Easing economic headwinds bode well for a stronger recovery in Asia this year, however, longer-term challenges remain for the regional economies including China amid the slowing global economic momentum, the International Monetary Fund has said.
“Headwinds that faced Asia and the Pacific last year have started to fade. Global financial conditions have eased, food and oil prices are down, and China’s economy is rebounding,” senior officials at IMF’s Asia and Pacific Department wrote in a blog post on Tuesday.
The outlook of the regional economies has improved, with growth now set to increase to 4.7 per cent this year, up from 3.8 per cent in 2022.
This will make it “by far the most dynamic of the world’s major regions and a bright spot in a slowing global economy”, Krishna Srinivasan, director of the Asia and Pacific Department, its deputy director Thomas Helbling and division chief Shanaka Jayanath Peiris wrote in a joint blog post.
The region’s emerging and developing economies that are expected to expand by 5.3 per cent in 2023 are also driving the economic “dynamism” of Asia and the Pacific region as a whole.
These nations are hitting their stride as pandemic supply chain disruptions fade and their service sector accelerate economic momentum.
“China and India alone are expected to contribute more than half of global growth this year, with the rest of Asia contributing an additional quarter,” IMF officials said.
“Cambodia, Indonesia, Malaysia, the Philippines, Thailand and Vietnam are all back to their robust pre-pandemic growth.”
Brightening economic prospects of the region are in contrast to slowing global economic growth.
The world economy is projected to grow at 2.9 per cent this year after 3.4 per cent expansion in 2022, according to IMF’s Economic Outlook released in January.
Although the fund has increased its latest 2023 growth estimate by 0.2 percentage points from its October forecast, it is still below the historical average of 3.8 per cent over the 2000-2019 period.
Better economic data in the third quarter of last year, easing inflation and the reopening of the Chinese economy will support economic growth this year. However, a lot needs to be done elsewhere before the global economy can fully recover, the fund said at the time.
The reopening of China has paved the way for a faster-than-expected rebound in economic activity, which is good news for Asia, as half of the region’s trade takes place between its economies, IMF officials said on Tuesday.
“Our analysis in the latest Regional Economic Outlook for Asia and the Pacific shows that, for every percentage point of higher growth in China, output in the rest of Asia rises by around 0.3 per cent,” they said.
India, which overtook the UK to become the world's fifth-largest economy in 2022, is expected to outpace the world's economies with a 6.1 per cent expansion in 2023 after growing 6.8 per cent last year. Its growth in 2024 is forecast at 6.8 per cent.
Asia’s inflation — which rose “worryingly” above central bank targets last year — is also poised to moderate this year and there are now encouraging signs that headline inflation peaked during the second half of 2022, IMF said.
“We expect inflation to return to central bank targets sometime next year amid an easing of financial and commodity headwinds,” the officials added.
While inflation is moving in the right direction, central banks need to stay alert as core inflation is still above their targets.
Fiscal deficits during the pandemic and higher long-term interest rates over the past year added to public debt burdens in the region. With several Asian countries facing debt distress, policymakers must continue with their plans for gradual fiscal consolidation, the IMF said.
For Asian countries that face elevated financial vulnerabilities with high leverage across household and corporate sectors, subtle policy trade-offs between controlling inflation and ensuring financial stability will be required, the fund officials said.