IMF sees strong growth in Asia continuing

Says further policy tightening needed

Asia remains firmly in the lead of the global economic recovery and strong growth in the region is set to continue, the International Monetary Fund (IMF) said last week in its latest Regional Economic Outlook (REO) for Asia and the Pacific which was released in Jakarta, Indonesia.

IMF Asia and Pacific Department Director Anoop Singh

The expansion in Asia exceeded expectations in the first half of the year, the IMF said, prompting the Fund to revise up its 2010 growth forecast for the region to eight per cent, nearly one percentage point higher than its April forecast.

Economies across the region are expanding strongly. China and India are leading the way with projected 2010 growth rates of 10.5 per cent and 9.7 per cent, respectively, while Indonesia is expected to grow by six per cent. In Japan, growth is now projected at 2.8 per cent. In 2011, regional growth is expected to moderate to a more sustainable pace of 6.8 per cent.

Strong economic growth is leading to new policy challenges, according to the REO analysis. Inflationary pressures are continuing to build, while prices in some property markets are growing at double-digit rates.

With Asia set to remain an attractive destination for foreign investment given the sluggish recovery in the US and Europe, capital inflows could add further to domestic price pressures in the period ahead.

The time has therefore come for countries in the region to normalise monetary and fiscal policy stances, according to Anoop Singh, Director of the IMF’s Asia and Pacific Department. “We welcome the steps so far taken by policymakers to control inflation risks and limit the build-up of financial sector vulnerabilities, but more now needs to be done given the continued strong growth in the region,” Singh said.

The REO points to the need for further tightening of monetary policy in many countries in Asia, including through greater exchange rate appreciation. A faster withdrawal of the fiscal stimulus put in place during the global financial crisis would also help guard against the risks of overheating. The REO notes, however, that should a worsening of global economic conditions negatively affect Asia, there is room to return to a more stimulative policy stance.

Managing capital inflows into the region is a difficult challenge. These inflows present many opportunities, but they also pose potential risks to financial stability. Macro-prudential measures have appropriately been taken in many regional economies to minimise risks, but more action may be needed. These important issues were recently discussed at a high-level conference on ‘Macro-Prudential Policies: An Asian Perspective’ hosted by the People’s Bank of China and the IMF in Shanghai.

Rebalancing Asia’s growth remains the top policy priority over the medium term. With external demand from advanced economies unlikely to return to pre-crisis levels in the foreseeable future, Asia will need stronger domestic demand in order to continue along a robust growth path.

A broad range of reforms are needed to support domestic consumption and investment, including strengthening social safety nets, ensuring access to credit, easing restrictions in service sectors, and improving infrastructure. Exchange rate appreciation is an important part of rebalancing.

“It is only natural that as Asian economies grow stronger so too will their currencies,” said the IMF’s Singh. “This is very much a sign of Asia’s success.”