Asia Needs to Navigate the Uncertain Global Environment and Build Inclusive Growth, Says the IMF’s Asia-Pacific Regional Economic Outlook

October 13, 2011

Fears about the spillovers from global growth amid still high inflation pressures in much of the region mean that policymakers in Asia face a delicate balancing act, the International Monetary Fund (IMF) said in its latest Regional Economic Outlook (REO) for Asia and the Pacific.

Growth in Asia has moderated since the second quarter of 2011, mainly reflecting a weakening of external demand. Domestic demand is still resilient, and it should continue to sustain activity across the region, contributing to relatively robust growth of 6.3 percent in 2011 and 6.7 percent in 2012 on average, slightly below our forecast last April. In Japan, the tragic earthquake and tsunami earlier this year had grave social and humanitarian costs and also set back the recovery; however, domestic demand is picking up as reconstruction efforts get under way and growth is expected to reach 2.3 percent next year. Meanwhile, inflation pressures have been elevated in a number of other Asian economies amid accommodative financial conditions, but should recede as food and energy prices gradually moderate.

Nevertheless, the report cautions that risks for the Asia and Pacific region are decidedly tilted to the downside. An escalation of the euro area financial turbulence and a more severe slowdown than anticipated in the United States would have clear macroeconomic and financial spillovers to Asia. While domestic demand remains strong, “Asia has clearly not “decoupled” from advanced economies,” the IMF says.

The REO welcomes the successive measures Asian policymakers have taken to normalize monetary and fiscal policy stances following the stimulus that was put in place in response to the global financial crisis. What does the emergence of renewed global downside risks imply for policies? Asian policy makers need to balance growth considerations against inflation and balance sheet risks from prolonged easy financial conditions. In economies where inflation pressures are still elevated and monetary conditions accommodative, the return to more neutral monetary stances should continue. However, for economies where expected inflation is within central banks’ target ranges and the exposure to severe external shocks is greater, a pause in monetary tightening may be warranted. Meanwhile, fiscal policy consolidation is rightly continuing in many economies as structural fiscal deficits are still above pre-crisis levels.


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