{
  "title": "Asia Sails Into Headwinds From Rate Hikes, War, and China Slowdown",
  "publication": "IMF Blog, October 13, 2022",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2022/10/13/asia-sails-into-headwinds-from-rate-hikes-war-and-china-slowdown",
  "canonical": "https://www.imf.org/en/blogs/articles/2022/10/13/asia-sails-into-headwinds-from-rate-hikes-war-and-china-slowdown",
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  "summary": "Growth forecasts have been lowered for this year and next, while inflation exceeds central bank targets in most countries",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Growth forecasts for Asia and the Pacific have been cut to 4 percent this year and 4.3 percent next year, compared with a 5.5 percent average over the last two decades.\n- Asia’s rebound early in the year is losing momentum after a weaker-than-expected second quarter.\n- Three persistent headwinds are identified: tightening financial conditions, Russia’s invasion of Ukraine, and China’s strict zero-COVID policy coupled with real estate sector turmoil."
    },
    {
      "heading": "Key headwinds and transmission channels",
      "content": "- Sharp tightening of financial conditions:\n  - Raising government borrowing costs.\n  - Likely to become more constricting as major advanced-economy central banks continue to raise interest rates.\n  - Rapidly depreciating currencies could further complicate policy challenges.\n- Russia’s invasion of Ukraine:\n  - Continues to trigger a sharp slowdown in Europe and reduce external demand for Asian exports.\n- China slowdown:\n  - Zero-COVID policy and lockdowns, plus deepening real estate turmoil, have caused an uncharacteristic and sharp slowdown that weakens momentum in connected economies."
    },
    {
      "heading": "Growth forecasts and regional outlook",
      "content": "- China:\n  - Near-zero growth in the second quarter.\n  - Full-year growth of 3.2 percent, recovering modestly in the second half.\n  - Accelerates to 4.4 percent next year, assuming pandemic restrictions are gradually loosened.\n- Japan:\n  - Growth unchanged at 1.7 percent this year.\n  - Slows to 1.6 percent next year, weighed down by weak external demand.\n- Korea:\n  - 2022 growth revised up to 2.6 percent due to a strong second-quarter.\n  - Revised down to 2 percent in 2023 reflecting external headwinds.\n- India:\n  - Expands by 6.8 percent this year.\n  - Slows to 6.1 percent in 2023 due to weakening external demand and tightening monetary and financial conditions.\n- Southeast Asia and select countries:\n  - Vietnam: expected 7 percent growth this year and a slight moderation next year.\n  - Philippines: forecast 6.5 percent expansion this year.\n  - Indonesia and Malaysia: growth will top 5 percent this year.\n  - Cambodia and Thailand: will expand faster in 2023 on a likely pickup in foreign tourism.\n  - Myanmar: growth this year expected to stabilize at a low level amid continued unrest and suffering.\n- Asian frontier and vulnerable markets:\n  - Sri Lanka: experiencing a severe economic crisis; authorities have reached an agreement with IMF staff on a program to help stabilize the economy.\n  - Bangladesh: war in Ukraine and high commodity prices have dampened recovery; authorities have preemptively requested an IMF-supported program and access to the Resilience and Sustainability Trust to meet large climate financing needs.\n  - High-debt economies such as Maldives, Lao P.D.R., and Papua New Guinea, and those facing refinancing risks like Mongolia, are facing challenges as global conditions change.\n- Pacific Island Countries:\n  - Growth expected to rebound strongly next year to 4.2 percent from 0.8 percent this year as tourism-based economies benefit from eased travel restrictions."
    },
    {
      "heading": "Inflation and exchange rates",
      "content": "- Inflation:\n  - Now exceeds central bank targets in most Asian economies.\n  - Driven by global food and energy prices, currencies falling against the US dollar, and shrinking output gaps.\n  - Core inflation has also risen; persistence driven by inflation expectations and wages must be closely monitored.\n- Exchange rate movements:\n  - US dollar strengthened against most major currencies as the Federal Reserve raises interest rates and signals further hikes.\n  - Most Asian emerging market currencies have lost between 5 percent and 10 percent of their value against the dollar this year.\n  - The yen has depreciated by more than 20 percent.\n  - Recent depreciations have started passing through to core inflation across the region, potentially keeping inflation high for longer.\n- Commodity price shocks:\n  - Spikes in global food and energy prices early this year threatened to abruptly raise the cost of living, with particularly strong implications for lower-income households."
