After leading the global recovery for a second year, Asia’s economic outlook remains positive but, in its latest report on the state of the region’s economy, the IMF cautions that inflationary pressures are emerging.
In view of the strong expansion under way, the report says Asia has reached the threshold to normalize policy stances across the region.
In their twice-yearly overview of the Asia and Pacific region, IMF economists say growth in the first half of 2010 was well above trend in almost all regional economies, prompting the Fund to revise up its growth forecast to 8%, nearly 1 percentage point higher than its April forecast.
“The rebound in global manufacturing fueled exports and investment in the region, and private consumption remained strong as labor markets continued to improve, ” said Anoop Singh, head of the IMF’s Asia and Pacific Department, at the launch of the Asia and Pacific Regional Economic Outlook in Jakarta, Indonesia. The report is being launched in Indonesia and Singapore.
Economies across Asia are expanding strongly, with China and India leading the way with projected growth rates of 10.5% and 9.7% respectively. Indonesia is expected to grow by 6%, while growth in Japan is projected at 2.8%. The report also predicts that regional growth will moderate to a more sustainable pace of 6.8% next year.
Inflationary pressures are continuing to build, according to the analysis, while prices in some property markets are growing at double-digit rates. IMF economists believe the time has come for countries in the region to normalize monetary and fiscal policy stances.
The report highlights the need for further tightening of monetary policy in many countries, including through greater exchange rate appreciation. A faster withdrawal of the fiscal stimulus put in place during the global financial crisis would also help guard against the risks of overheating.
Managing capital inflows is another major policy challenge for Asia. Many investors have been attracted to the region by its bright growth prospects and exceptionally low interest rates in rich countries. These inflows present many opportunities but they may also pose challenges for policymakers if they are associated with easy domestic financial conditions, notes the report.
Macroprudential measures have already been taken in many regional economies to minimize risks, but more action may be needed, says the report.
“We welcome the steps taken so far by policymakers to control inflation risks and limit the buildup of financial sector vulnerabilities,” said Singh. “But now more needs to be done given the continued strong growth in the region,” he added.
However, the report notes that should a worsening of global economic conditions affect Asia, there is room to return to a more simulative policy stance.
Rebalancing Asia’s growth remains the top priority over the medium term, suggests the report. It recommends a broad range of reforms to support domestic consumption and investment, including strengthening social safety nets, ensuring access to credit, easing restrictions in service sectors, and improving infrastructure.
“With external demand from advanced economies unlikely to return to pre-crisis trends in the foreseeable future, Asia will need stronger domestic demand to maintain robust growth. The normalization of policy conditions in Asia would, therefore, need to be accompanied by continued measures to reinforce private domestic consumption and investment,” says the report.