1. Outlook for Asia and Pacific: Sailing into Headwinds

International Monetary Fund. Asia and Pacific Dept

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International Monetary Fund. Asia and Pacific Dept

International Monetary Fund. Asia and Pacific Dept
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Language:: English

Keywords:: Asia; ASEAN; COVID-19; corporate debt; digitalization; labor; geoeconomic fragmentation; trade policy; inflation

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Abstract

The authors of this chapter are Yan Carrière-Swallow (lead) and Yizhi Xu, with contributions from Chris Redl (Box 1.1), Daniel Jiménez (Box 1.2), Alessia De Stefani, Giacomo Magistretti, Anh Ti Ngoc Nguyen, and Modeste Some (Box 1.3).

After the strong rebound of 6.5 percent posted in 2021, growth in Asia and Pacific is expected to moderate to 4.0 percent in 2022 amid an uncertain global environment and rise to 4.3 percent in 2023. Inflation has risen above most central bank targets, but is expected to peak in late 2022. As the effects of the pandemic wane, the region faces new headwinds from global financial tightening and an expected slowdown of external demand. While Asia remains a relative bright spot in an increasingly lethargic global economy, it is expected to expand at a rate that is well below the average rate of 5½ percent seen over the preceding two decades. Policy support is gradually being withdrawn as inflation rises and idle capacity is utilized, but monetary policy should be ready to tighten faster if the rise in core inflation turns out to be more persistent. The region’s rising public debt levels call for continued fiscal consolidation, so interventions to mitigate global food and energy shocks should be well targeted, temporary, and budget neutral. Structural reforms are needed to boost growth and mitigate the scarring that is expected from the pandemic, especially making up for lost schooling through investments in education and training, promoting diversification, addressing the debt overhang from the pandemic, and harnessing digitalization. Strong multilateralism—including through international organizations, the Group of Twenty and regional processes—will be needed to mitigate geoeconomic fragmentation and deliver much needed progress on climate change commitments.

Asia’s recovery from the COVID-19 pandemic continues in the face of multiple headwinds. But countries in the large and diverse region are on different tacks in their management of the pandemic and their outlook for growth and inflation.

Recent Developments

Growth during the beginning of 2022 was propelled by postpandemic recovery. Most countries have shifted toward treating COVID-19 as an endemic disease, and mobility indicators in those countries returned to prepandemic levels in late 2021 and have remained there, despite waves of infections. As countries emerge from the pandemic’s disruptions, closures, and hardships, output gaps are shrinking and have already closed entirely in many of the region’s advanced economies. The region (except for China) largely brushed of a wave of Omicron infections, with minimal delays to reopening plans. This allowed for continued recovery of the contact-intensive service sector that has been particularly strong in Association of Southeast Asian Nations (ASEAN) countries. Most countries have reopened their borders to foreign visitors, and tourist arrivals are on the rise. Domestic consumption also recovered and industrial production performed well amid strong demand for manufacturing exports. These factors led to growth in the first quarter that was generally stronger than expected in the April 2022 World Economic Outlook (Figure 1.1), particularly among ASEAN emerging markets and Taiwan Province of China.

However, the continued pickup in growth envisioned in the second quarter was somewhat weaker than expected. In China, the aggressive pandemic containment policy known as zero-COVID has met localized waves of infections with strict municipal and regional lockdowns, reducing demand and disrupting manufacturing and supply chains. These factors reduced China’s growth to a sequential contraction in the second quarter and to just 0.4 percentage point year over year. The large contraction of Chinese import volumes has weakened momentum in neighboring Japan and Korea, but exports from the rest of Asia performed well in the first half of 2022, supported by sustained demand from Europe and the United States (Figure 1.2). As such, the impact of Russia’s invasion of Ukraine recorded in the second quarter of 2022 has been felt in the region mostly through softening consumer demand because of higher commodity prices but not from weak external demand, as was initially feared (Kammer and others 2022). However, in recent months, there have been early signs that the war’s global impact has begun to weaken orders for Asia’s exports. Third-quarter manufacturing purchasing managers indexes are softening (Figure 1.3), and investment appears to be weakening in Asia as the regional and global economic outlook is becoming more uncertain (Chapter 3).

The Return of Inflation

Global inflation has repeatedly surprised on the upside—surging to multidecade highs—and is proving to be more persistent than initially anticipated (October 2022 World Economic Outlook, Chapter 1). In response, central banks in major advanced economies have embarked on tightening monetary policy to cool demand and tame inflation.

Although global inflation picked up sharply after the first quarter of 2021, it rose more modestly in Asia (Figure 1.4). Two important factors kept inflation lower in Asia than in other regions during 2021 (Carrière-Swallow, Deb, and Jiménez 2021). First, food prices in Asian emerging market and developing economies rose less than in other regions because of specific factors such as a solid harvest in India in 2021, a hog population rebound from the 2019 swine flu epidemic in China, and contained increases in rice prices (Asia’s preferred staple food). Second, Asian emerging market and developing economies have been relatively more insulated from shocks to global oil prices, given their extensive use of fuel subsidies and administered price policies, and lower inflation in Asia’s advanced economies largely reflects a more muted increase in energy prices than in other advanced economies, particularly Europe, where gas prices have surged more than in other regions.

The sharp bout of volatility in global commodity markets after Russia’s invasion of Ukraine in February put additional pressure on Asia’s headline inflation in the first half of 2022. But the increase in headline inflation observed in 2021 and 2022 goes beyond food and energy price surges and reflects higher core inflation, which excludes volatile food and fuel categories (Figure 1.5).¹

Core inflation has increased in both advanced and emerging Asia—though less than in the rest of the world—and now exceeds central bank targets in most Asian economies (Figure 1.6). In Asian emerging market and developing economies, core inflation has increased from 2.3 percent in 2021 to 3.3 percent in July 2022. The increase reflects the pass-through of higher import prices— including the delayed transmission of the spike in global shipping costs that peaked in November 2021 (Carrière-Swallow and others 2022a)—to those of other goods and depreciating exchange rates, while still-wide output gaps have helped to contain pressure on core inflation.² In Asian advanced economies, core inflation has increased from 2.4 percent in 2021 to 3.5 percent in July 2022, reflecting both higher import prices and strong domestic demand in some countries (Australia, New Zealand), as well as a large role for unexplained factors. But in China and Japan—which together make up more than half of regional output—recent inflation has been much lower. In both, weak domestic demand and large output gaps have kept core inflation below central bank targets, with food and energy prices pushing headline inflation above the Bank of Japan’s 2 percent target (Figure 1.5).

Global and Regional Headwinds to Growth

The outlook for global economic activity, including notably for Asia and Pacific, reflects the impact of three important headwinds: global financial tightening, the war in Ukraine, and the sharp and uncharacteristic slowdown in China.

Global Financial Tightening

In response to surging inflation over the past year, the Federal Reserve and the European Central Bank have moved to tighten monetary policy, putting an end to a decade of quantitative easing. As a result of this shift in the policy stance, global financial conditions have tightened (October 2022 Global Financial Stability Report, Chapter 1), presenting a headwind for Asia’s outlook. The yield on benchmark 10-year US Treasuries has risen by 275 basis points, and the US dollar has strengthened markedly against most global currencies.

Following the rise in US Treasury yields, sovereign yields have also risen across Asia in 2022 (Figure 1.7). Exceptions are China and Japan, where yields remain near the minimums reached during the pandemic, as monetary accommodation— including continued use of yield curve control in Japan—has kept financial conditions loose. Among other Asian advanced economies, local currency yields have risen by about 225 basis points on average and are generally about 100 basis points above their 2015–19 average levels. For most Asian emerging market and developing economies, local currency yields have also risen in line with US Treasuries, but they generally remain close to or below their historical averages. Financial conditions have also remained favorable for emerging market and developing economy Asia’s issuers of US dollar–denominated sovereign and corporate bonds, where spreads have generally risen by less than 50 basis points, particularly for debt issued by large firms.

