Update: IMF revises Asia Pacific’s economic growth downwards to 6.5 pct this year

Updated with correction in graf 4, should read: “As vaccination rates accelerate, the region is expected to grow by 5.7 percent in 2022, 0.4 percentage point faster than projected in April,”… 

WASHINGTON, Oct 19 – The International Monetary Fund (IMF) has revised its economic growth forecast for the Asia Pacific region to 6.5 percent this year, a downgrade by more than one percentage point compared with its April forecast.

In its Regional Economic Outlook For Asia and Pacific released today, the IMF cited the resurgence of the pandemic, amid initially low vaccination rates, as a factor for the slow recovery in the region, especially in emerging markets and developing economies.

The forecast for Malaysia was revised to 3.5 percent growth this year from 6 percent in April while the forecast for 2022 and 2023 remained at 6.0 percent and 5.7 growth respectively.

Despite the downward revision, Asia-Pacific remains the fastest growing region in the world and “As vaccination rates accelerate, the region is expected to grow by 5.7 percent in 2022, 0.4 percentage point faster than projected in April,” said Changyong Rhee, IMF Director of the Asia and Pacific Department in a statement today.

The forecast differs across country groups, with the forecast for Korea and New Zealand remaining the same, while for Japan, the forecast was downgraded to 2.4 percent “following a disappointing second quarter and the state of emergency extensions.”

Korea, on the other hand, is experiencing a strong economic recovery, supported by high-tech exports, with growth projected at 4.3 percent.

China is projected to grow by 8.0 percent in 2021, revised down from 8.4 percent projected in April, reflecting the spread of delta virus and the significant fiscal policy tightening. The policy tightening on the property sector is also weighing on real estate investment and related activities and there are signs of stress for some developers.

“While our baseline projections reflect the effects of financial tightening on real estate investment in 2021, there are risks, given the large role that real estate sector plays in China’s economy and financial system, and we are watching developments closely.”

Most of the growth downgrades in the region come from emerging market and low income-countries, led by India and the ASEAN countries. India is projected to grow by 9.5 percent after a sharp decline in 2020, and while the pandemic surge earlier this year had a large adverse impact on growth, the subsequent rebound in activity has gained strength, Rhee said.

The ASEAN-5 countries (Indonesia, Malaysia, Philippines, Singapore, Thailand), are still facing severe challenges from a resurgent virus and weakness in contact-intensive sectors. At the same time, growth in Cambodia, Lao P.D.R., and South Asia is suffering from the hit to tourism and constrained policy space.

Finally, the growth outlook for Pacific Island Countries is also downgraded, reflecting the continued hit to tourism and limited policy space amid pre-existing vulnerabilities, including ongoing natural disaster and climate risks, high debt, over-leveraged balance sheets, and dwindling correspondent banking relationships.

Divergences in economic prospects—across countries, sectors, income and skill levels, age, and gender—remain the most important feature of the ongoing recovery. The divergence between Asian advanced economies and developing economies is deepening, with output levels in the emerging market economies and low-income countries expected to remain below pre-pandemic trends in the coming years, reflecting differences in policy support and vaccination rollout.

Rising inflation meanwhile has been posing uncertainties for the global recovery, as higher commodity prices, supply chain bottlenecks, and rising shipping costs continue to put inflationary pressures. The increase in inflation in Asia, however, has been more subdued than other regions so far, reflecting the low pass-through of producer prices to consumer prices, and monetary policies have remained broadly accommodative.

With the possibility of evolving pandemic dynamics and lower vaccine efficacy against new variants being a main risk, and other factors such as global supply disruptions and weakening global value chain participation and elevated financial vulnerabilities pose risks for the region and hence it will be critical to have in place policies to support a sustained and equitable recovery, Rhee said.

The first priority is to address the health crisis. Swift and broad vaccinations and equitable sharing of vaccines globally are critical. Second, policymakers should articulate credible medium-term fiscal frameworks to ensure debt sustainability while acknowledging the need to maintain accommodative policies with improved targeting in the short run where the recovery is fragile, and inflation is under control.

Central banks should be prepared to act quickly if the recovery is faster than expected or where there is a tangible risk of rising inflation expectations. A close eye must also be maintained on emerging financial stability risks with proactive action as needed, including through macroprudential policies, policies to expedite the resolution of debt overhangs and to flatten the insolvency curve through corporate sector restructuring frameworks such as out-of-court settlements to handle non-viable “zombie” firms.

Finally, all countries must take steps to avoid long-term scarring from the pandemic, rising inequality and poverty, and setbacks in human capital accumulation. Trade liberalisation, which has historically been a powerful driver of growth in Asia, can play an important role.