The International Monetary Fund (IMF), in its latest Regional Economic Outlook Report for Asia and Pacific: Sailing into Headwinds, has said Asia’s growth is expected to slow in 2022 and 2023. The slowdown is being caused by headwinds from global financial tightening, the Russia-Ukraine war, and the "sharp and uncharacteristic” slide in the Chinese economy.
The global financial institution has downgraded the GDP growth forecast for Asia and the Pacific, compared with its projections in April, by 0.9 percentage points in 2022 and by 0.8 percentage points in 2023 – to 4% this year and 4.3% next year.
However, the IMF says, there is considerable "heterogeneity" across Asia. The growth in the region’s advanced economies remains above potential at 2.3% in 2022 and is expected to fall to 2% in 2023 and to 1.9% in 2024. By contrast, Asia’s emerging market and developing economies will see a dip in growth to 4.4% in 2022 and will rise to 4.9% in 2023 and 5.2% in 2024.
The IMF report says the strong recovery in South Asia is expected to take a breather, with India’s economy expanding at 6.8% in 2022, revised down by 1.4 percentage points since the IMF's April outlook, because of a weaker-than-expected recovery in the second quarter and subdued external demand.
"A further slowdown of India’s growth to 6.1% is expected in 2023 as external demand and a tightening in monetary and financial conditions weigh on growth," the IMF's 67-page report adds.
The US-based multilateral agency earlier this month cut projections for India's growth by 60 basis points to 6.8% in the current financial year, on a weaker-than-expected outturn in the second quarter and more subdued external demand. However, it kept India's growth forecast for FY24 unchanged at 6.1%.
“Asia’s strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter. 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.
According to the global body, 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 its 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. The third headwind is the sharp and uncharacteristic slowdown in China.
The 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 will also 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 has driven food and fuel prices, says the report.
Srinivasan says policymakers must prioritise further "tightening of monetary policy" to tame inflation with the target. "Fiscal consolidation is needed to stabilise 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," Srinivasan says. Notably, among the emerging economies in Asia, the Philippines has hiked rates by 225 basis points and India by 190 basis points since June 2021.