Financial tightening in the region has been more pronounced in riskier asset classes. Yields have risen further for frontier market economies such as Mongolia, Papua New Guinea, and Sri Lanka; Sri Lanka’s bonds trading at distressed levels after having defaulted in June for the first time in its history. Yields have also risen sharply on bonds issued by riskier firms in the region—including firms linked to the Chinese real estate sector such as property developers—and those with high leverage (Figure 1.8).

As the Federal Reserve tightens its policy rate, Asian exchange rates have broadly depreciated against the US dollar in 2022. The magnitude of each country’s exchange rate depreciation is correlated with the change they have faced in the commodity terms of trade and has also been affected by interest rate differentials in some cases (Figure 1.9). Given the global nature of the US dollar’s strength, Asia’s trading partners and competitors have tended to depreciate by a similar amount, limiting movements in nominal effective exchange rates (Figure 1.10). The largest depreciation among major currencies has been to the Japanese yen (-18 percent through end-August), which reflects the Bank of Japan breaking out of step with a highly synchronized global rate hike cycle in the absence of a persistent increase in domestic inflation.

There have also been significant portfolio outflows from Asia so far this year. At a regional level, the scale of the outflows from Asian emerging markets is comparable to previous episodes such as the 2013 taper tantrum and the 2020 onset of the COVID-19 pandemic (Figure 1.11). However, strong outflow pressures have been focused on a handful of economies (India, Taiwan Province of China), while the majority saw relatively moderate net outflows (Indonesia, Korea, Malaysia). Recent data point to outflows having stabilized and partially reversed in some cases (India), while others have experienced strong net inflows (Thailand)—that is, broad-based or sustained capital account pressures have not emerged yet across the region. In the countries facing the most volatility in net portfolio flows, these seem predominantly driven by equity instead of debt flows (India, Thailand). These flows and the differentiation of equity prices have responded to changes in growth expectations.

War in Ukraine

The second headwind affecting Asia’s outlook is the war in Ukraine, which has several implications for the region. The invasion provoked a generalized spike in global commodity prices that lasted for several months, causing shocks to Asia’s terms of trade and current accounts, and propelling inflation higher. The rise in crude oil, natural gas, coal, and agricultural commodity prices in the first half of 2022 has been a negative terms-of-trade shock for most of the region and placed strain on the external accounts of large net importers in ASEAN (Philippines, Thailand), South Asia (Bhutan, India, Maldives, Nepal, Sri Lanka), and the Pacific islands (Kiribati, Tonga, Vanuatu). With their large vulnerable populations and strong dependence on imported commodities, India, Nepal, and the Philippines have been hit hard by the spike in world food and fuel prices and shortages of fertilizer. But for the region’s net commodity exporters (Australia, Brunei Darussalam, Indonesia, Malaysia, New Zealand), it has provided a windfall from higher export revenue and bolstered private consumption.

The war has also led to a significant downward revision to the outlook for growth in the euro area for 2023—from 2.3 percent in the April 2022 World Economic Outlook to 0.5 percent—amid gas and energy shortages. This will reduce external demand for Asian exports.

Finally, trade uncertainty has risen since the invasion, and risks of geoeconomic fragmentation have become more salient (Chapter 3).

The Sharp and Uncharacteristic Slowdown in China

The third headwind facing the outlook for Asia originates within the region. The outlook for China’s growth in 2022 has been revised down substantially in successive editions of the World Economic Outlook, from 5.7 percent in October 2019 to 3.2 percent in October 2022 (Figure 1.12). This projected growth rate would be the second lowest since 1977. The government’s strict adherence to the zero-COVID policy has led to repeated lockdowns of major cities, which has had an important incidence on mobility and activity.

At the same time, the turmoil in China’s property sector has deepened, as property developers are facing exacerbated liquidity stress. With a growing number of property developers defaulting on their debt over the past year, the sector’s access to market financing has become increasingly challenging. Liquidity conditions are further impaired by tighter control over the sale of units before construction (previously an important source of working capital) and has diminished developers’ ability to execute new projects (Figure 1.13). Risks to the banking system from the real estate sector are rising because of substantial exposure.

Both factors—extended lockdowns and the worsening property market crisis—have spread to other parts of the economy. The slowdown in China has now become broad-based across sectors, with activity indicators underperforming market expectations, reflecting a sluggish recovery in consumption and investment amid very low consumer confidence and stress in the property sector. Internal weakness is compounded by slowing external demand.

China’s growth slowdown has important implications for regional supply chains because it is the main export market for many countries and an important source of imported inputs. Box 1.1 quantifies these spillovers for the region. It finds that impacts on growth are significant when the fall in Chinese activity is caused by shocks to supply and are more pronounced for countries that have stronger trade links, particularly Asia’s advanced economies. Shocks from slowdowns to Chinese consumption or to investment in the real estate sector provoke similar-size spillovers, and these are more front-loaded, with impacts on regional growth that peak within the first year.

The Outlook for Asia and Pacific

The headwinds are contributing to a marked slowdown in global economic activity, including in Asia and Pacific, but the region continues to perform better than the rest of the world (Table 1.1).

^{Table 1.1.}

Asia: Real GDP Growth

(Percent; year-over-year change)

Sources: IMF, World Economic Outlook database; and IMF staff estimates and projections. Note: Shaded columns denote IMF staff projections.

^¹Emerging market and developing economies excluding Pacific island countries and other small states.

^²India’s data are reported on a fiscal year basis. Its fiscal year starts from April 1 and ends on March 31.

^³Pacific island countries aggregate is calculated using simple average, all other aggregates are calculated using weighted average.

^⁴Tonga’s data are reported on a fiscal year basis. Its fiscal year starts from July 1 and ends June 30.

^⁵ASEAN comprises Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, the Philippines, and Singapore.

^⁶ASEAN-5 comprises Indonesia, Malaysia, Philippines, Singapore, and Thailand.

^{Table 1.1.}

Asia: Real GDP Growth

(Percent; year-over-year change)

