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On an annual average basis, growth in Asia is projected to slow from 7.6% in 2007 to 6% this year and 4.9% in 2009, according to the IMF's regional economic outlook for Asia-Pacific report released earlier this week.
"With the recent intensification of the global financial turmoil, any hopes that Asia would escape the crisis unscathed have evaporated,ö says Jerald Schiff, a senior advisor in the IMF's Asia and Pacific Department. ôDespite its strong fundamentals û notably a substantial cushion in external reserves and robust corporate and banking sectors û the region is being buffeted by large external shocks."
Every country in Asia is expected to experience slower growth, with Japan projected to be the hardest hit. JapanÆs economy is expected to shrink 0.2% in 2009 from a projected growth of 0.5% this year.
Schiff cites two main reasons for the slowdown in the regionÆs growth.
First, global demand for Asia's exports is waning. After all, the economies of the euro area, Japan, and the US are in a deep slump and forward-looking indicators are pointing to a sharper decline ahead.
Second, the financial environment has become extremely challenging. Global deleveraging is contributing to tighter financing conditions, capital outflows, depressed equity prices, a weakening of a number of regional currencies, and higher sovereign and bank spreads.
Slowing economic growth and lower commodity prices are already contributing to moderating inflation, and the report expects a continued decline over the course of 2009, with headline consumer price inflation for the region falling from 6% this year to just over 3% in 2009, according to the IMF.
While the baseline scenario for Asia sees recovery beginning in the second half of 2009, risks to the outlook are significantly larger than usual and tilted strongly to the downside, the IMF report noted.
A deeper and more protracted global slowdown than currently anticipated, combined with tighter international financial conditions from the ongoing global deleveraging, could have significant spillovers to the region through both exports and a range of financial channels. Most notably, slowing growth is likely to contribute to rising bad loans for regional banks, and risking an adverse cycle of tightening credit conditions and deteriorating growth.
It also remains unclear how domestic demand in the region would stand up to a sharp decline in export growth and tighter financial conditions, the report notes. Despite Asia's generally strong fundamentals, and large foreign exchange reserves, the region is being rattled by the crisis due to its close trade and financial integration with the rest of the world.
"In this difficult environment, policymakers need to focus on ensuring financial stability and the functioning of credit markets, while using macroeconomic policies to support growth," Schiff says.
Schiff notes that countries in the region have already taken a number of positive measures to stabilise financial conditions, including exceptional provision of domestic and foreign exchange liquidity and, in several cases, the extension of guarantees on bank deposits and other liabilities.
However, more action may be needed, he says, including public recapitalisation of banks, if this becomes necessary.
With inflation having peaked in most countries, there is room for further monetary policy easing, the IMF notes. Plus, progress in fiscal consolidation in recent years will allow many countries to put in place stimulus packages, and a number of countries have already moved in this direction, including Japan, Korea, and China.
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