Asia’s Economic Growth To Slow Down

FDI Flows to South Asia Grew Despite Covid 19

With slower growth and rising prices, coupled with challenges of war, infection and tightening financial conditions, the economic growth in Asia and the Pacific is poised to slow more than previously estimated this year. The International Monetary Fund’s latest projections show that regional gross domestic product will expand by 4.9 percent, 0.5 percentage points less than January forecast and slower than last year’s 6.5 percent growth rate.

The IMF also warned that inflation will rise faster in many countries, though from relatively low levels.

UKRAINE

The IMF shows that Russia’s invasion of Ukraine was the biggest challenge for economic growth, with the region’s advanced economies hurt most by reduced demand from Europe and emerging markets feeling the effects of higher global commodity prices. The IMF’s latest World Economic Outlook lowered the 2022 global growth estimate by 0.8 percentage point to 3.6 percent. It reflects a 1.1 percentage point cut for the euro area now seen expanding 2.8 percent. As Asia’s advanced economies have strong ties with Europe, the continent’s weaker growth will weigh on external demand and ultimately growth for major regional trade partners like Japan and Korea.

ECONOMIC DRIVERS

Most of Asia’s emerging and developing economies are net importers of oil, gas and metals, which make them particularly vulnerable to rising global commodity prices. This means that a deterioration in their terms of trade-a measure of prices for a country’s exports relative to its imports—will likely reduce growth, weaken currencies, and worsen current account balances. High food and fuel costs also add to inflation pressures, especially in lower-income countries where they make up a large share of consumer spending.

COVID 19

Coronavirus infections in most of Asia have retreated from their peaks during the rapid spread of the omicron variant, with mobility indicators approaching pre-pandemic levels. “These lockdowns are one reason that we project growth in China to slow to 4.4 percent this year, which will affect Asia’s emerging economies through reduced trade and demand Tightening and inflation,” the IMF projections said.

The IMF mentioned that tightening global financial conditions would impact economic growth. The Government bond yields in major Asian economies have begun rising as the Federal Reserve starts to lift US interest rates. The IMF projection said that continued tightening abroad and rising inflation at home will lead many Asian central banks to hike rates themselves, placing a drag on investment. Risks to the economic outlook include an intensification of the aforementioned three main headwinds. Moreover, an escalation of war in Ukraine would also further increase food and energy prices. This would add to stresses for vulnerable households and potentially causing social unrest to spread to more countries. The IMF also said that a tightening of US monetary policy that is materially faster or larger than currently expected by markets-or both-would have large spillovers to Asia. “If disruptive capital outflows occur as a result, central banks in affected countries could respond through the judicious use of all their policy levers in an integrated fashion. The downside risk of capital outflows is mitigated in countries that have built up strong buffers, but is amplified where high debt conspires with other vulnerabilities,” the IMF said.

A greater slowdown in China’s economy due to broader virus lockdowns or other risk factors such as the continued weakness in the real estate sector, would also have large implications for the region, given trade linkages within Asia. Moreover, a potential fragmentation of supply chains and added geopolitical tensions will remain risks for the longer term for a region that has flourished in recent decades from rising wealth and other economic gains from globalization.

STRONG RESPONSES
  1. PROTECT the most vulnerable from rising fuel and food costs. Social unrest has already flared where these pressures exacerbate vulnerabilities, such as Sn Lanka Promising regional examples of targeted and temporary protections include a Philippine cash-transfer program and New Zealand’s reduction in public transport
  2. Anchor medium-term fiscal policy frameworks to ensure debt sustainability. With output gaps still large in many countries, the withdrawal of fiscal stimulus must be well calibrated to support the pandemic recovery.
  3. Tighten monetary policy where inflation is rising faster, such as Singapore, or above central-bank targets, as in Korea. Macro prudential policies should limit financial stability risks amid high household debt levels, including to address significant increases in housing prices in some countries.
  4. Enact economic reforms to boost long-term growth. This is particularly important in Asia’s emerging economies because they may see the most scarring from the pandemic
  5. Overhauls are needed in several areas to boost productivity, such as non-tariff barriers and product and labour markets.
  6. Education reforms are essential to address the long term issues of school closures, which were substantial in South Asia and low-income and developing countries.

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