The International Monetary Foundation cut its growth forecasts for the Asia and Pacific region on Friday (October 28) as it said the region was burdened by a "sharp and uncharacteristic slowdown" of China's economy, global financial tightening and the war in Ukraine.
The growth forecasts were dropped to 4% for 2022 and 4.3% for 2023, a 0.9 and 0.8 point drop respectively from April's figures. The region has had an average of 5.5% growth over the last two decades.
"Asia's strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter," explained Kirshna Srinivasan, director of the IMF's Asia and Pacific department.
The IMF outlined three "formidable headwinds" including slowing Chinese growth, that led to the revision of the figures.
The group forecasted growth for China to be 3.2% in 2022, the second-lowest level since 1977. It said this reflected the impact of zero-Covid policy and the issues in the real estate sector.
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Another major headwind is the Federal Reserve's more aggressive approach to monetary policy, which has caused "tighter financial conditions" for Asia.
The IMF also pointed to the war in Ukraine, which has caused a spike in commodity prices and a "deterioration" of trade for many Asian countries, which in turn has caused currency depreciations.
Srinivasan commented that policymakers needed to ensure they were tackling inflation and said further tightening would be needed.
"Fiscal consolidation is needed to stabilize public debt and support the monetary policy stance," he said. "Asia is now the largest debtor in the world besides being the biggest saver, and several countries are at high risk of debt distress."
Fragmentation concerns
The IMF report, Regional Economic Outlook: Asia and the Pacific, also warned of the impact of "geo-economic fragmentation" on Asia.
It pointed out "early signs of fragmentation", including trade policy uncertainty and more trade restrictions.
"Even in the absence of actual restrictions, greater trade policy uncertainty can have adverse macroeconomic consequences in the short term," Srinivasan said. "A typical shock to trade policy uncertainty, like the 2018 build up of U.S.-China tensions, reduces investment by about 3.5% after two years."
The report said if the world divides into separate trading blocks, losses due to lower productivity in Asia could lead to 3.3 percentage point reduction in regional output. Srinivasan added "total losses are likely much larger due to the dent on investment as firms lose access to export markets".
Srinivasan argued for the "need for international cooperation", advising policymakers "to roll back trade restrictions, reduce policy uncertainty, and promote open and stable trade - both regionally and globally - to avoid the most harmful fragmentation scenarios, and to ensure that trade continues to act as an engine of growth".
