IMF says Asia’s growth expected to slow down amid headwinds

Despite being a relative bright spot in an increasingly dimming global economy, Asia’s growth is expected to slow down in 2022 and 2023 amid headwinds from global financial tightening, the war in Ukraine, and the sharp and uncharacteristic slowdown in the Chinese economy, the International Monetary Fund recently said in its Regional Economic Outlook Report for Asia and Pacific.

This challenging conjuncture poses difficult trade-offs for policymakers, IMF noted.

Asia’s policymakers face worsening trade-offs but should remain steadfast on monetary tightening to tame rising inflation, fiscal consolidation to stabilize debt, and pre-emptively address emerging stability risks through the full use of its policy toolkit, IMF said.

Given its strong trade and supply-chain links, Asia has a lot to lose in the event of sharp fragmentation scenarios where the world divides into separate trading bloc, it said.

“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 per cent this year and 4.3% 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% average over the last two decades,” noted Krishna Srinivasan, director of 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 US 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, IMF observed.

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, it said.

The third headwind is the sharp and uncharacteristic slowdown in China. IMF has marked down Chinese growth for 2022 to 3.2%, 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.