Asia Faces Stronger Growth, but Further Rebalancing Critical

Asian policymakers need flexibility to support non-inflationary growth

Euro debt crisis remains lingering threat

Continued rebalancing, best insurance against external shocks

At the launch in Kuala Lumpur, Malaysia, of the IMF’s regular outlook for the Asia Pacific region, the economists said that the region is expected to continue growing at around 6 percent this year, before rebounding in 2013.

“Calibrating the right amount of insurance to support stable, non-inflationary growth is the main near-term policy challenge,” said Anoop Singh, head of the IMF’s Asia and Pacific Department.

“Policymakers should be ready to shift gears and renew tightening if overheating pressures become evident,” he added.

Robust domestic demand

Asia has continued to enjoy robust domestic demand against the background of the fragile global recovery. This has been reflected in low unemployment and robust credit growth in the region. Inflation expectations also picked up and so far, capital inflows into emerging Asia have rebounded in 2012.

The IMF forecasts regional growth will be 6 percent this year, roughly the same level as in 2011, and about 6½ percent in 2013. But there remains considerable regional variation. While emerging Asia will remain the fastest growing region in the world, led by China and India, expanding at 6.9 percent this year, industrial Asia is projected to grow only at 2.2 percent.

A further stabilization of global economic and financial conditions over the course of 2012 would provide a boost to the whole region. But it could also revive the threat of inflation.

The report suggests that inflation will decline modestly in 2012, averaging some 3½ percent. But this partly reflects a normalizing of commodity prices, and in several cases sustained demand pressures means inflation is likely to remain above explicit or implicit target ranges.

Threats to growth

Despite brighter prospects for the region, the report warns that financial turmoil in Europe could yet escalate and spread to Asia. In particular, a sharp fall in exports...