains traction.
Protect the most vulnerable through better targeting of fiscal support, especially to youth and women who have taken the biggest hit.
Maintain vigilance against emerging credit risks in corporates and households given potential impacts on financial institutions.
Address unsustainable public debt proactively, since delays are very costly historically.
Facilitate corporate restructuring and resource reallocation to enable structural change and reorient toward sectors that will support stronger medium-run inclusive green growth.
Prioritize economic policies “laser-focused on the world of tomorrow, not yesterday” to enable structural change.

The region has the wherewithal to craft a better future for its citizens.
With the right policies and international support when needed, Asia’s engines can work together again and power the region ahead.
The IMF stands ready to support economies across Asia and the Pacific with financing, policy advice, and capacity development tailored to diverse needs in the region.

Source: Engines Not Yet in Sync: A Multispeed Recovery in Asia, Jonathan D. Ostry, October 21, 2020.