Growth in Asia-Pacific has slowed as debt crises in advanced economies have spread and there are “clear downside risks” ahead, warned Anoop Singh at the annual IMF-World Bank summit in Tokyo.
Presenting an economic outlook at the event last Friday, the IMF’s director for Asia and Pacific noted that growth for the region was expected to expand at just over two percentage points faster than the world average next year (with countries dependent on exports to the eurozone most vulnerable).
But while the outlook for Asia-Pacific holds considerable risk, Singh stressed that this would tilt if financial pressures were to ease in eurozone economies and policymakers avoid a “fiscal cliff” in the US.
He added that inflation in Asean economies was back within “comfort zones” as a result of better financial conditions that have kept domestic demand robust, particularly in the Philippines where an effort to raise infrastructure financing has increased potential for growth.
“Previously there were constraints… but this has been changed through fiscal reforms that are being planned for consolidation and revenue increases to ensure that spending on infrastructure can rise in a sustainable way,” said Singh.
He cited a decline in exports to Europe as the “driving factor” behind the easing of growth in the region. In the first half of this year, GDP growth across Asia fell to its lowest rate since the 2008 global financial crisis, averaging 5.5% year-on-year (still well above the global average).
Policies to cool a booming Chinese economy contributed to Asia’s slowdown along with a weakening of investor sentiment in India, said Singh.
But it was because of policy changes that Asian economies had been able to resist shocks from Europe hitherto, noted Singh. “There is room in Asia for monetary easing in many countries and automatic fiscal stabilisers,” he said.
“On policy there is room for discretionary fiscal measures in several countries including China. But structural fiscal deficits remain in some countries and there is the need for consolidation, certainly in India and in Japan by its doubling of consumption tax by 2015.
“There is a lot of consensus that the best insurance against risks of slow growth in advanced economies is to build domestic sources of growth.”
He said the growth rate for China had been reduced slightly from 8% to 7.8%. “But under our baseline, China should pick up next year and go back to 8%,” Singh added.
In Bangladesh, the garment industry’s exposure to European markets was seen as a risk, but the Dhaka government’s shift of emphasis from subsidies to targeted tax could mitigate this, according to IMF Asia and Pacific department officials.
Asean’s reconstruction fund and policies to rebalance the economy were viewed as crucial to countries such as Indonesia.
Singh added that many Asian economies had reached a stage of development where they had fallen into a middle-income trap, with incomes stagnating at median levels and well behind those of high-income countries.
“The relaxing that is needed to ensure growth becomes domestic-based are infrastructure reforms and social safety nets that will deal with the concerns of the middle-income trap,” said Singh. “Collective action is needed in the global economy and Asia to keep the growth momentum strong.”