    },
    {
      "heading": "Policy recommendations and priorities",
      "content": "- Monetary policy:\n  - Central banks need to persevere with policy tightening until inflation durably falls back to target.\n  - Exchange rates should be allowed to adjust to reflect fundamentals, including the terms of trade and foreign monetary policy decisions.\n  - If global shocks raise borrowing rates unrelated to domestic policy and/or threaten financial stability or inflation expectations, foreign-exchange interventions may be useful for countries with adequate reserves, alongside macroprudential policies.\n  - Countries should urgently consider improving liquidity buffers, including by requesting access to precautionary instruments from the Fund for those eligible.\n- Fiscal policy:\n  - Continue gradual fiscal consolidation to moderate demand alongside monetary policy, focused on the medium-term goal of stabilizing public debt.\n  - Measures to shield vulnerable populations from rising costs should be well-targeted and temporary.\n  - In countries with high debt levels, support needs to be budget-neutral to maintain the path of fiscal consolidation.\n  - Credible medium-term fiscal frameworks remain imperative.\n- Structural and longer-term policies:\n  - Address scarring from the pandemic: elevated corporate leverage that may weigh on private investment, and education losses from school closures that could erode human capital without remedial measures.\n  - Urgent need for ambitious structural changes to boost productive potential and address the climate crisis.\n  - Strong international cooperation is needed to prevent greater geoeconomic fragmentation and ensure that trade aids growth.\n\nIMF Blog: Asia Sails Into Headwinds From Rate Hikes, War, and China Slowdown\n\n---\n\n\n References\n\n- Vietnam\n- agreement with IMF staff\n- Resilience and Sustainability Trust\n- geoeconomic fragmentation\n\nSource: https://www.imf.org/en/blogs/articles/2022/10/13/asia-sails-into-headwinds-from-rate-hikes-war-and-china-slowdown"
    }
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    "Authors: Krishna Srinivasan, Shanaka J Peiris",
    "Published: October 13, 2022",
    "Growth forecasts for Asia and the Pacific have been cut to 4 percent this year and 4.3 percent next year, compared with a 5.5 percent average over the last two decades.",
    "Asia’s rebound early in the year is losing momentum after a weaker-than-expected second quarter.",
    "Three persistent headwinds are identified: tightening financial conditions, Russia’s invasion of Ukraine, and China’s strict zero-COVID policy coupled with real estate sector turmoil.",
    "Sharp tightening of financial conditions:",
    "Russia’s invasion of Ukraine:",
    "China slowdown:",
    "China:",
    "Japan:",
    "Korea:",
    "India:",
    "Southeast Asia and select countries:",
    "Asian frontier and vulnerable markets:",
    "Pacific Island Countries:",
    "Inflation:",
    "Exchange rate movements:",
    "Commodity price shocks:",
    "Monetary policy:",
    "Fiscal policy:",
    "Structural and longer-term policies:",
    "[Vietnam](https://www.imf.org/en/News/Articles/2022/08/26/CF-Vietnam-bucks-Asias-Downbeat-Growth)",
    "[agreement with IMF staff](https://www.imf.org/en/News/Articles/2022/09/01/pr22295-imf-reaches-staff-level-agreement-on-an-extended-fund-facility-arrangement-with-sri-lanka)",
    "[Resilience and Sustainability Trust](https://www.imf.org/en/Topics/Resilience-and-Sustainability-Trust)",
    "[geoeconomic fragmentation](https://www.imf.org/en/Blogs/Articles/2022/05/22/blog-why-we-must-resist-geoeconomic-fragmentation)"
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