The International Monetary Fund (IMF) forecast India’s economic growth to rebound to 7.4 percent in the current 2018/19 financial year from previous year’s 6.7 percent, as the economy recovers from disruptions related to the currency exchange initiative and the rollout of the new Goods and Services Tax.
However, it expects China’s economic growth to moderate to 6.6 percent in 2018 form 6.9 percent last year, as financial, housing, and fiscal tightening measures take effect.
The IMF’s Regional Economic Outlook: Asia and Pacific (REO) forecast growth for Asia at 5.6 percent this year and next. The outlook, it said, is supported by strong global demand, as well as still accommodative policies and financial conditions.
Growth in Japan, which has been above potential for eight consecutive quarters, is expected to remain strong at 1.2 percent this year, the IMF said.
Asia continues to be the main engine of the world’s economy, accounting for more than 60 percent of global growth—three-quarters of which comes from China and India alone. But there are risks and challenges ahead, including from a tightening of global financial conditions, a shift toward inward-looking policies, and—over the longer run—population aging, slowing productivity growth, and the rise of the digital economy, according to the IMF’s latest regional report.
Growth in ASEAN is projected to stay at 5.3 percent both this year and next, reflecting strong investment and consumption across several countries.
The IMF said present rates of inflation in Asia were some of the lowest in decades even though headline inflation in the region had picked up since September last year due to rising oil prices.
“But core inflation—which excludes food and energy—remains low and below target in many economies,” it said in the report.
In 2017, headline inflation on average was 0.6 percent lower than target in Asian advanced economies, and 0.8 percent under target in Asian emerging market economies. As the chart shows, many countries across the region had inflation below target over the past two years.
According to the report, there are both upsides and downsides to the forecast. Although they largely balance out in the near term—over the medium term, the downside risks dominate.
On the upside, growth momentum could be more durable than expected amid strong consumer and business confidence and still loose financial conditions. The rollout of the fiscal stimulus in the U.S. as well as a stronger recovery in the euro area could lift global growth, with positive spillovers to Asia.
But over the medium-term, Asia is vulnerable to a tightening of global financial conditions, spurred by higher U.S. interest rates, which could trigger capital outflows.
Further, a global shift toward inward-looking policies would be worrying given Asia’s trade openness—suppressing Asia’s exports and reducing foreign direct investment in the region.
Escalating geopolitical risks as well as natural disasters and cyberattacks could also negatively impact the region’s medium-term growth.
And over the longer term, Asia faces a number of important challenges from population aging, slowing productivity growth, and the digital revolution, which of course brings huge opportunities along with risks.