Asia faces a “stagflationary” outlook, a senior International Monetary Fund (IMF) official warned on Tuesday, pointing to the Ukraine war, soaring commodity prices and China’s economic slowdown as risks to the region.
While Asia’s trade and financial exposure to Russia and Ukraine are limited, the region’s economies will be affected by the crisis through higher commodity prices and slower growth in European trading partners, said Anne-Marie Gulde-Wolf, acting director of the IMF’s Asia and Pacific Department.
At the same time, inflation in Asia is also starting to pick up just as China’s economic slowdown is adding to pressure on regional growth, Gulde-Wolf also said.
“Therefore, the region faces a stagflationary outlook, with growth being lower than previously expected, and inflation being higher,” she told an online news conference in Washington, DC.
The headwinds to growth come at a time of limited policy options, Gulde-Wolf said, adding that Asian policymakers will face a difficult trade-off of responding to slowing growth and rising inflation.
“Monetary tightening will be needed in most countries, with the speed of tightening depending on domestic inflation developments and external pressures,” she said.
The US Federal Reserve’s expected steady interest rate hikes also present a challenge to Asian policymakers given the region’s huge dollar-denominated debt, Gulde-Wolf said.
In its latest forecast issued this month, the IMF said it expects Asia’s economy to expand 4.9 percent this year, down 0.5 percentage points from its previous projection made in January.
Inflation in Asia is now expected to hit 3.4 percent in 2022, 1 percentage point higher than forecast in January, it said.
A further escalation in the war in Ukraine, new COVID-19 waves, a faster-than-expected Fed rate hike trajectory, and prolonged or more widespread lockdowns in China are among risks to Asia’s growth outlook, Gulde-Wolf said.
“There is significant uncertainty around our baseline forecasts, with risks tilted to the downside,” she said.
Trinh Nguyen, a senior economist for Asia at Natixis in Hong Kong, said she agreed with the sober economic outlook.
“There are three shocks hitting Asian economies: escalated food and energy costs pushing headline inflation higher; lower Chinese demand pushing exports lower; a more hawkish Fed and higher inflation pushing up domestic interest rates, tightening financial conditions. These three shocks push up inflation and subdue growth prospects,” Nguyen told Al Jazeera.
“Meaning, with higher inflation and a hawkish Fed, central banks have less room to support growth even if exports weaken, and they actually have to tighten to fight inflation at the expense of growth. Those that choose growth and keep rates steady will face higher inflation and a weaker foreign exchange like Thailand and Japan.”