The International Monetary Fund (IMF) downgraded its 2021 economic growth forecast for the Asia Pacific region, because of the recent peaks of the coronavirus pandemic cycle, driven by the highly contagious Delta variant. This coupled with slow progress in vaccine rollout has clouded the recovery prospects, IMF said. For this year, the experts expect a growth rate of 6.5%, down 1.1 percentage point from its earlier projection made in April.
In its regional outlook update released on 20 October, IMF warned that a fresh wave of Covid-19 infections, supply chain disruptions and inflation pressures pose downside risks to the outlook. It has, however, raised the Asia growth forecast for 2022 to 5.7% from a 5.3% estimate in April, on the back of progress in vaccination rates in the region.
Meanwhile, the global economy is projected to grow 6.0% in 2021 and 4.9% in 2022.
Uneven impact of pandemic on Asia’s growth
The Asia and the Pacific region (APAC) is projected to remain the fastest-growing region in the world with 6.5% growth in 2021, led by China and India, according to the newly released regional economic outlook.
Following a sharp decline in 2020, India’s economy is now projected to grow by 9.5% (3.0 percentage point lower than April) and by 8.5% in 2022 (1.6 percentage point higher than April), while China’s economy is expected to grow by 8.0% this year (0.4 percentage point lower than April) and 5.6% (unchanged) in 2022. However, IMF added that China’s recovery remains “unbalanced” as repeated coronavirus outbreaks and fiscal tightening weigh on consumption.
At the same time, the divergence between advanced economies from the APAC region and emerging market and developing economies is deepening. As per the IMF forecast, almost all the countries from emerging markets and developing economies registered a downgrade compared to the April forecast, while almoste all advanced Asian economies registered and upgrade.
“The ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, Thailand), are still facing “severe challenges” from a resurgent virus and weakness in contact-intensive sectors,” Chang Yong Rhee, director of the IMF`s Asia and Pacific Department said.
Among the ASEAN nations, the steepest downgrade was seen in the Philippines, where the economic growth forecast is projected at 3.2% (3.7 percentage points lower than April). The growth forecast for Malaysia is projected at 3.5% (-3.0 percentage points). Followed by Vietnam at 3.8% (-2.7 percentage points), Thailand at 1.0% (-1.6 percentage points) and Indonesia at 3.2 (-1.1 percentage points).
For the advanced economies in Asia, the IMF forecast was broadly unchanged for 2021, with a projection of 3.7% for 2021, (at a difference at 0.1 percentage points from April). Most of the countries managed upgrades. Hong Kong is projected to land at 6.4% for 2021, up from 4.3% forecasted in April, South Korea at 4.3% (+0.7 percentage points), Taiwan at 5.9% (+1.1 percentage points), New Zealand at 5.1% (1.0 percentage points) and Singapore at 6% from 5.2% in April.
Downgrades were only seen in Japan and Australia. Japan’s economic growth prospects were downgraded to 2.4% (0.9 percentage point lower than April) mainly because of a hurtful second quarter and extensions of state-of-emergency in most of the country. Meanwhile, Australia growth projections came at 3.5%, a 1.0 percentage point lower than April.
Near term risks
According to the international body, a spike in Delta variant cases has hit consumption and factory output from the region. The highly transmissible Delta variant is has contributed to surging cases, mass hospitalizations, and tragic loss of life, especially in densely populated South and Southeast Asia.
Risks, according to the IMF, are uncertain pandemic dynamics, vaccine efficacy against virus variants, supply chain disruptions, and untimely policy change as well as potential global financial spillovers from the US Federal Reserve’s monetary normalization. The policy risk by the US could also trigger significant capital outflow and higher borrowing costs for Asian emerging economies, creating heightened risk for the region, the IMF added in its report.
US interest rates can also amplify the divergences by affecting those Asian firms with higher debt-servicing risks concentrated in sectors that were affected disproportionally by the Covid-19 shock.
This is because Asian countries have increased leverage overall due to limited policy space, said the IMF official. Furthermore, inflation has been on the rise, driven by rebounding commodity prices and supply-demand mismatches that are expected to be mostly transitory.