The IMF cut its forecasts for Asian growth and warned in a report yesterday that the region faces downside risks due to worries over the eurozone debt crisis and a slowdown in the US.
In its twice-yearly Regional Economic Outlook: Asia and Pacific, the IMF warned that risks for the region are “decidedly tilted to the downside.”
The IMF expects growth of 6.3 percent this year and 6.7 percent next year for Asia on average, slightly below its forecast of 6.8 percent and 6.9 percent respectively in April’s report.
It warned that any escalation in the European sovereign debt crisis would have “clear macroeconomic and financial spillovers” to Asia as the region’s economy has clearly not “decoupled” from advanced economies.
“The panic sell-offs across Asian financial markets and safe-haven flows into Japan that occurred when European troubles intensified in August-September 2011 demonstrate that there is ‘no place to hide’ when advanced markets come under pressure,” the IMF said.
“Since 2009 investors from advanced economies have built up substantial positions in Asian markets, including Indonesia and other Asian sovereign debt markets,” it said. “A sudden liquidation of these positions could trigger a loss of confidence, and contagion could spread from bond and equity markets to currency and other markets.”
Asian policymakers faced a “delicate balancing act” to guard against risks to growth but also need to limit “the adverse impact of prolonged easy financial conditions on inflation.”
The IMF said that inflationary pressures were “elevated” in a number of Asian economies due to accommodative monetary policies, but should ease off as food and energy prices “gradually moderate.”
While noting that growth in Asia has eased since the second quarter, mainly reflecting weakening external demand, the IMF said domestic demand is still resilient and should continue to sustain activity across the region.
In Japan, the earthquake and tsunami in March “had grave social and humanitarian costs and also set back the recovery,” the IMF said.
However, “domestic demand is picking up as reconstruction efforts get under way” toward reaching the 2.3 percent growth it forecast for Japan for next year, it said.
The IMF called on Japan to make further efforts to reduce its massive public debt by limiting spending growth and through comprehensive tax reforms.
It welcomed the government’s plan to double the consumption tax to 10 percent by the middle of the decade and adjusting pension benefits, but said “more needs to be done to put the net debt-to-GDP ratio on a downward path.”
Japan’s public debt is one of the world’s highest at more than 200 percent of GDP.