		Actual and Latest Projections					Difference from July 2022 WEO Update			Difference from April 2022 WEO
		2020	2021	2022	2023	2024	2022	2023	2024	2022	2023	2024
Asia		-1.1	6.5	4.0	4.3	4.6	-0.2	-0.2	-0.2	-0.9	-0.8	-0.3
Advanced economies		-2.6	3.7	2.3	2.0	1.9	0.0	-0.2	-0.1	-0.4	-0.7	0.2
	Australia	-2.1	4.9	3.8	1.9	1.8	0.0	-0.3	-0.6	-0.4	-0.6	-0.5
	New Zealand	-2.1	5.6	2.3	1.9	2.0	-0.4	-0.7	0.1	-0.4	-0.7	0.1
	Japan	-4.6	1.7	1.7	1.6	1.3	0.0	-0.1	0.1	-0.7	-0.7	0.5
	Hong Kong SAR	-6.5	6.3	-0.8	3.9	3.0	-1.3	-0.6	0.1	-1.3	-1.0	0.1
	Korea	-0.7	4.1	2.6	2.0	2.7	0.3	-0.1	-0.1	0.1	-0.9	0.1
	Taiwan Province of China	3.4	6.6	3.3	2.8	2.1	0.1	-0.1	-0.1	0.1	-0.1	-0.1
	Singapore	-4.1	7.6	3.0	2.3	2.6	-0.7	-0.3	0.0	-1.0	-0.6	0.0
Emerging markets and developing economies¹		-0.6	7.2	4.4	4.9	5.2	-0.2	-0.2	-0.2	-1.0	-0.7	-0.4
	Bangladesh	3.4	6.9	7.2	6.0	6.5	0.8	-0.7	-0.7	0.8	-0.7	-0.7
	Brunei Darussalam	1.1	-1.6	1.2	3.3	3.2	-4.6	0.7	1.1	-4.6	0.7	1.1
	Cambodia	-3.1	3.0	5.1	6.2	6.6	0.0	0.0	0.0	0.0	0.3	0.5
	China	2.2	8.1	3.2	4.4	4.5	-0.1	-0.2	-0.2	-1.2	-0.7	-0.6
	India²	-6.6	8.7	6.8	6.1	6.8	-0.6	0.0	-0.4	-1.4	-0.8	-0.2
	Indonesia	-2.1	3.7	5.3	5.0	5.4	0.0	-0.2	0.0	-0.1	-1.0	-0.4
	Lao P.D.R.	-0.4	2.1	2.2	3.1	3.7	0.0	0.0	0.0	-1.0	-0.4	-0.1
	Malaysia	-5.5	3.1	5.4	4.4	4.9	0.3	-0.3	0.0	-0.2	-1.1	0.0
	Myanmar	3.2	-17.9	2.0	3.3	3.4	0.4	0.3	0.3	0.4	0.3	0.3
	Mongolia	-4.6	1.6	2.5	5.0	7.0	0.5	-2.0	0.5	0.5	-2.0	0.5
	Nepal	-2.4	4.2	4.2	5.0	5.1	0.1	-1.1	-0.6	0.1	-1.1	-0.6
	Philippines	-9.5	5.7	6.5	5.0	6.0	-0.2	0.0	-0.5	0.0	-1.3	-0.5
	Sri Lanka	-3.5	3.3	-8.7	-3.0	1.5	-11.3	-5.7	-1.3	-11.3	-5.7	-1.3
	Thailand	-6.2	1.5	2.8	3.7	3.6	0.0	-0.3	0.0	-0.5	-0.6	-0.2
	Vietnam	2.9	2.6	7.0	6.2	6.6	0.0	-0.5	-0.3	1.0	-1.0	-0.4
Pacific island countries³		-3.6	-1.9	0.8	4.2	3.7	-1.1	-0.7	0.3	-1.1	-0.7	0.3
	Fiji	-17.0	-5.1	12.5	6.9	5.7	5.7	-0.8	-0.7	5.7	-0.8	-0.7
	Kiribati	-0.5	1.5	1.0	2.4	2.8	-0.1	-0.4	0.2	-0.1	-0.4	0.2
	Marshall Islands	-1.6	1.7	1.5	3.2	2.0	-0.5	0.0	-0.6	-0.5	0.0	-0.6
	Micronesia	-1.8	-3.2	-0.6	2.9	2.8	-0.1	0.1	0.0	-0.1	0.1	0.0
	Nauru	0.7	1.6	0.9	2.0	2.4	0.0	0.0	0.0	0.0	0.0	0.0
	Palau	-8.9	-13.4	-2.8	12.3	9.1	-10.9	-6.5	6.2	-10.9	-6.5	6.2
	Papua New Guinea	-3.5	1.2	3.8	5.1	3.0	-1.0	0.8	0.0	-1.0	0.8	0.0
	Samoa	-3.1	-7.1	-5.0	4.0	4.2	-5.0	0.0	0.2	-5.0	0.0	0.2
	Solomon Islands	-3.4	-0.2	-4.5	2.6	2.4	-0.5	-0.6	-0.7	-0.5	-0.6	-0.7
	Tonga⁴	0.5	-2.7	-2.0	2.9	2.7	-0.4	-0.1	-0.3	-0.4	-0.1	-0.3
	Tuvalu	1.0	2.5	3.0	3.5	4.0	0.0	0.0	0.0	0.0	0.0	0.0
	Vanuatu	-5.4	0.4	1.7	3.1	3.5	-0.5	-0.3	0.0	-0.5	-0.3	0.0
ASEAN⁵		-3.2	3.1	5.0	4.7	5.1	-0.1	-0.2	-0.1	-0.1	-0.9	-0.3
ASEAN-5⁶		-4.4	3.8	4.9	4.5	4.9	0.0	-0.2	-0.1	-0.2	-0.9	-0.3
EMDEs excluding China and India		-2.4	3.2	5.0	4.8	5.3	-0.2	-0.4	-0.2	-0.2	-1.0	-0.3

Sources: IMF, World Economic Outlook database; and IMF staff estimates and projections. Note: Shaded columns denote IMF staff projections.

^¹Emerging market and developing economies excluding Pacific island countries and other small states.

^²India’s data are reported on a fiscal year basis. Its fiscal year starts from April 1 and ends on March 31.

^³Pacific island countries aggregate is calculated using simple average, all other aggregates are calculated using weighted average.

^⁴Tonga’s data are reported on a fiscal year basis. Its fiscal year starts from July 1 and ends June 30.

^⁵ASEAN comprises Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, the Philippines, and Singapore.

^⁶ASEAN-5 comprises Indonesia, Malaysia, Philippines, Singapore, and Thailand.

^{Table 1.1.}

Asia: Real GDP Growth

(Percent; year-over-year change)

		Actual and Latest Projections					Difference from July 2022 WEO Update			Difference from April 2022 WEO
		2020	2021	2022	2023	2024	2022	2023	2024	2022	2023	2024
Asia		-1.1	6.5	4.0	4.3	4.6	-0.2	-0.2	-0.2	-0.9	-0.8	-0.3
Advanced economies		-2.6	3.7	2.3	2.0	1.9	0.0	-0.2	-0.1	-0.4	-0.7	0.2
	Australia	-2.1	4.9	3.8	1.9	1.8	0.0	-0.3	-0.6	-0.4	-0.6	-0.5
	New Zealand	-2.1	5.6	2.3	1.9	2.0	-0.4	-0.7	0.1	-0.4	-0.7	0.1
	Japan	-4.6	1.7	1.7	1.6	1.3	0.0	-0.1	0.1	-0.7	-0.7	0.5
	Hong Kong SAR	-6.5	6.3	-0.8	3.9	3.0	-1.3	-0.6	0.1	-1.3	-1.0	0.1
	Korea	-0.7	4.1	2.6	2.0	2.7	0.3	-0.1	-0.1	0.1	-0.9	0.1
	Taiwan Province of China	3.4	6.6	3.3	2.8	2.1	0.1	-0.1	-0.1	0.1	-0.1	-0.1
	Singapore	-4.1	7.6	3.0	2.3	2.6	-0.7	-0.3	0.0	-1.0	-0.6	0.0
Emerging markets and developing economies¹		-0.6	7.2	4.4	4.9	5.2	-0.2	-0.2	-0.2	-1.0	-0.7	-0.4
	Bangladesh	3.4	6.9	7.2	6.0	6.5	0.8	-0.7	-0.7	0.8	-0.7	-0.7
	Brunei Darussalam	1.1	-1.6	1.2	3.3	3.2	-4.6	0.7	1.1	-4.6	0.7	1.1
	Cambodia	-3.1	3.0	5.1	6.2	6.6	0.0	0.0	0.0	0.0	0.3	0.5
	China	2.2	8.1	3.2	4.4	4.5	-0.1	-0.2	-0.2	-1.2	-0.7	-0.6
	India²	-6.6	8.7	6.8	6.1	6.8	-0.6	0.0	-0.4	-1.4	-0.8	-0.2
	Indonesia	-2.1	3.7	5.3	5.0	5.4	0.0	-0.2	0.0	-0.1	-1.0	-0.4
	Lao P.D.R.	-0.4	2.1	2.2	3.1	3.7	0.0	0.0	0.0	-1.0	-0.4	-0.1
	Malaysia	-5.5	3.1	5.4	4.4	4.9	0.3	-0.3	0.0	-0.2	-1.1	0.0
	Myanmar	3.2	-17.9	2.0	3.3	3.4	0.4	0.3	0.3	0.4	0.3	0.3
	Mongolia	-4.6	1.6	2.5	5.0	7.0	0.5	-2.0	0.5	0.5	-2.0	0.5
	Nepal	-2.4	4.2	4.2	5.0	5.1	0.1	-1.1	-0.6	0.1	-1.1	-0.6
	Philippines	-9.5	5.7	6.5	5.0	6.0	-0.2	0.0	-0.5	0.0	-1.3	-0.5
	Sri Lanka	-3.5	3.3	-8.7	-3.0	1.5	-11.3	-5.7	-1.3	-11.3	-5.7	-1.3
	Thailand	-6.2	1.5	2.8	3.7	3.6	0.0	-0.3	0.0	-0.5	-0.6	-0.2
	Vietnam	2.9	2.6	7.0	6.2	6.6	0.0	-0.5	-0.3	1.0	-1.0	-0.4
Pacific island countries³		-3.6	-1.9	0.8	4.2	3.7	-1.1	-0.7	0.3	-1.1	-0.7	0.3
	Fiji	-17.0	-5.1	12.5	6.9	5.7	5.7	-0.8	-0.7	5.7	-0.8	-0.7
	Kiribati	-0.5	1.5	1.0	2.4	2.8	-0.1	-0.4	0.2	-0.1	-0.4	0.2
	Marshall Islands	-1.6	1.7	1.5	3.2	2.0	-0.5	0.0	-0.6	-0.5	0.0	-0.6
	Micronesia	-1.8	-3.2	-0.6	2.9	2.8	-0.1	0.1	0.0	-0.1	0.1	0.0
	Nauru	0.7	1.6	0.9	2.0	2.4	0.0	0.0	0.0	0.0	0.0	0.0
	Palau	-8.9	-13.4	-2.8	12.3	9.1	-10.9	-6.5	6.2	-10.9	-6.5	6.2
	Papua New Guinea	-3.5	1.2	3.8	5.1	3.0	-1.0	0.8	0.0	-1.0	0.8	0.0
	Samoa	-3.1	-7.1	-5.0	4.0	4.2	-5.0	0.0	0.2	-5.0	0.0	0.2
	Solomon Islands	-3.4	-0.2	-4.5	2.6	2.4	-0.5	-0.6	-0.7	-0.5	-0.6	-0.7
	Tonga⁴	0.5	-2.7	-2.0	2.9	2.7	-0.4	-0.1	-0.3	-0.4	-0.1	-0.3
	Tuvalu	1.0	2.5	3.0	3.5	4.0	0.0	0.0	0.0	0.0	0.0	0.0
	Vanuatu	-5.4	0.4	1.7	3.1	3.5	-0.5	-0.3	0.0	-0.5	-0.3	0.0
ASEAN⁵		-3.2	3.1	5.0	4.7	5.1	-0.1	-0.2	-0.1	-0.1	-0.9	-0.3
ASEAN-5⁶		-4.4	3.8	4.9	4.5	4.9	0.0	-0.2	-0.1	-0.2	-0.9	-0.3
EMDEs excluding China and India		-2.4	3.2	5.0	4.8	5.3	-0.2	-0.4	-0.2	-0.2	-1.0	-0.3

