Asian economic growth will slow sharply as major industrial economies contract and financial firms reduce risky assets, the International Monetary Fund said on Monday. It said growth would likely start to pick up again late in 2009, but a recovery would be gradual.
In a twice-yearly regional economic outlook for Asia, the IMF said the risks of deflation in Japan were low. It also said the strains from the global financial crisis could extend beyond 2009, exerting more pressure on Asian economies.
"Looking ahead, the key financial risks for Asia stem from volatile capital flows, tighter external financing, and disruptive spillovers to domestic markets, which could lead to a sharp credit squeeze and slower growth," the IMF said in the report. The regional outlook comes after the IMF published its World Economic Outlook this month.
In the world outlook, the IMF projected China's growth will slow to 8.5 percent in 2009 from an estimated 9.7 percent this year and in commentary on Monday it added that "risks to China's outlook are firmly tilted to the downside." The IMF projected growth in Asia, including the Pacific, would drop to 4.9 percent in 2009 from 6 percent in 2008 and 7.6 percent in 2007.
The credit crisis will push global growth to 2.2 percent in 2009, its lowest since the 2001 recession, from 3.8 percent in 2008, the fund forecast. It projects that industrial economies will contract next year. "A recovery is expected to take hold in late 2009 but is likely to be very gradual by past standards on account of the significant financial strains," the IMF said.
The IMF expects inflation in 2009 to moderate back to 2007 levels, with headline inflation in Asia projected to ease to around 3 percent from 6 percent in 2008. Inflation in the emerging economies of Asia could fall to 4 percent in 2009, and while headline inflation may hit zero briefly in Japan, "the risks of more entrenched deflation seem low...," the IMF said.
Concerns about global deflation are growing since inflation has been falling rapidly in recent months. Japan suffered a decade of deflation beginning in the late 1990s. The IMF warned a larger-than-expected wave of corporate defaults leading to bank failures could not be ruled out in Asia as the crisis bites.
"Temporary credit guarantees may be necessary to ensure the normal flow of credit, and authorities have to stand ready to recapitalise banking systems if needed," it said. The fact that policy rates in many countries remained below the level of inflation suggested a supportive monetary stance. However, a broader measure that includes credit risk indicated financial conditions had tightened, it said.
Emerging Asia private external financing through bonds, equity and loan issuance had fallen steadily, reaching only US $137 billion through the third quarter of 2008, compared with US $211 billion over the same period last year, it said. The IMF added that domestic initial public offerings had also collapsed in markets such as Hong Kong.
On a conference call with journalists to discuss the outlook, the Fund said that more government spending may be warranted to prop up slowing economies. "There are a number of countries in Asia where fiscal stimulus is feasible and probably desirable," Jerald Schiff, senior adviser to the IMF's Asia and Pacific department. "If growth slows more than we are now anticipating, there would be quite a bit of scope for more fiscal stimulus in the region," he added. He said Japan may have some scope for "modest" stimulus, although it was constrained by debt levels.
The IMF said it expected Asia's fiscal deficit to widen as governments support their economies, and monetary easing would be appropriate in several countries. "But with inflation still above targets or comfort levels in many of these countries, effective communication by central banks will be key to ensuring that inflation expectations remain well anchored. "Beyond considerations of inflation, monetary policy will have to ensure sufficient provision of liquidity for orderly market functioning," the IMF said.
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