IMF: ASIA GROWTH TO SLOW AMID RUSSIA-UKRAINE WAR, COVID RESURGENCE

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

In an April 26 report, IMF said regional gross domestic product will expand by 4.9%, 0.5 percentage points less than its forecast in January and slower than last year’s 6.5% growth rate based on its latest projections.

 

It added that inflation will also rise faster in many countries, though from relatively low levels.

 

"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," IMF said.

 

Ukraine war "biggest" challenge to economic growth

 

The IMF went on to note that the ongoing war between Russia and Ukraine — triggered by Kremlin's attack on its neighbour country on February 24 — will be the biggest threat to the world economy this year.

 

"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, according to our latest projections," the IMF said.

 

It noted that based on the latest World Economic Outlook, the organization lowered the 2022 global growth estimate by 0.8 percentage points to 3.6%. This reflects a 1.1 percentage point cut for the Euro area, now seen expanding to 2.8%.

 

"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," the IMF report added.

 

It went on to note that 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.

 

Supply chain woes from China lockdowns

 

The IMF noted that the 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. However, it pointed out that 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% this year, which will affect Asia's emerging economies through reduced trade and demand," IMF added.

 

It said that tightening global financial conditions will also weigh on economic growth as government bond yields in major Asian economies have begun rising as the Federal Reserve starts to lift US interest rates. 

 

"Risks to the economic outlook include an intensification of the aforementioned three main headwinds," the IMF said.

"An escalation of the war in Ukraine would further increase food and energy prices, adding to stress for vulnerable households and potentially causing social unrest to spread to more countries," it added.

On the other hand, the IMF noted that a tightening of US monetary policy that is materially faster or larger than currently expected by markets — or both —would have large spillovers to Asia.

 

Supply chain fragmentation

 

"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 report continued.

 

"More broadly, a potential fragmentation of supply chains and added geopolitical tensions will remain risks for the longer term for a region that has flourished in recent decades from rising wealth and other economic gains from globalization," it added.