Sources: IMF, World Economic Outlook database; and IMF staff estimates and projections. Note: Shaded columns denote IMF staff projections.

^¹Emerging market and developing economies excluding Pacific island countries and other small states.

^²India’s data are reported on a fiscal year basis. Its fiscal year starts from April 1 and ends on March 31.

^³Pacific island countries aggregate is calculated using simple average, all other aggregates are calculated using weighted average.

^⁴Tonga’s data are reported on a fiscal year basis. Its fiscal year starts from July 1 and ends June 30.

^⁵ASEAN comprises Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, the Philippines, and Singapore.

^⁶ASEAN-5 comprises Indonesia, Malaysia, Philippines, Singapore, and Thailand.

After a very strong recovery of 5.7 percent in 2021, growth in the United States is expected to grind to a stall pace of 1.6 percent in 2022 and 1.0 percent in 2023, and a growing share of the world’s economies are expected to be in a growth slowdown or outright contraction. Altogether, the global economy is expected to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023—its slowest pace in more than 20 years, excluding the global financial crisis and the COVID-19 pandemic.

Reflecting this, forecasts for GDP growth in Asia and Pacific, compared with projections in the April World Economic Outlook, are being downgraded by 0.9 percentage point in 2022— reflecting an envisioned slowdown in the second half—and by 0.8 percentage point in 2023.

However, there is considerable heterogeneity across Asia. Growth in the region’s advanced economies remains above potential at 2.3 percent in 2022 and is expected to fall to 2.0 percent in 2023 and to 1.9 percent in 2024. By contrast, Asia’s emerging market and developing economies will see a dip in growth to 4.4 percent in 2022— largely reflecting the slowdown in China—and will rise to 4.9 percent in 2023 and 5.2 percent in 2024.

China, Japan, and South Asia

After posting near-zero growth in the second quarter, growth in China will recover modestly in the second half of the year to reach 3.2 percent in 2022 and is expected to rise to 4.4 percent in 2023 as COVID-19 restrictions are gradually loosened and a moderate pickup of public investment is deployed. In Japan, growth is expected to remain at 1.7 percent in 2022 before slowing to 1.6 percent in 2023, weighed down by weak external demand. Consumption and private investment are expected to continue to recover, partly reflecting pent-up demand.

The strong recovery in South Asia is expected to take a breather, with India’s economy expanding at 6.8 percent in 2022, revised down by 1.4 percentage points since the April 2022 World Economic Outlook because of a weaker-than-expected recovery in the second quarter and subdued external demand. A further slowdown of India’s growth to 6.1 percent is expected in 2023 as external demand and a tightening in monetary and financial conditions weigh on growth. The war in Ukraine has dampened Bangladesh’s robust recovery from the pandemic and put pressure on the balance of payments. The authorities have preemptively requested an IMF-supported program that will bolster the external position, and access to the IMF’s new Resilience and Sustainability Trust to meet their large climate financing need, both of which will strengthen their ability to deal with future shocks. The economic crisis in Sri Lanka is expected to lead to a contraction in growth of 8.7 percent in 2022, before recovering gradually, contingent on its implementation of reforms and it reaching agreement with creditors on a debt restructuring consistent with the parameters of an IMF-supported Extended Fund Facility program. The import controls and rationing of essential goods and services, including fuel, is placing a heavy burden on the vulnerable, with further risks of social unrest. Maldives is recovering from the pandemic, with growth expected to reach 8.7 percent in 2022 supported by a strong resumption in tourism before moderating to 6.1 percent in 2023 reflecting global trends. However, vulnerabilities remain high from elevated public debt and declining international reserves, reflecting fiscal spending pressures and elevated food and fuel prices.

Association of Southeast Asian Nations

The recovery in the ASEAN is expected to be strong in 2022, because of robust consumption, services, and exports in the first half of the year, supported by high vaccination rates, border reopenings, and the gradual removal of pandemic restrictions. Growth is projected at slightly more than 5 percent in Cambodia, Indonesia, and Malaysia, and 6.5 percent in the Philippines. Vietnam is benefiting additionally from trade diversion from China and is expected to grow at 7 percent (Dabla-Norris, Díez, and Magistretti 2022). After a precipitous fall in output of almost 18 percent in 2021 amid a political and humanitarian crisis, Myanmar is expected to begin a moderate recovery, with growth of 2 percent in 2022 and rising to 3.3 percent in 2023. The outlook for Lao P.D.R. remains challenging, given elevated debt vulnerabilities and low reserves, resulting in foreign exchange shortages that hurt the poor and hamper the recovery.

The growth momentum is expected to moderate somewhat in 2023 for Indonesia, Malaysia, the Philippines, Singapore, and Vietnam. This reflects weaker external demand, supply chain disruptions, a pivot to macro policy normalization to contain price pressures and manage risks, and tighter financial conditions. Cambodia and Thailand will instead expand faster as the recovery in foreign tourism is now expected to be more vigorous.

Pacific Island Countries

Among the Pacific island countries, growth is expected to rise from 0.8 percent in 2022 to 4.2 percent in 2023.³ Driving this rebound are tourism-based economies benefiting from a reopening of borders and easing of travel restrictions. However, economic recovery has proceeded slower than anticipated at the time of the April 2022 World Economic Outlook, with higher global fuel and food prices impacting the import-dependent region through higher inflation and weaker current account balances.

An Uncertain Inflation Outlook

The outlook for inflation in the region also reflects another substantial upward revision with respect to previous World Economic Outlooks (Figure 1.14), though the size of the expected rise in inflation is more modest than has been seen in other regions. Inflation in Asia is expected to peak at an average of 4.2 percent in the third quarter of 2022—the same timing as other regions who saw earlier and larger price spikes. Inflation is expected to decelerate in 2023, reflecting tighter monetary policy and a reversal in the external drivers that led to the rise in 2022. Lower prices for crude oil and food commodities on global markets, and rapidly falling shipping costs should contribute to lower import price inflation in the second half of 2022 and 2023. However, the continued strength of the recovery and lower potential output from pandemic scarring (see below) will continue to close output gaps, and strong domestic demand could put pressure on core inflation.

