IMF cuts Asia’s economic forecasts as China’s slowdown bites

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The financial agency calls higher interest rates a risk to the region’s economic growth.

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The International Monetary Fund (IMF) cut its economic outlook for Asia as global monetary tightening, rising inflation fueled by the war in Ukraine and a sharp economic slowdown in China dampen the region’s recovery prospects.

While inflation in Asia remains subdued relative to other regions, most central banks should continue to raise interest rates to keep inflation expectations from easing, the IMF’s Asia-Pacific report released Friday said.

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“Asia’s booming economic recovery earlier this year is losing momentum as the second quarter was weaker than expected,” said Krishna Srinivasan, director of the IMF’s Asia and Pacific Department.

“Further monetary tightening will be required to ensure inflation returns to its target and inflation expectations remain robust.”

The IMF cut Asia’s growth forecast to 4 percent this year and 4.3 percent next year, down 0.9 percent and 0.8 points from April, respectively. The slowdown followed 6.5% growth in 2021.

“As the effects of the pandemic ease, the region faces new headwinds due to global financial tightening and an expected slowdown in external demand,” the report said.

One of the biggest headwinds is a rapid and wide-ranging economic slowdown in China, blamed on severe COVID-19 lockdowns and worsening real estate problems, the IMF said.

“With a growing number of developers defaulting on their debts over the past year, the sector’s access to market financing is becoming increasingly difficult,” the report says.

“Risks to the banking system from the real estate sector are growing due to significant risks.”

The IMF expects China’s growth to slow to 3.2 percent this year, 1.2 points below its April forecast, after rising 8.1 percent in 2021. The world’s second largest economy is expected to grow 4.4 percent next year and 4.5 percent in 2024. said the IMF.

While the IMF expects China to gradually lift strict COVID-19 restrictions next year, the IMF does not see a speedy resolution to the Beijing property crisis, which it says needs to be addressed comprehensively to support growth.

“It is to be hoped that the party congress is behind us and more attention will be paid to the political response to them,” Srinivasan said.

“But we do not see a quick resolution of the real estate sector (crisis) because it may take longer,” he added.

As Asian emerging economies are forced to raise rates to avoid rapid capital outflows, the “wise” use of foreign exchange intervention could help ease the burden of monetary policy in some countries, the IMF said.

“This tool could be especially useful in shallow Asian currency markets,” such as the Philippines, or where currency mismatches in bank or corporate balance sheets increase the risk of exchange rate volatility, such as in Indonesia, the IMF said.

“Intervention in foreign exchange should be temporary to avoid side effects from long-term use, which may include increased risk in the private sector,” he added.

Credit: www.aljazeera.com /

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