Economic growth in the Asia and Pacific region is expected to remain robust in 2011, but the potential overheating pressures and the inflationary risks remain on the upside, accompanied by continuing capital inflows, the International Monetary Fund (IMF) said in a report released here on Thursday. The overall economy is seen to accelerate gradually over the course of 2011, leading to annual growth for the region of nearly seven percent in both 2011 and 2012, unchanged from IMF’s October forecast last year.
Asia’s rapid growth is accompanied by the emergence of pockets of overheating across the region in both goods and asset prices. Asset price pressures are reflected in strong credit dynamics as well as in certain segments of property markets in a few economies. Inflation is expected to increase further in 2011, before decelerating modestly in 2012 as global commodity prices stabilise and central banks across the region make further progress with tightening macroeconomic conditions.
Meanwhile, increased volatility of capital inflows, especially debt related inflows, remains a key concern, said the report. The surge of the inflows has been moderated since late last year, but surely it will not stop, said Anoop Singh, director of the IMF’s Asia and Pacific department, in a press briefing in the day. “The challenge of the region is to ensure that its absorptive capacity rises,” Singh said, who urged countries to take measures for financial development, making sure that capital inflows directly go into sectors that are crucial for rebalancing.
In China, the economy is expected to grow 9.6 percent in 2011. The figure was unchanged from the October forecast, and was moderated from 10.3 percent growth in 2010 as policy tightening slows investment. Consumer price inflation in China rose during the course of 2010, and reached 4.9 percent year on year in January and February 2011. Inflation appears close to peaking, as food supply shocks begin to work themselves out of the system, the IMF said.
There are few signs that wage increases are outpacing productivity gains — sequential growth of industrial unit labor cost is around zero and the latest household surveys suggest that wage incomes are still falling as a share of GDP (gross domestic product). “Inflation in China should peak shortly, and should come down later this year, and should come back to the target range, which is close to four or 4.5 percent,” Singh said. Nevertheless, the economy is still vulnerable to further domestic supply shocks and rising global commodity prices, particularly food.
In this environment, it will be important therefore to maintain a prudent monetary stance to forestall the possibility that inflation may become more generalised and entrenched, the report said. There are also signs that overheating pressures are building up. Credit dynamics are particularly strong in the Chinese mainland and Hong Kong. Property markets appear relatively buoyant in certain segments in the mainland and Hong Kong, the report showed. In Japan, a pickup in activity emerged in early 2011, but was interrupted in mid-March by the earthquake and tsunami that caused extensive loss of life and property. Japan’s growth is expected to moderate from 3.9 percent in 2010 to 1.4 percent in 2011.
A prolonged disruption in production and transportation facilities would affect regional production networks by more than anticipated in IMF’s baseline. Moreover, the need to replace or at least supplement nuclear power (which represents about 30 percent of Japanese energy supply) with other energy sources, as well as the reconstruction efforts, could pose upward pressure on global commodity prices. The impact of Japan’s natural disaster is also likely to be felt well mainly through trade channels on the supply side.
The global environment is still complicated by significant fiscal and financial vulnerabilities in advanced economies. Meanwhile, higher commodity prices are spilling over to a more generalised increase in inflation. The robust demand for consumer durables and the strong investment cycle projected in both advanced economies and emerging markets are likely to further boost Asian exports. Private domestic demand should also remain strong in Asia. Capital inflows are expected to continue, but at a more moderate pace, the organisation said.
Against the background of strong economic growth and overheating concerns, the need to tighten macroeconomic policy stances in Asia has become more pressing now than it was six months ago. Over the longer term, the main challenge for Asia’s policymakers remains to achieve a balanced, sustainable, and more inclusive pattern of growth, the report suggested. It is also important for countries to reduce inequality through inclusive labor markets, said Singh, who believed that would guard against risks to social stability, and develop new engines of growth by strengthening private domestic demand.