Prospects for the Medium Term—Greater Scarring from the Pandemic

The downgrade to the pace of Asia’s postpandemic recovery means that IMF staff forecasts now expect Asia to suffer from more severe scarring than had been forecast at the time of the October 2021 Regional Economic Outlook: Asia and Pacific, with long-term output levels expected to remain substantially below those projected before the pandemic. The region’s level of output is now expected to be more than 2 percent lower in 2025 than was forecast a year ago, when emerging market and developing economy Asia was already expected to experience the most scarring in the world (Figure 1.15). Notably, the degree of scarring in China is now seen to be comparable to emerging market and developing economies outside Asia, whereas it had previously been seen as relatively more resilient in earlier forecasts.

The severe scarring expected in Asia partly reflects the region’s high debt levels, which hamper the recovery in investment. The analysis in Chapter 2 concludes that lower rates of capital accumulation account for about one-quarter of Asia’s expected medium-term output losses. Another one-quarter of the loss reflects lower employment, as population growth has slowed in advanced economies because of stalled migration, and labor force participation is expected to remain below prepandemic levels in emerging market and developing economies. In the longer term, these losses could build further as lower fertility affects population growth and the impact of school closures is felt in the human capital stock.

Risks to the Outlook Are to the Downside

The key risks to the outlook involve the intensification of the headwinds. In the short term, an intensification of the war in Ukraine could drive up commodity prices and make the slowdown in demand from the United States and European Union deeper and more persistent than expected. Likewise, the materialization of risks from China’s property sector could deepen its slowdown and stretch it into 2023. Even though financial conditions have tightened in the baseline, they remain favorable, and there are risks of further repricing, particularly if the policy decisions of the Federal Reserve and the European Central Bank deviate from current market expectations, or if risk appetite worsens.

To quantify the impact from the joint materialization of these risks, a downside scenario was constructed using a version of the IMF’s Flexible System of Global Models that is commonly used for scenario analysis of the Group of Twenty economies, but which has been tailored to provide additional granularity for Asia (Andrle and others 2015). The model includes rich crosscountry trade and financial links, and incorporates the typical fiscal and monetary policy responses in each country. The scenario includes three related layers of shocks:

Deeper slowdown in China. The scenario assumes that a negative shock to investment reduces China’s growth by 1 percentage point in 2023, producing a second consecutive year of growth below 3½ percent.
Global slowdown. The global slowdown is assumed to become more pronounced, with weaker consumption and investment reducing growth in the United States and euro area by 1 percentage point in 2023. While this shock is smaller than one standard deviation of each country’s growth data, it takes US and euro area growth essentially to zero in 2023 and reduces global growth to below 2 percent, which most observers denote a global recession.
Tighter financial conditions. The scenario assumes that the US term premium returns to its historical average (+200 basis points) and that this leads to higher term premiums in Asia, according to historical correlations. Such a tightening could reflect unexpected market reactions following the reversion of 10 years of quantitative easing by major central banks, which coincided with very favorable pricing of duration and risk assets. Sovereign and corporate spreads in Asia (excluding China and Japan) also rise by an additional 150 basis points as risk assets are repriced.

The simulated impact of this scenario on the outlook for Asian growth is illustrated in Figure 1.16. At a regional level, growth is lower in 2023 by about 1 percentage point, falling to a level of about 3½ percent. While the shocks are calibrated to be transitory, they have a persistent impact on regional growth that decays through 2025 and thus leads to a permanent fall in the level of output that worsens scarring, compared with the baseline.

The fall in growth is more pronounced and more persistent in the region’s emerging markets, particularly in the ASEAN economies, where the impact of lower external demand has a larger incidence than in the advanced economies. The shock’s impact through financial conditions is large and more uniform, reducing growth in most countries by a bit less than 1 percentage point. But even in this severe global scenario, all Asian economies maintain positive growth in 2023.

Beyond the Conjunctural Downside Risks

In the medium to long term, risks stem from geoeconomic fragmentation of the global economy into regional blocks. This is expected to have substantial implications for global value chains and the efficient allocation of capital, as cross-border investment and trade patterns are increasingly disrupted. As a region that has benefited greatly from globalization and trade openness over the past 30 years, Asia and Pacific has a lot to lose in such a scenario (Chapter 3). To avoid these losses and support long-term growth, the region must continue to prioritize maintaining open and stable trading relationships.

Recent natural disasters such as extreme heatwaves and droughts in China and South Asia underscore the human and economic impacts of climate change. These costs are expected to build over time without appropriate policies to support the transition to carbon neutrality (October 2022 World Economic Outlook, Chapter 3).

Policies

Asia’s authorities are setting policy under heightened global uncertainty and face difficult trade-offs among supporting growth, lowering inflation, and managing financial stability risks. Most Asian central banks have continued to use multiple tools to respond to global shocks, considering the trade-offs across policy objectives that occur because of their economies’ characteristics (Finger and López Murphy 2019, Adrian and others 2022).

Withdrawal of policy support in the postpandemic phase is proceeding across most of the region (Figure 1.17, shaded quadrant), but countries are placing different burdens of adjustment on monetary and fiscal policies. Approaches reflect substantial heterogeneity in the inflation and growth outlooks across the region, and the degree of space available for each instrument within the limits of policy frameworks.

Monetary Policy

For economies where output gaps remain large and core inflation was slower to surpass central bank targets or long-term averages (Figure 1.18)— including Indonesia, Malaysia, Thailand, and Vietnam—monetary policy has started tightening more recently (Figure 1.17, green oval). And in the case of China and Japan, rates have remained accommodative. But for the Asian economies where output gaps are closing or have already done so, and where inflation has risen well above central bank targets (including most advanced economies) monetary policy rates were hiked earlier (purple oval). Central banks in Korea and New Zealand were the first to start tightening monetary policy in the region, leading what has since become an increasingly synchronized global hiking cycle, and they have broadly matched the Federal Reserve’s pace. Australia initiated its hiking cycle in the second quarter of 2022 and has since implemented a steep rate path to curb excess demand amid accelerating and increasingly broad-based inflation. Among the emerging economies in this group, the Philippines has hiked rates by 225 basis points and India by 190 basis points since June 2021.

In economies that have fixed exchange rate regimes, such as Hong Kong Special Administrative Region, policy has been appropriately tightened in lockstep with the Federal Reserve, and should continue doing so as dollar rates continue to rise, with fiscal policy calibrated to supporting a balanced recovery. Singapore, with an exchange-rate-based monetary policy framework, was the first to initiate monetary policy normalization in the ASEAN and has tightened four times so far in 2022 in response to rising inflation because of domestic and external pressures.

Markets expect the size of the hiking cycle in Asia to be relatively modest. For Asia’s emerging markets, expected hikes are much less than what has been observed in other regions, such as Latin America and eastern Europe, where central banks have or are expected to hike rates between 500 and 1,000 basis points. An implication is that currently negative real interest rates in Asia are expected to rise only gradually to positive territory but not to become contractionary.

The modest degree of monetary tightening needed to tame inflation is predicated on a few important assumptions. First is that the contribution of global oil and food prices will turn negative in late 2022 as commodity markets and supply chains normalize. There are early signs that this is taking place, with crude oil and many agricultural commodities trading below the prices that prevailed prior to the invasion of Ukraine. Second is the limited magnitude of second-round effects—that is, the pass-through of volatile prices to wages and core inflation—which tends to be the case when inflation expectations remain well anchored to central bank targets.

