Opening Remarks and Presentation: IMF Press Briefing on Economic Outlook for Asia Pacific and Korea

IMF News, May 4, 2023

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Global growth is expected to decelerate and bottom out in 2023, as rising interest rates and Russia’s war in Ukraine weigh on activity.
Global inflation is easing but remains stubbornly high.
Banking strains in the US and Europe have injected greater uncertainty into an already complex economic landscape.

Growth in Asia and the Pacific is projected to increase in 2023 to 4.6 percent, up from 3.8 percent in 2022.
This reflects an increase of 0.3 percentage points compared with projections in the October WEO.
In Asia’s advanced economies, growth will slow in 2023 to 1.6 percent, about 0.4 percentage points lower than projected in October.
The economies of Asia and the Pacific are expected to contribute about 70 percent of global growth in 2023.

The Chinese economy is expected to expand by 5.2 percent in 2023.
The upward revision to Chinese growth by 0.8 percent in 2023 is the largest in this edition of the WEO.
Empirical spillover: a one percentage point increase in Chinese growth leads to an increase, on average, of about 0.3 percentage points in the rest of Asia.
Current recovery in China is led by services and consumption demand, generating stronger spillovers to the region than in past cycles.
Spillover heterogeneity: countries exporting final consumption goods to China or dependent on tourists from China will gain more; exporters of raw commodities to China are unlikely to receive a strong boost this time.

Weakening external demand from the US and Europe is weighing on the region; very weak import growth is expected in 2023 and 2024 for the US and Europe.
This is putting pressure on Asia’s exports of manufactured goods.
Recent moderation in demand for technology exports from Asia to the US, with orders for semiconductors having slowed substantially.

Headline inflation has been easing but remains above central bank targets in most economies.
As commodity prices recede, core inflation is becoming a more important driver of headline inflation and is proving stickier.
Output gaps are closing or have closed across the region; exchange rate depreciations are still passing through to domestic prices.
Analysis finds exchange rate pass-through is stronger when inflation is already high.
Monetary tightening has slowed or paused in most countries; view is that monetary policy in Asia will need to remain tight until inflation falls durably back to target.
Exceptions: China and Japan, where output is below potential and inflation expectations have stayed muted.
Japan: uncertainty around direction of monetary policy amid a rise in inflation; Japanese government bond yields have increased notably since October. Changes that lead to further increases in yields could have global spillovers through Japanese investors and portfolio rebalancing.

Over the medium term, Chinese productivity and investment are expected to slow, lowering Chinese growth below 4 percent by 2028.
Risk of global economy fragmenting into trading blocs; larger exposures would be to Asian economies exporting significantly to the US and Europe and those integrated in value chains exporting intermediate goods to China.
Policy recommendation: implement structural reforms to boost long-term growth, prioritizing reforms that boost innovation and digitalization, while accelerating the green energy transition.

Growth has slowed in recent quarters due to subdued trading partner growth and the global semiconductor downcycle affecting exports.
Effects of past monetary policy tightening and normalization of fiscal policy following significant stimulus in 2022 are affecting domestic demand.
Higher interest rates have contributed to ongoing correction of housing prices, holding back domestic demand.
Net exports contribution turned positive again in 2023Q1, driven by automobile shipments.
China’s rapid recovery and a broadening of its expansion should increasingly benefit Korea’s exports.
Industry experts expect an improvement in the semiconductor cycle later in the year, benefiting Korea’s exports.
Growth forecast for Korea: 1.5 percent in 2023, with strengthening momentum in H2 carrying into 2024, where growth is expected at 2.4 percent.

Housing market downturn linked to potential financial sector vulnerabilities; risks associated with real estate project financing remain.
Overall liquidity conditions have improved significantly, but credit risk is elevated for some small and medium-sized developers and construction firms.
Pockets of vulnerability may exist in some non-bank financial institutions heavily exposed to project financing, though not seen at systemic scale.

Inflation has remained significantly above the Bank of Korea’s 2 percent target.
Headline inflation has come down with lower international energy prices, but core inflation (excluding food and energy) has not yet come down decisively.
Near-term: monetary policy needs to remain focused on the inflation challenge; premature easing should be avoided.
Policy tradeoffs shifting as growth momentum slows and labor market tightness is expected to ease; risks of policy overtightening need to be minimized.
Bank of Korea has paused rate hikes in the February and April meetings while keeping options open for further hikes depending on incoming data.

Following significant fiscal support measures in early 2022, fiscal normalization started in the second half of 2022 and continues in 2023.
Marked reduction of the central government fiscal deficit to below 1 percent of GDP in 2023 and 2024.
Fiscal normalization helps support monetary policy to address inflation and improves public debt dynamics by moderating the pace of public debt build-up after pandemic increases.

Opening Remarks and Presentation: IMF Press Briefing on Economic Outlook for Asia and the Pacific, May 3, 2023 (As prepared for delivery).