China and India will drive Asia’s economic growth in 2023, making Asia-Pacific the “most dynamic of the world’s major regions,” the International Monetary Fund (IMF) said on Tuesday, while projecting the region’s growth in the year at 4.6%. It, however, urged central banks the region, including India’s, to keep monetary policy tight to bring down inflation.
“The costs of failing to bring inflation below target are likely to outweigh any benefits from keeping monetary conditions loose,” the IMF said, while rendering the advice to key central banks in Asia, excluding Japan and China. “Insufficient tightening in the short term would require disproportionately more monetary tightening later to avoid high inflation becoming ingrained, making a larger contraction more likely,” the multilateral agency warned.
The reopening of China’s economy – which is seen to grow at 5.2% in 2023- will be pivotal for the region with the spillover to Asia seen focused on consumption and service-sector demand rather than investment, the IMF said, in its regional economic outlook report.
On April 11, the IMF had lowered its growth forecasts for India for the current fiscal year and the next by 20 bps and 50 bps, to 5.9% and 6.3% respectively. Sticking to these projections, it has now said growth in the rest of Asia is also expected to bottom out this year.
IMF’s latest India forecast is broadly in line with the cuts in its global growth forecasts for 2023 and 2024 by 10 bps each to 2.8% and 3%. It, however, means India may not be weathering the global turmoil as exceptionally as it was expected to. Of course, India will still be the fastest growing major economy during the forecast period.
But the IMF cut next year’s Asian growth forecast by 20 bps to 4.4%, and warned of risks to the outlook such as stickier-than-expected inflation, slowing global demand as well as the impact of U.S. and European banking-sector stress.
“While spillovers to the region from stress in U.S. and European financial sectors have been relatively contained thus far, Asia remains vulnerable to tightening financial conditions and to sudden and disorderly repricing of assets,” the IMF said.
And while Asia has strong capital and liquidity buffers to fend off market shocks, the region’s highly leveraged corporate and household sectors are “significantly” more exposed to a sharp increase in borrowing costs, it added.