Could second-round effects materialize and lead to entrenched high inflation in Asia? Available indicators suggest that inflation expectations in the region are well anchored to central bank targets. While professional forecasters expect inflation to remain well above central bank targets in most Asian countries at a one-year horizon, they expect inflation to return to central bank targets by 2024 (Figure 1.19). But the region has important data gaps in the collection of surveys about the inflation expectations of households and firms, which makes it difficult to make conclusive assessments about anchoring in some countries. Given the importance of monitoring inflation expectations for guiding policy, central banks should urgently address these data gaps (Box 1.2). In addition, Phillips curves estimated on historical data reveal that core inflation has generally been persistent in Asian emerging market and developing economies, though this persistence does not seem to have increased during the pandemic as it has in other regions (Figure 1.20). Estimates also show that core inflation in Asia tends to respond strongly to global shocks to volatile prices such as those associated with shipping, food, and oil (Figure 1.21, based on Carrière-Swallow and others 2022b). Thus there is a risk that these recent shocks could trigger a more pronounced and long-lasting rise in core inflation than is anticipated in the baseline. In countries where these risks are more likely to materialize, a prudent policy may involve more monetary tightening than is currently anticipated by markets.

The impact of a scenario of rising medium-term inflation expectations and core inflation was simulated using the same regional variant of Andrle and others (2015) described previously (Figure 1.22).⁴ In such a scenario, Asia’s central banks would be expected to implement a more aggressive monetary policy response by hiking policy rates further than is currently envisioned to revert the rise in inflation. The result would be a slower recovery for Asia, with growth falling substantially below the baseline in 2023–25.

The impacts of greater second-round effects and de-anchoring are larger in emerging market Asia (excluding China), where a larger increase in rates is required, provoking a more severe slowdown.

Is There a Role for Intervention?

Exchange rates have also adjusted in response to financial and real shocks, such as the initial terms-of-trade decline after Russia’s invasion of Ukraine. Several Asian emerging market and developing economies have seen a decumulation of their international reserves—between 3 and 10 percent of their holdings in the first half of 2022 in India, Indonesia, the Philippines, and Thailand—especially during periods of intense external financial shocks. Given adequate buffers, this is broadly in line with the Integrated Policy Framework’s recommendations (Adrian and others 2020; Basu and others 2020). Specific responses depend on country characteristics—including the presence of financial frictions—and the nature of shocks affecting the economy, with detailed analysis of policy combinations under alternative scenarios being explored in recent Article IV consultations (Indonesia, Thailand).

Responding to a downside scenario in which inflation expectations show signs of de-anchoring after a shock to financial conditions could involve the use of policy rate hikes in combination with intervention in foreign exchange markets to mitigate overshooting and pass-through to inflation. The judicious use of foreign exchange intervention should allow for macroeconomic adjustment to take place and could temporarily ease the burden on monetary policy, allowing it to stay focused on stabilizing domestic demand. This tool could be particularly useful among Asia’s shallower foreign exchange markets where interventions are potentially more effective and can help avoid a de-anchoring of inflation expectations (for instance, Philippines), and in those economies where currency mismatches on bank or corporate balance sheets give rise to risks from exchange rate volatility (for instance, Indonesia). Foreign exchange intervention should be temporary to avoid side effects from sustained use, which may include increased risk-taking in the private sector (Tong and Wei 2021).

The Stance of Fiscal Policy

Most economies in Asia and Pacific—including ASEAN-5, Australia, and India—are consolidating fiscal policy alongside monetary policy following substantial support during the pandemic. However, there has also been heterogeneity in the pace of fiscal policy adjustment (Figure 1.23). Some economies—including Australia and Indonesia—have implemented large fiscal adjustments from 2020 to 2022 as they withdrew pandemic support.

Several countries deployed fiscal support packages in 2022 in the face of adverse shocks. China and Hong Kong Special Administrative Region temporarily reversed their consolidation paths in 2022 as large fiscal support packages were needed to respond to outbreaks under the zero-COVID policy. China has announced fiscal easing in 2022 in response to a marked slowdown and a moderate pickup in public investment in 2023 that will support the expected increase in growth to 4.4 percent. The country enjoys some policy space, such that monetary and fiscal accommodation can be maintained, and there is scope for more vigorous support targeted to vulnerable households, which could boost consumption and provide substantial regional benefits. In Japan, the authorities announced modest fiscal support packages to mitigate the impact of external shocks on the local population, and continued accommodation remains appropriate, preferably through more targeted measures. New Zealand has also announced fiscal support packages to respond to new infection waves and other headwinds, while implementing relatively aggressive monetary tightening.

The spikes in global food and energy markets during the first half of 2022 contributed to inflation and threatened to abruptly raise the cost of living across the region, with particularly strong implications for the real incomes of lower-income households that spend more of their disposable income on these commodities (Box 1.3). In response to these developments, many countries across Asia deployed fiscal and quasi-fiscal policy support, including subsidies, administered prices, and direct transfers. For example, Indonesia kept administered fuel prices frozen throughout 2021 and the first half of 2022, which moderated the rise in inflation, but then raised them by 30 percent in September 2022 to contain mounting subsidies as the authorities prioritized their objective of restoring the fiscal deficit ceiling in 2023.

Given high debt levels, it will be important for these measures to be targeted and temporary to preserve scarce fiscal resources for other important priorities. In Asia’s low-income countries, fully covering the income loss suffered by vulnerable households is likely to pose too large a fiscal cost, given very limited space, so support should be budget neutral. Importantly, the prolonged use of fuel and energy subsidies mutes the price signals needed to accelerate the green transition and meet the region’s commitments to reduce carbon emissions.

In the medium term, an appropriate objective for fiscal policy should be the stabilization of public debt, which has risen substantially in Asia over the past 15 years—particularly in the advanced economies and China—and rose further during the pandemic (Figure 1.24). This is crucial to safeguard adequate buffers that can be deployed in the event of future shocks. With both China and Japan having experienced large increases in public debt since 2007 and facing demographic headwinds, articulating commitments to fiscal frameworks that anchor debt dynamics in the medium term remains crucial. Even in countries where debt remains relatively low (Korea), demographics and health care for aging populations will significantly raise public debt, requiring a long-term strategy to ensure debt sustainability.

Across Asia, public debt dynamics have deteriorated since the pandemic’s onset. Interest rates on sovereign bonds have risen substantially from their pandemic trough and over time will raise the cost of servicing debt. Medium-term output levels and growth rates have been revised down, and debt levels are up.⁵ These factors have raised the primary balance that is needed to stabilize public debt, thus eroding the fiscal space that is available for non-interest expenditures. Of 17 Asian countries with access to Poverty Reduction and Growth Trust resources, 9 are now assessed as being at high risk of debt distress, and Sri Lanka’s sovereign bonds are trading at distressed levels.

Overcoming long-term policy challenges will create new spending pressures, such that preserving fiscal buffers requires mobilizing additional resources. For example, India would need to spend 6.2 percent of GDP each year to achieve the Sustainable Development Goals in 2030, and these resource requirements are compounded by less favorable debt dynamics.⁶ Tax revenue ratios generally remain low in Asia— particularly in ASEAN (Indonesia, Philippines) and South Asia—leaving scope to raise revenues through rationalizing income tax holidays in line with the global agreement on minimum corporate taxation rates (Gaspar, Hebous, and Mauro 2022) and through digitalization (Dabla-Norris and others 2021). Prompt creditor cooperation is essential for countries in need of sovereign debt restructuring, such as Sri Lanka.

Rising Corporate Vulnerabilities and the Role for Financial Policies

Nonfinancial corporate debt has also increased across Asia since 2007, and it rose further during the pandemic in the advanced economies and in China. The pandemic also saw a sharp rise in the share of this debt that is issued by vulnerable firms with low interest coverage ratios (Figure 1.25). Additional risks stem from balance sheet mismatches that leave firm balance sheets exposed in the context of strong exchange rate depreciation. Where leverage is high, firms will face a challenging period as interest rates rise and earnings become sluggish amid a global slowdown in 2023. Financial supervisors in these economies should ensure that loan classification and provisioning rules precisely reflect credit risk and losses, and that banks have adequate risk-management capacity and capital buffers to mitigate financial stability risks.

