Singapore:
Growth in the Asia and Pacific region is expected to slow down in 2022 and
2023, reflecting headwinds from global financial tightening, the war in
Ukraine, and the sharp and uncharacteristic slowdown of the Chinese
economy. This challenging conjuncture poses difficult trade-offs for
policymakers, said the International Monetary Fund (IMF) in its Regional Economic Outlook: Asia and the Pacific.
“Asia’s strong economic rebound early this year is losing momentum, with a
weaker-than-expected second quarter. We have cut growth forecasts for Asia
and the Pacific to 4 percent this year and 4.3 percent next year—down by
0.9 and 0.8 percentage points, respectively, compared to the April World
Economic Outlook—which are well below the 5.5 percent average over the last
two decades. Despite this, Asia remains a relative bright spot in an
increasingly dimming global economy,” noted Krishna Srinivasan, Director of
the IMF’s Asia and Pacific Department.
The region faces three formidable headwinds, which may prove to be
persistent. The first headwind is global financial tightening. The Federal
Reserve has become much more aggressive in tightening their monetary policy
as US inflation remains stubbornly high. This has translated into tighter
financial conditions for Asia.
The second headwind is the war in Ukraine. The main impact on Asia has been
through commodities prices, which spiked following the invasion and have
remained high. Most—but not all—countries in Asia have seen a deterioration
of their terms of trade, and this has been an important factor behind
currency depreciations so far this year.
The third headwind is the sharp and uncharacteristic slowdown in China. The
IMF has marked down Chinese growth for 2022 to 3.2 percent, its
second-lowest level since 1977, reflecting the impact of the zero-COVID
lockdowns on mobility and the crisis in the real estate sector. This
slowdown is estimated to have important spillovers to the rest of Asia
through trade and financial links.
While inflation rose more modestly in Asia during 2021 than it did in other
regions, the sharp bout of volatility in global commodity markets after
Russia’s invasion of Ukraine in February put additional pressure on Asia’s
headline inflation in the first half of 2022. This increase has been driven
by rising food and fuel prices—particularly in Asian emerging market and
developing economies—but also reflects higher core inflation as the region
recovers.
Against this backdrop, Mr. Srinivasan stressed several priorities for
policymakers: “Further tightening of monetary policy will be required to
ensure that inflation returns to target and inflation expectations remain
well anchored. Fiscal consolidation is needed to stabilize public debt and
support the monetary policy stance. Asia is now the largest debtor in the
world besides being the biggest saver, and several countries are at high
risk of debt distress. Public and private debt dynamics are already worse
following the pandemic because of slower growth and higher debt levels.
Depreciations and rising interest rates could expose financial
vulnerabilities from high leverage and unhedged balance sheets, and further
raise public debt ratios. As interest rates rise, this will raise the
fiscal balance needed to stabilize debt. An integrated approach to tackling
these challenges in a timely and well-calibrated way is of the essence
while being mindful of the further downside risks.
“The challenging conjuncture is aggravating the medium-term economic scars
opened by the pandemic. The pandemic is expected to provoke a long-term
fall in output with respect to pre-pandemic projections, and this scarring
is expected to be worst in Asia and Pacific. Much of the shortfall in
growth in Asia relative to other regions can be explained by lower levels
of investment following the pandemic. These output losses are also
particularly severe in tourism-dependent economies and those with high
debt.
“While exact policy responses will depend on country-specific
circumstances, tackling corporate debt overhang and mitigating human
capital losses will be important for a wide range of countries in the
region.
“The prospect of greater geo-economic fragmentation also poses a
significant risk to the region. In the report, we document worrying early
signs of fragmentation, with trade policy uncertainty spiking and countries
imposing more trade restrictions. Even in the absence of actual
restrictions, greater trade policy uncertainty can have adverse
macroeconomic consequences in the short term. A typical shock to trade
policy uncertainty, like the 2018 buildup of U.S.-China tensions, reduces
investment by about 3.5 percent after two years.
“The report considers an illustrative sharp fragmentation scenario in which
the world divides into separate trading blocs, and shows it would carry
large, permanent output losses. These could be especially severe for Asia,
given its significant role in global manufacturing and trade. Just the
losses due to lower productivity could take up to 3.3 percentage points off
regional output. Total losses are likely much larger due to the dent on
investment as firms lose access to export markets.
“We therefore stress the need for international cooperation to roll back
trade restrictions, reduce policy uncertainty, and promote open and stable
trade – both regionally and globally – to avoid the most harmful
fragmentation scenarios, and to ensure that trade continues to act as an
engine of growth.”