The International Monetary Fund (IMF) has raised Asia’s economic forecast for this year as China’s recovery underpins growth, but it warns of risks from persistent inflation and global market volatility driven by Western banking-sector woes.
The reopening of China’s economy is pivotal for the region with the spillover seen focused on consumption and service-sector demand rather than investment, the IMF said on Tuesday.
“Asia and Pacific will be the most dynamic of the world’s major regions in 2023, predominantly driven by the buoyant outlook for China and India,” the IMF said its regional economic outlook report.
“As in the rest of the world, domestic demand is expected to remain the largest growth driver across Asia in 2023,” it said.
Asia’s economy is expected to expand 4.6 percent this year after a 3.8 percent increase in 2022, contributing about 70 percent of global growth, said the IMF, which upgraded its forecast by 0.3 percentage points from October.
China and India will be key drivers with an expansion of 5.2 percent and 5.9 percent, respectively, although growth in the rest of Asia is expected to bottom out this year, the report said.
As a result, the IMF cut next year’s Asian growth forecast by 0.2 percentage points to 4.4 percent and warned of risks to the outlook, such as stickier-than-expected inflation, slowing global demand and the impact of United States and European banking-sector stress.
“While spillovers to the region from stress in US and European financial sectors have been relatively contained thus far, Asia remains vulnerable to tightening financial conditions and to sudden and disorderly repricing of assets,” the IMF said.
And while Asia has strong capital and liquidity buffers to fend off market shocks, the region’s highly leveraged corporate and household sectors are “significantly” more exposed to a sharp increase in borrowing costs, it added.
The IMF also urged central banks in Asia – excluding Japan and China – to keep monetary policy tight to bring down inflation, which could remain stubbornly high due in part to robust domestic demand.
“The costs of failing to bring inflation below target are likely to outweigh any benefits from keeping monetary conditions loose,” the IMF said.
“Insufficient tightening in the short term would require disproportionately more monetary tightening later to avoid high inflation becoming ingrained, making a larger contraction more likely,” it warned.
While China will be a key driver of the region’s growth, the country’s property sector remains a risk that policymakers need to address to ensure an even recovery in the sector, the IMF said.
Recent moves by the government to ease financing to developers have largely benefited bigger developers, and regions in China with smaller, weaker players had yet to show signs of a recovery, said Thomas Helbling, deputy director of the IMF’s Asia and Pacific Department.
“While the government’s effort has stablised the market, it should proactively support the restructuring of weaker developers, which are still suffering,” Helbling said at a media briefing in Hong Kong.
China’s policymakers have been trying to stabilise the sector, which accounts for a quarter of national gross domestic product, after a string of defaults among developers and a slump in home sales.
“For regions with weaker housing markets, the recovery has yet taken place,” Helbling said. “We need further policy measures to limit potential risks.”