The Asian economic outlook stays positive as the region’s domestic demand has so far remained strong despite monetary tightening, said IMF recently at its press briefing on Economic Outlook for Asia Pacific and Korea .
Growth in Asia and the Pacific is projected to increase this year to 4.6%, up from 3.8 % in 2022, though external demand for technology products and other exports from Asia is weakening, IMF noted.
This reflects an increase of 0.3 percentage points compared with projections we had made in the October World Economic Outlook (WEO) by the fund.
The biggest driver of Asia’s growth
The biggest driver of Asia’s upward growth revision this year is China, while other emerging economies in the region are on track to enjoy solid growth, though in some cases at slightly lower rates than last year’s, IMF pointed out.
In Asia’s advanced economies, growth will slow this year to 1.6%, said IMF, adding that his is about 0.4 percentage points lower than we projected in October.
Our forecast revisions imply that the economies of Asia and the Pacific are expected to contribute about 70% of global growth in 2023, which is a significantly larger share than we have seen during the past few years.
The Chinese economy is expected to expand by 5.2% this year. Data from the first quarter, which includes a very sharp rebound in exports, have confirmed our forecast of a dynamic start to 2023, and PMI surveys show that the recovery will continue to be led by services.
The upward revision to Chinese growth by 0.8% in 2023 is our largest in this edition of the WEO.
IMF said it see this boosting growth in the rest of Asia as well—typically, a one percentage point increase in Chinese growth leads to an increase, on average, of about 0.3 percentage points in the rest of Asia.
Normally the strongest spillover from China would be from its demand for investment goods, but this time the biggest effect is from demand for consumption, IMF added.
The fund estimated that t this will generate stronger spillovers to the region compared to the past.
But these spillovers from China will have heterogeneous effects to trade partners across the region, IMF noted, adding that the boost will vary according to their exposure to Chinese demand for consumption and investment.
For example, countries that export final consumption goods to China or those that depend on tourists from China will stand to benefit a lot, while those economies that mainly export raw commodities to China are unlikely to receive a strong boost from China’s recovery this time around, IMF said.
Weakening external demand weighs on Asian economic outlook
One factor that is weighing on the short-term Asian economic outlook is the weakening of external demand, with the US and Europe expected to have very weak import growth in 2023 and 2024, according to the fund.
In recent data, this is putting pressure on Asia’s exports of manufactured goods, IMF said.
The slowdown is already manifesting in a moderation of demand for technology exports from Asia to the US, with orders for semiconductors having slowed substantially, the fund pointed out.
Headline inflation has been easing but remains above central bank targets in most economies, IMF observed.
As commodity prices recede, core inflation is becoming a more important driver of headline inflation and is proving stickier, the fund added.
As output gaps are closing or have already closed across the region, and exchange rate depreciations are still passing through to domestic prices, the battle to contain inflation remains, IMF warned.
“Our analysis finds that exchange rate pass-through is stronger when inflation is already high, as it is today in many Asian economies,” IMF said.
Yet monetary tightening has slowed down or paused in most countries, IMF observed.
“Given the still substantial inflation risk, we are of the view that monetary policy in Asia will need to remain tight until inflation falls durably back to target,” IMF said. “The exceptions are China and Japan, where output is below potential and inflation expectations have stayed muted.