Robust growth in Asia triggers inflation concern
After reaching a rate of 8.3 percent in 2010, GDP growth in Asia is
projected to average nearly 7 percent in both 2011 and 2012, according
to the IMF.
Although the earthquake in Japan in mid-March caused terrible loss of
life and property, the government’s response helped to contain the
economic impact, and spillovers to the rest of Asia through the supply
chain should be limited.
But in its regular report on the economic outlook of the Asia and
Pacific region, the IMF warns that Asia’s rapid recovery from the global
economic crisis has been accompanied by pockets of overheating across
the region.
The threat of overheating
At the launch of the IMF’s twice-yearly Regional Economic Outlook
held in Hong Kong, Anoop Singh, head of the Fund’s Asia and Pacific
department, said economic growth in Asia was expected to remain robust,
fueled by both exports and domestic demand, but new risks had emerged,
including the threat of inflation.
“Headline CPI inflation has accelerated since October 2010, and while
this initially reflected higher commodity prices, pressures have now
spilled over into core inflation and inflation expectations,” said
Singh.
‘While we expect inflation in many Asian economies to increase
further in 2011 before decelerating modestly in 2012, inflation risks in
Asia remain tilted on the upside.’
The IMF economist also noted that credit growth was not far from the
“boom” levels in a number of economies, while property prices continued
to grow rapidly in a few regional markets.
As well as the danger posed by exuberant credit and property markets,
Singh also identified additional risks from higher commodity prices,
volatile capital inflows and possible spillovers from Japan’s
earthquake.
Tightening macroeconomic policies
Against this background, Singh said the need to tighten macroeconomic
policies in Asia had become more pressing than it was six months ago.
“Further monetary tightening is necessary in economies that are
facing generalized inflation pressures, as interest rates are generally
negative,” said Singh.
He added that there was also room for further fiscal consolidation
and exchange rates appreciation that would help contain inflationary
pressures.
While the task of monetary tightening has been complicated by surges
of capital flows to Asia after the global crisis, their recent
moderation gives central banks more room to raise rates. Capital is
expected to continue flowing into Asia in 2011 and 2012, attracted by
the region’s strong growth prospects and fueled by abundant global
liquidity and risk appetite, but at a more moderate pace than in 2009
and early 2010.
Capital inflows remain a concern
Still, increased volatility of capital inflows, especially debt
related inflows, ‘remains a key concern,’ for a few regional economies
where these flows have been particularly large, says the Regional
Economic Outlook.
The report notes that several Asian economies have introduced
macroprudential measures aimed at reducing the risk of overheating in
asset markets, and staving off any subsequent bust if capital flows
reverse. These measures include reducing banks and household leverage,
and cooling down property markets.
“These measures have been helpful,” says the report, but stresses
they are “complements” and not a substitute for macroeconomic policy.
Balanced, sustainable, inclusive growth
Over the longer term, the report says the main challenge for Asia’s
policymakers is to achieve a balanced, sustainable, and more inclusive
pattern of growth and it warns that the global imbalances that
characterized the pre-crisis period remain unchanged.
“Without policies targeted at correcting these underlying
distortions, they could threaten global growth prospects,” it warns.
Among the challenges it identifies are strengthening domestic demand
in Asian emerging economies, allowing the exchange rate to appreciate in
some economies, narrowing inequality through inclusive labor markets,
and offering stronger social protection. |