IMF cuts Asia’s growth forecast, warns of supply chain risks

China’s economy will grow by 8.0% this year and 5.6% in 2022, but the recovery remains “unbalanced” as repeated coronavirus outbreaks and fiscal tightening weigh on consumption, it said.

Any “untimely policy normalization or misconstrued policy communications” by the U.S. Federal Reserve could also trigger significant capital outflow and higher borrowing costs for Asian emerging economies, the IMF said.

In its regional outlook report, the IMF cut this year’s economic growth forecast for Asia to 6.5%, down 1.1 percentage point from its projection made in April, as a spike in Delta variant cases hit consumption and factory output.

The IMF raised its Asia growth forecast for 2022 to 5.7% from a 5.3% estimate in April, reflecting progress in vaccinations.

“Although Asia and Pacific remains the fastest growing region in the world, the divergence between Asian advanced economies and emerging market and developing economies is deepening,” the report said.

“Risks are tilted to the downside,” mainly on uncertainty over the pandemic, supply chain disruptions and potential spillovers from U.S. policy normalisation, it said.

China’s economy hit its slowest pace of growth in a year in the third quarter, highlighting the challenge policymakers face as they seek to prop up a faltering recovery while reining in the real estate sector.

India is expected to expand 9.5% this year, while advanced economies like Australia, South Korea, New Zealand and Taiwan benefit from high-tech and commodity booms, the IMF said.

But ASEAN-5 countries – Indonesia, Malaysia, Philippines, Singapore, Thailand – still face “severe challenges” from a resurgent virus and weakness in service consumption, it said.

“Over the coming months, new infection waves remain the biggest concern,” the IMF said.

While inflation expectations are “generally well-anchored” in Asia, higher commodity prices and shipping costs, coupled with continued disruption of global value chains, are amplifying concerns over persistent inflation.

Most Asian emerging economies must maintain monetary support to ensure a lasting recovery, but central banks “should be prepared to act quickly if the recovery strengthens faster than expected or if inflation expectations rise,” it said.