Financial policies—particularly macroprudential measures that safeguard financial stability—should strike a balance between containing the buildup of vulnerabilities and avoiding procyclicality. In both advanced and emerging Asia, credit-to-GDP gaps became strongly positive during the pandemic—reflecting the sharp increase in private debt and fall in output—and had reverted to a smaller positive position by the end of 2021 as monetary and fiscal policy support was withdrawn and output recovered (Figure 1.26). Broadly speaking, the financial cycle in Asia calls for a gradual withdrawal of the exceptional loosening of financial policies that were deployed during the pandemic.

Last year, policymakers in Asia’s advanced economies such as Australia, Korea, and New Zealand tightened macroprudential tools to address a marked increase in risks from surging real estate prices (Deb and others, forthcoming). As interest rates rise, these markets have shown signs of cooling, reducing price misalignments. If these trends continue, there may be space to loosen these measures as systemic risk moderates, since risks in the banking system remain contained.

In China, authorities should take prompt actions to arrest the deepening crisis in the real estate sector. Authorities should facilitate the efficient and orderly restructuring of distressed property developers; ensure the completion of unfinished, presold housing to boost confidence; and prepare to deal with systemic spillovers to the financial system. In the rest of emerging Asia, the global stress test has found that the domestic banking sector may have limited capital buffers under certain adverse scenarios (October 2022 Global Financial Stability Report, Chapter 1). This partly reflects rising exposures to sovereign debt on bank balance sheets, in a context of deteriorating public debt dynamics.

Cryptoization and the Need for Greater Regulation

Asia is at the forefront of global crypto asset adoption. The region, led by Japan and Korea, now accounts for a large share of global crypto-asset volumes and is holding a similar value of crypto assets as the Americas and Europe (Figure 1.27). Since the pandemic, the correlation between the performance of the region’s equity markets and crypto assets such as Bitcoin and Ethereum has increased, suggesting growing interconnectedness across these markets (Choueiri, Gulde-Wolf, and Iyer 2022). As the IMF has warned previously, while widespread adoption of crypto assets can present opportunities for consumers, it may introduce risks to domestic monetary policy as they substitute away from local currency, and may facilitate the circumvention of national laws and regulations (IMF 2020). The growing popularity of US dollar–denominated stablecoins could present a backdoor form of dollarization in Asia if left unchecked and publicly supported digital assets (such as central bank digital currencies) are not facilitated.

These and other concerns have recently led authorities in Asia to implement a range of policy responses. Singapore introduced a strong regulatory regime to manage risks in the sector, while China and Indonesia issued outright bans on crypto currency transactions by regulated financial firms. India introduced a 30 percent tax on income derived from crypto trading and is currently developing a regulatory framework, like many countries in the region. Regulation of crypto assets should adopt a comprehensive, consistent, and coordinated approach (Adrian, He, and Narain 2021). An important aspect of the policy response should include investments to modernize digital payment systems—including cross-border integration—and the eventual issuance of central bank digital currencies, which could offer consumers many of the benefits of crypto without the risks.

Boosting the Region’s Productive Potential

Structural policies should seek to boost long-term growth, particularly in emerging market and developing economies where scarring from the pandemic is expected to be most significant (Chapter 2). Digitalization can significantly mitigate scarring during downturns—for instance by facilitating virtual education, remote work, and contactless sales—while also improving productivity and innovation during expansions (Dabla-Norris and others 2021). The lower labor force participation rate observed since the pandemic could also be addressed through labor market reforms to reallocate workers across sectors.

Education reforms will be especially important to address the long-term effect of school closures, which were substantial in Asia and Pacific during the pandemic. These closures are expected to have significant long-lasting impacts on human capital (Chapter 2). This is expected to be particularly severe in the region’s low-income countries, where students lost an average of 382 days of classroom instruction during 2020–21, and where poor internet connectivity precluded effective remote education.⁷ For economies with large gaps in internet penetration rates, investments in digital infrastructure could protect the economy in the event of a future pandemic.

A difficult set of short-term headwinds should not detract from efforts to meet Asia’s climate change mitigation commitments under the Paris Agreement. Implementation gaps must be closed to meet nationally defined contributions, particularly among the region’s largest emitting countries. It is crucial that foreign green financing is made available to finance these efforts in the region’s emerging market and developing economies. In the Pacific islands and other small island states (Maldives), policy should be focused on adaptation, and large infrastructure investment needs will require much greater international support.

^{Box 1.1.}

Growth Spillovers to the Rest of the World from a Slowdown in China

A moderation in Chinese growth poses headwinds for the region. China plays a central role in regional trade, which has grown significantly in the past decade. Chinese supply shocks tend to have significant spillovers that are more pronounced for countries with higher export exposure to China and thus are larger for the region.

Growth in China is projected to moderate from 8.1 percent in 2021 to 3.2 percent in 2022 and remain below 5 percent for the following five years, and this is expected to generate spillovers globally, especially in Asia. Intraregional trade has grown significantly in the past decade to more than half of total Asian trade. Chinese demand absorbs one-quarter of the region’s exports, with 20 percent absorbed by final demand and 5 percent re-exported.¹ Similarly, the recent slowdown in the property sector may lead to regional spillovers, as value added absorbed by China’s final demand for real estate averages about 0.6 percent of GDP.

Spillovers from Chinese growth are estimated using a panel local projections model (Jordà 2005) with data covering 50 advanced and emerging economies.² The analysis follows recent studies, which have used a broad range of indicators to proxy domestic activity (Barcelona and others 2022; Fernald, Hsu, and Spiegel 2021) in using the Federal Reserve Bank of San Francisco’s China Cyclical Activity Tracker (developed by Fernald, Hsu, and Spiegel 2021) to measure overall Chinese activity.³ The results suggest that a one standard deviation (equivalent to 2.3 percentage points of GDP) decline in Chinese growth results in only moderate short-term effects but medium-term effects of about a 0.7 percent reduction in GDP in other countries (Box Figure 1.1.1). These results are in line with the literature, in which spillovers from a 2.3 percentage point decline in Chinese growth have been estimated to be in the range of 0.3 to 0.9 percentage point.⁴

The size and persistence of spillovers depends on the type of shock driving activity. Recent shocks to Chinese activity, such as COVID-19 lockdowns and supply chain issues, affect supply and may have different spillovers from fluctuations in overall activity. We decompose the China Cyclical Activity Tracker into demand and supply components with a structural vector autoregression model for China that includes consumer prices and the China Cyclical Activity Tracker, where supply movements are identified by opposite movements in prices and activity, and demand via those variables moving in the same direction. Repeating the global spillovers analysis but using the supply component of activity rather than overall activity suggests larger effects—about 1.3 percent in the medium term (Box Figure 1.1.1)—in part because of the larger and more persistent effect of supply shocks relative to demand shocks on Chinese activity.

Consumption and property sector spillovers. Reduced consumption spending is a significant part of the deceleration in Chinese growth between 2021 and 2022, related to its zero-COVID policy. In parallel, financial stress in the property sector has broadened beyond a few large developers and sales have been sharply weaker. The analysis uses the residual in a regression of consumption and property value added on their own past values as a measure of the shock to Chinese activity and repeat the cross-country panel regressions to estimate growth spillovers. Spillovers to the rest of the world from a slowdown in consumption and the property sector are similar to the estimates for a supply shock, but the effects are more front-loaded and, for the case of consumption, less persistent.⁵

Trade exposures and regional spillovers. Trade links are a key channel of the magnitude of growth spillovers (Furceri, Jalles, and Zdzienicka 2017). Exports to China are an important source of demand for the region, while imports from China are an important source of inputs for the region’s exporters. The additional drag on GDP from trade exposures to China is examined by adding an interaction term between the supply shock and imports or export exposures to China (measured as exports to, and imports from, China as a share of a country’s GDP). A country moving from the 25th percentile to the 75th percentile of trade exposure (measured as exports to China as a share of the country’s GDP) experiences an additional 0.35 percentage point reduction in GDP from a China supply shock (Box Figure 1.1.2). In general, emerging markets face greater exposure to a slowdown via this link, with an additional drag on GDP of 0.41 percentage point via the export channel and 0.46 percentage point for imports. However, Asia faces a larger hit from export exposures than from import exposures, and contrary to the general result, in Asia advanced economies are more heavily exposed than emerging economies, due to relatively higher imports from, and exports to, China.

