Asia: Robust Growth, But Inflation Causing Concern

Asia in 2011: strong growth, with overheating pressures

Tighter fiscal stance, stronger currencies and macroprudential measures needed

Sustainable growth should be balanced and inclusive

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...