IMF Survey: Asia Faces Risk of Overheating, Needs Quality Growth

IMF News, February 17, 2011

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Publication date: February 17, 2011
Asia continues to lead the global recovery following the financial crisis, but risks of overheating are emerging within the region.
Growth must be "balanced, of the right quality, and sustainable," and "inclusive" to address rising concerns about income disparities.
Near-term concern: rising global food prices are "an important issue in many countries."

Emerging markets have led the global recovery out of crisis for the first time ever.
Developments raising concerns across parts of Asia:
- rising inflationary expectations
- higher property prices
- strong credit growth
Inflation dynamics:
- Rising food prices have fueled higher inflation in many countries in the region.
- "Our sense is that core inflation is also rising in some parts of the region, and we see risks of spillovers into generalized inflation."
- Growth in real wages, falling unemployment, and signs of skills shortages noted as inflationary pressures.
Property markets:
- Surging property prices have been a cause for concern in a few regional economies.
- "There is the risk in some countries of property bubbles developing."
- Some upward pressures have abated in recent months following measures to cool property markets.
Capital flows:
- Singh pointed to "surging capital flows into Asia over the past year" that will need careful management.
- In 2009 and the following year, capital flows into Emerging Asia reached more than $200 billion, following a net exodus of foreign capital, in 2008.
- Portfolio flows in particular "had been increasing into Asia and could quickly overwhelm their absorptive capacity."

Macroeconomic policy normalization:
- Authorities in Asia should pursue more rapid normalization of both fiscal and monetary stances.
- Singh: "If you look at normalizing macroeconomic policies, monetary and fiscal, there needs to be a faster and quicker normalization of these policies..."
Exchange rate flexibility:
- Singh: normalization "is difficult to do that without more flexible currencies in many countries."
Preemptive measures:
- Uri Dadush: conditions for overheating in many emerging markets are "blatantly in place today, in a way that is almost unprecedented."
- Dadush urged authorities to take preemptive action: "We are at a very early stage in the recovery cycle, and financial crises take time to build... so it is important that policy makers take preemptive measures today to avoid big, big problems down the road."

Anoop Singh: "It is not enough for us to have a strong recovery. It must be sustainable and it must have the right quality."
Anoop Singh on inclusiveness: "Asia has significantly lowered poverty in the past decades and, looking ahead, the growth momentum must remain inclusive, and address rising concerns in some countries about income disparities."
On portfolio flows: portfolio flows "could quickly overwhelm their absorptive capacity."

Source: IMF Survey: Asia Faces Risk of Overheating, Needs Quality Growth (February 17, 2011).