The International Monetary Fund’s World Economic Outlook report for 2012 said recessions in Europe and turmoil in the Middle East had hit Asia’s export markets, forcing downward revisions to regional growth forecasts.
But it said resilient domestic demand in China, the world’s second biggest economy, and the capacity of Asian banks to fill the liquidity gap left by constrained European lending would help growth recover in 2013.
“Although the external environment is challenging, a soft landing is projected under the baseline forecast given robust domestic demand, favourable financial conditions and room for policy easing,” the report said.
Regional growth would flatten out at six percent this year, from 5.9% in 2011, before reviving to 6.5% in 2013, it said.
Emerging Asia – excluding the advanced economies of Australia, Japan and New Zealand – would see growth fall 0.5% this year to 6.8%, before rising to 7.4% next year.
Despite the blow to its export industries due to “spillovers from Europe”, China’s economy would post growth of more than eight percent in 2012 and 2013 thanks to “robust” domestic consumption and investment.
The IMF said the Chinese economy was expected to grow by 8.2% this year – above the Chinese government’s target of 7.5% — and by 8.8% in 2013.
Growth in China has slowed recently, falling to 8.1% in the first quarter from 9.7% a year earlier, as domestic demand drops and Europe’s debt woes curb business activity.
The IMF upgraded its growth forecast for Japan’s economy from 1.7% to 2.0% growth this year, reversing a 0.7% decline in 2011, saying the country would receive a “timely boost” from spending on reconstruction following last year’s catastrophic earthquake and tsunami.
But it said Japanese growth would fall to 1.75% in 2013.
“The crisis in Europe and problems regarding energy supply are likely to dampen Japanese economic activity and exports,” the report said.
Significant downside risks
The report had some tough words for emerging giant India, saying its slowdown from 7.2% growth in 2011 to a projected 6.9% this year had as much to do with “domestic factors” as external headwinds.
It cited “policy uncertainty and supply bottlenecks” for deteriorating business sentiment in the South Asian power, along with higher interest rates and wobbly export markets.
Thailand’s devastating floods were another domestic source of weakness for the region last year, cutting two percent off the country’s annual growth.
The IMF warned of “significant downside risks” to the regional outlook this year, including a possible escalation in the eurozone debt crisis.
A worst-case scenario in Europe had the potential to slash 1.75% off Japanese output, it said.
Australia and New Zealand, with the greatest reliance on wholesale funding from Europe, also remained vulnerable to moves by foreign banks to cut back lending.
The danger of a spike in oil prices linked to tensions in the Middle East could precipitate a decline in investment and economic activity in China which would have regional consequences.
“Policy in the region needs to be set with an eye toward these risks,” the report said.
“The fragility of the external outlook highlights the need for the region to rebalance growth by strengthening domestic sources of demand over the coming years.”
In China, this meant a “continuation of recent currency appreciation” and progress in implementing policies to cut its huge external surplus.
In the emerging markets of Southeast Asia and India, policymakers should focus on boosting investment by fixing infrastructure bottlenecks and improving governance.