Expansion in Asia to slow, says IMF

Asia is not likely to escape the impact of the US-led global downturn, the International Monetary Fund said on Friday, although it added that growth was likely to remain high relative to other regions of the world.

The IMF said it had cut its forecast for growth in Asia this year and now projected more moderate expansion of 6.2 per cent — down 1.75 per cent from 2007. It said 2008 would be a “challenging year” and that “the balance of risks remains on the downside” — lower growth — in spite of high inflation.

This view is certain to be controversial, with many economists saying that the main risk to Asian economies is inflation, not low growth, and that policymakers in the region should be concentrating their efforts on fighting price increases.

The IMF said “key activity indicators in recent months suggest that momentum is easing” in Asia, adding that “confidence indicators also point to slowing activity”.

Asian money markets had also been affected by the financial crisis, with falls in equities and increases in the risk spreads on corporate debt.

The IMF said Asia “has not delinked” from the US, and “the US slowdown could have a larger impact” than recent US downturns, in particular on China, given the increased economic integration between the countries.

However, exports were still growing, it acknowledged, in part because of growing exposure to non-traditional markets in the rest of the developed world.

Inflation pressures were rising across Asia. Headline inflation momentum had increased “noticeably” in India and the Association of South-East Asian Nations region in recent months, and had “picked up anew” in China.

“Core inflation has also risen,” the IMF added, with signs of “second round effects” as workers and companies sought to pass on the cost of more expensive food, energy and other commodities in the form of wages and prices.

It said policymakers would face “difficult choices in this environment” with limited room for manoeuvre on monetary policy. It urged them to consider currency appreciation as a way to curb inflation while also switching production to-wards domestic demand.

The IMF also advised Asian countries to prepare contingency plans for a fiscal boost in the event that growth fell sharply — noting that many countries “have considerable scope” to do so, owing to strong public finances.

Courtesy - Business Standard