Strong Growth for Asia with Risk of Overheating

7 percent growth predicted for Asia in 2011 and 2012

Increasing overheating pressure in goods, asset markets

Heightened need for macroeconomic policy tightening

Speaking to reporters during the Spring Meetings of the IMF and the World Bank in Washington DC, Singh said the recovery in Asia had matured.

“Both exports and domestic demand fueled rapid economic growth, which reached about 8½ percent in 2010. Growth should remain robust at close to 7 percent in 2011/2012.”

Growth within the region will also be varied, with China and India likely to lead the rest of the region with their economies growing at 9½ and 8 percent respectively.

Threat of inflation

But Singh also sounded a note of caution, saying that pockets of overheating pressures had emerged across Asia in both goods and asset prices.

“Headline inflation has accelerated in the last six months and initially that reflected commodity prices, but we do see these pressures now spilling over into core inflation and inflation expectations,” said Singh.

The IMF expects inflation in many Asian economies to increase further this year before slowing modestly next year as global commodity prices stabilize and macroeconomic policies are tightened.

“But the inflation risk for Asia is clearly on the upside,” said Singh.

New risks emerge

He also identified new risks that had emerged in the region, including possible disruptions to the global supply chain caused by the disaster in Japan, and the threat posed by rising commodity prices.

“A more prolonged disruption of industrial production in Japan could have effects on other economies in the region, and elsewhere in the world, that are linked to Japan through the global supply chain,” he said.

“Asia could also be affected if second-round effects from higher oil prices resulted in a global slowdown that hurts external demand,” he added.

Need for monetary tightening

Against this background of strong growth, possible closing output gaps, and overheating, Singh said the need to tighten macroeconomic policy stances has become more pressing now than six months ago.

“Certainly further monetary tightening, which is ongoing in Asia, is necessary in economies that are facing these generalized inflation pressures, as interest rates remain below levels that are consistent with stable growth and low inflation.”

Singh...