Asia and Pacific regional outlook brightening, says IMF

The economic headwinds that faced Asia and the Pacific last year have started to fade, according to the International Monetary Fund (IMF). Global financial conditions have eased, food and oil prices are down, and China’s economy is rebounding.

These developments are helping improve prospects across the region, with growth set to accelerate to 4.7 percent this year from 3.8 percent 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.

The region’s emerging and developing economies, poised to expand by 5.3 percent this year, drive this dynamism. These economies are hitting their stride as pandemic supply-chain disruptions fade and the service sector booms.

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. Cambodia, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam are all back to their robust pre-pandemic growth.

China’s open doors

The most significant revision since the IMF last published forecasts in October has been to China, where a sudden re-opening has paved the way for a faster-than-expected rebound in activity.

China has strong trade and tourism linkages, so this is positive news for Asia, as half of the region’s trade takes place between its economies.

While benefiting from these developments, prospects for Asia’s advanced economies are more mixed.

The near-term outlook for Japan is stronger, supported by accommodative policies, border reopening and supply chain improvements while growth would fall back in 2024 as conditions normalise and policy support eases.

The strong performance of manufacturing exports has also started to cool under the weight of slowing global trading partners.

For Korea, Singapore, and Taiwan Province of China, the technology cycle - visible in the sagging price of microchips - is a drag on exports that’s likely to last through year-end. But with growth thought to be bottoming out in the rest of the world, external demand should firm heading into next year.

Meanwhile, Asia’s inflation - which rose worryingly above central bank targets last year - is poised to moderate. 

Supply chains still recovering

However, just like the near-term acceleration in growth in China is expected to generate positive spillovers, the slowdown in coming years will weigh on growth prospects across Asia’s highly integrated supply chains and around the world.

This will make reforms to boost productivity and long-term growth more urgent across Asia.

Fiscal deficits during the pandemic and higher long-term interest rates over the past year added to public debt burdens. With several Asian countries facing debt distress, authorities must continue with their plans for gradual fiscal consolidation.

Finally, many Asian countries face elevated financial vulnerabilities, with high leverage across household and corporate sectors, and significant bank exposure to real estate downturns.

This suggests subtle policy trade-offs between controlling inflation and ensuring financial stability, and a need to strengthen resolution frameworks.