IMF Adjusts Upward Asia’s Economic Forecast Fueled by China’s Recovery

The International Monetary Fund (IMF) has revised its economic forecast for Asia, emphasizing China’s recovery as a driving force while cautioning against risks posed by inflation and global market volatility. The IMF’s regional economic outlook report, released on Tuesday, highlighted the significance of China’s economic reopening, projecting a spillover effect on consumption and service-sector demand rather than investment.

According to the report, the Asia-Pacific region is expected to be the most dynamic among the major world regions in 2023, primarily due to the optimistic outlook for China and India. The IMF anticipates that domestic demand will continue to be the primary growth driver across Asia in 2023, contributing to the region’s economic expansion of 4.6 percent this year following a 3.8 percent increase in 2022. This growth is projected to account for about 70 percent of global growth, with China and India leading the way with expansions of 5.2 percent and 5.9 percent, respectively.

Despite the positive outlook, the IMF tempered expectations for the following year, reducing the Asian growth forecast for 2024 by 0.2 percentage points to 4.4 percent. The report also highlighted potential risks to the economic outlook, including persistent inflation, a slowdown in global demand, and challenges posed by stress in the US and European banking sectors.

While acknowledging that spillovers to the region from financial stress in the US and Europe have been relatively contained so far, the IMF emphasized Asia’s vulnerability to tightening financial conditions and abrupt asset repricing. It noted that although Asia has robust capital and liquidity buffers to withstand market shocks, highly leveraged corporate and household sectors in the region are significantly exposed to a sudden increase in borrowing costs.

The IMF recommended that central banks in Asia, excluding Japan and China, maintain tight monetary policies to address inflation concerns, emphasizing the potential risks of not bringing inflation below target. The report cautioned that insufficient tightening in the short term could necessitate more drastic monetary measures later to prevent high inflation from becoming entrenched.

China’s recovery is expected to drive regional growth, the IMF pointed out that risks remain, particularly in the country’s property sector. Policymakers were urged to address risks in the sector, ensuring an even recovery, and supporting the restructuring of weaker developers. The IMF emphasized that additional policy measures might be necessary to limit potential risks, especially in regions with weaker housing markets that have yet to experience a full recovery.

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