Asia growth slows on commodities, Covid and rising interest rates

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Economic growth in Asia and the Pacific is poised to slow more than previously estimated this year amid headwinds from the war in Ukraine, a resurgent pandemic, and tightening global financial conditions, the International Monetary Fund (IMF) said.

“Regional gross domestic product will expand by 4.9 percent, 0.5 percentage points less than we forecast in January and slower than last year’s 6.5 percent growth rate, according to our latest projections. We also estimate that inflation will rise faster in many countries, though from relatively low levels,” its analysts said in a blog.

Slower growth and rising prices, coupled with the challenges of war, infection and tightening financial conditions, will exacerbate the difficult policy trade-off between supporting recovery and containing inflation and debt, the IMF said, adding that according to latest projections, the Russia’s invasion of Ukraine will pose the biggest challenge for economic growth, with the region’s advanced economies hurt most by reduced demand from Europe and emerging markets feeling the effects of higher global commodity prices.

In its latest World Economic Outlook the IMF lowered the 2022 global growth estimate by 0.8 percentage point to 3.6 percent. It reflects a 1.1 percentage point cut for the euro area, now seen expanding 2.8 percent. Because Asia’s advanced economies have strong ties with Europe, the continent’s weaker growth will weigh on external demand and ultimately growth for major regional trade partners like Japan and Korea. 

“Most of Asia’s emerging and developing economies are net importers of oil, gas, and metals, making them particularly vulnerable to rising global commodity prices. That means that a deterioration in their terms of trade—a measure of prices for a country’s exports relative to its imports—will likely reduce growth, weaken currencies, and worsen current-account balances. High food and fuel costs also add to inflation pressures, especially in lower-income countries where they make up a large share of consumer spending,” the IMF analysts pointed out.

Covid, China still a concern

Coronavirus infections in most of Asia have retreated from their peaks during the rapid spread of the omicron variant, with mobility indicators approaching pre-pandemic levels. China is the most notable exception to this, as lockdowns in Shanghai and elsewhere idle a wide range of activity and threaten to cause further disruptions to regional and global supply chains.

“These lockdowns are one reason that we project growth in China to slow to 4.4 percent this year, which will affect Asia’s emerging economies through reduced trade and demand,” they said.

According to the IMF, tightening global financial conditions will weigh on economic growth. Government bond yields in major Asian economies have begun rising as the Federal Reserve starts to lift US interest rates.

An escalation of the war in Ukraine would further increase food and energy prices, adding to stresses for vulnerable households and potentially causing social unrest to spread to more countries, while a greater slowdown in China’s economy due to broader virus lockdowns or other risk factors such as the continued weakness in the real estate sector, would also have large implications for the region, given trade linkages within Asia, the IMF said.

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