Inflation, Capital Inflows: Asia and the Challenges of Success in 2011

Asian growth expected to slow to more sustainable levels

Future risks posed by financial spillovers and possible slowing of global economy

Exchange rate flexibility, macroprudential policies needed to manage capital inflows

In a wide-ranging interview with IMF Survey online looking at the prospects for the world’s fastest growing region, the head of the IMF’s Asia and Pacific Department, Anoop Singh, warned that the strength of Asia’s growth could lead to the threat of inflation.

Asia also had to contend with the risks posed by possibly weaker global economic growth and financial spillovers from advanced economies, suggested Singh, but he predicted that the region’s economic importance would continue to increase. Following is the text of the interview:

IMF Survey online: Let’s begin by looking back at 2010. It was a pretty good year for Asia. The region led the recovery from the global downturn. What was behind this strong performance in Asia?

Singh: As you said, Asia performed remarkably well the last year. It led the global recovery. Policymakers have managed effectively their response to the global crisis.

Regional economies grew well above trend in the first half of 2010, supported by both domestic and external factors. We saw that appropriate policy stimulus in Asia played an important role. But also, Asia benefited from the rebound in global manufacturing, which boosted Asian exports. Beyond these two issues, I will say that domestic demand also played an increasing role in contributing to Asia’s momentum last year.

IMF Survey online: Was this strong performance apparent throughout the whole region or were there regional variations?

Singh: The big recovery was in the first half of the year. The second half of the year did see some moderation, but this means it was moderating to a more sustainable base. Also, throughout the year we saw that China and India were leading Asia’s growth, but we also saw in the Association of Southeast Asian Nations (ASEAN) region and in the export-dependent parts of Asia, there was a strong recovery which was linked to the rebound that we saw in global manufacturing, which boosted the exports from these countries.

IMF Survey online: That is the very positive picture from last year. Let’s look ahead to 2011. What are your expectations for the region in the coming year?

Singh: Well, we expect growth to remain strong. We expect it to settle at a more sustainable rate of about 7 percent for Asia as a...