This box was prepared by Chris Redl. ¹ Data are 2018 figures from the Organisation for Economic Co-operation and Development Trade in Value Added database. ² This model controls for country fixed effects, lags of GDP growth, financial conditions, the Chicago Board Options Exchange Volatility Index, world export-weighted GDP growth, and a time trend. ³ Such as exports, imports, air passengers, electricity consumption, credit extension, rail use, retail sales, industrial production, government revenue, and highway usage. ⁴ Rescaling estimates to the 2.3 percent of GDP we examine here, Cashin, Mohaddes, and Raissi (2016) and Dizioli and others (2016) find a 0.5 percentage point decline in global growth and 0.6 percentage point decline in growth for ASEAN–5 economies. Duval and others (2014) find spillovers for Asia of 0.7 percent compared with 0.3 percent for other economies. Furceri, Jalles, and Zdzienicka (2017) estimate an average decline of 0.9 percent in GDP after three years. ⁵ The consumption and property value-added shocks declined earlier and rebounded more quickly during the global financial crisis of 2008–09 than the supply shock, which may explain the different timing and persistence in their spillovers to other countries.

^{Box 1.2.}

How Are Inflation Expectations Measured in Asia?

Central banks use various inputs to guide their monetary policy decisions. Surveys of inflation expectations are a key source of information for gauging current and prospective economic conditions. This box describes the availability and characteristics of inflation expectation surveys in Asia and Pacific and offers comparisons to surveys from other regions, identifying two data gaps that should be addressed.

An assessment of expectations provides important insights about how economic agents expect the economy to evolve, and thus plays an important role in policymaking. Asia’s central banks frequently invoke the degree of anchoring of inflation expectations in their monetary policy statements.

A comprehensive assessment of inflation expectation surveys in Asia points to several considerations (Annex Table 1.1). The region’s surveys tend to focus on surveying households, which is common among global central banks. The available sample period is also on par with the rest of the world, with most surveys offering comparable data starting at about 2000.

However, the region has a few important data gaps. First, only 10 central banks in Asia and Pacific collect and publish regular surveys of inflation expectations. As 17 economies are included in the Consensus Economics survey of professional forecasters, this leaves seven central banks to rely exclusively on commercial information (Bangladesh, China, Hong Kong Special Administrative Region, Myanmar, Sri Lanka, Taiwan Province of China, and Vietnam). Another group of economies—including all Pacific Island Countries—has no available information on inflation expectations from any source.

Second, available surveys tend to ask about expectations at short horizons of up to 12 months. Among emerging market central banks, only Malaysia collects information about expectations at longer horizons, but this is common among peers in Latin America and eastern Europe. This impedes the ability of policymakers to assess the degree to which inflation expectations are well anchored and aligned with inflation targets (Weber and others 2022). Finally, some countries administer surveys once per quarter but hold monetary policy meetings more frequently (the Philippines, Thailand). This may affect the ability of policymakers and market participants to monitor the evolution of inflation expectations before each decision.

This box was prepared by Daniel Jiménez.

^{Box 1.3.}

The Effect of Food and Energy Price Inflation on Households in Asia

Rising food and energy price inflation is likely to have significant negative distributional implications on households in low-income countries and emerging markets. Under different scenarios for food and energy price growth over the course of this year, the share of households living below half of median annual income per capita may increase up to 1 percentage point in some countries. As a result, consumption inequality is likely to increase over the medium term, unless policies succeed in altering historical patterns.

As in most of the world, inflation in many economies in the Asia and Pacific region is rising largely because of higher energy and food prices. This is a concern for many households because food and energy constitute the largest item in their consumption baskets (about 52 percent and up to 61 percent including transportation), especially for poorer households in lower-income countries (Box Figure 1.3.1).¹ Households in the lowest consumption segment (the lowest 50th percentile of the income distribution) in low-income countries are the most vulnerable to food and energy price fluctuations, with about 59 percent of their income spent in food and another 10 percent for energy and transportation (Box Figure 1.3.2). By contrast, the richest household group in Asian emerging market and developing economies (above the 91st percentile) spend less on food (16 percent) and energy (2 percent) and more on transportation (21 percent).

Higher inflation will erode real income and push more households below the poverty line (Box Figure 1.3.3). Results based on household surveys for selected Asian emerging market and developing economies and on July 2022 World Economic Outlook Update inflation projections suggest that relative poverty may increase by about 1 percentage point in Cambodia and Vietnam and about 0.2 percentage point in China.² Differences across countries reflect higher inflation forecasts in Cambodia and Vietnam, and the different shapes of income distributions, since the greater the number of households clustering just above the relative poverty threshold, the larger the changes in poverty shares.³ These effects would almost double under a scenario in which the magnitude of inflation of energy and food prices is assumed to be twice as large as in the baseline, and are likely to be even larger for households in many Asia low-income countries, where people’s exposure to changes in the prices of these goods is more substantial.

The rise in food and energy price would also lead to persistent increases in consumption inequality unless policies succeed in altering historical patterns. Bettarelli and others (forthcoming) provide evidence that major increases in these prices over the past five decades have led to persistent increases in the Gini coefficient and lowered the consumption shares of lower-income households. They find that a major increase in food and energy prices, such as that observed after the Russian invasion of Ukraine, have been historically associated with an increase in the Gini coefficient of consumption inequality of about 4.4 and 1.3 Gini points, respectively, corresponding to about two and 0.6 standard deviations of the annual change in the Gini, respectively (Box Figure 1.3.4). These distributional effects vary across countries and are larger in emerging market and developing economies, in which food and energy represent a larger share of the consumption basket.

Although some countries have deployed fiscal measures to support vulnerable consumers, this might not be enough to offset the substantial loss in income because of high inflation. Higher inflation could translate into proportional fiscal costs if governments decide to support vulnerable households for the income losses experienced because of inflation. For example, compensating all vulnerable households under the baseline projections would cost 0.15 percent of GDP in Cambodia, 0.06 percent in Vietnam, and 0.03 percent in China (Box Figure 1.3.5).⁴ Costs would double under a more severe combined food and energy price shock in all countries. While these burdens may be small in absolute value, they are likely to be challenging to shoulder for low-income countries and lower-middle-income emerging market economies coming out of the pandemic with higher debt burdens and limited fiscal space.

This box was prepared by Alessia De Stefani, Giacomo Magistretti, Anh Ti Ngoc Nguyen, and Modeste Some. ¹ Data from the World Bank Global Consumption database, a data set based on national household expenditure surveys between 2000–11. ² The simulation assumes an income elasticity to headline inflation equal to one and an identical consumption basket, equal to the consumer price index basket, for all households. It also assumes no wage adjustment or government interventions to compensate for real income losses. ³ The baseline relative poverty shares (defined as the proportion of households living below half of median annual income per capita) are estimated to be 24.5 percent in Cambodia, 21 percent in China, and 19 percent in Vietnam. ⁴ The fiscal compensation cost is calculated assuming that each household falling below the (preshock) relative poverty threshold under a given scenario will receive a transfer exactly equal to the amount of income “lost” to inflation. The frequency-weighted sum of these amounts yields overall expected fiscal costs.

Annex 1. Estimated Drivers of Core Inflation

This annex describes the analysis used to generate Figure 1.6 and 1.20. Following the October 2016 World Economic Outlook, the following Phillips curve equation for core inflation is estimated:

π_{t}^{c} = γ + ρ π_{t - 1}^{c} + (1 - ρ) π_{t}^{e} + θ {\tilde{y}}_{t} + φ e_{t} + \partial (π_{t}^{I} - \frac{1}{4} Σ_{l = 1}^{4} π_{t - l}^{c}) + ε_{t}

where $π_{t}^{c}$ is the annualized growth rate of the core consumer price index; $π_{t}^{e}$ are inflation expectations—measured by the three years ahead inflation expectations reported in Consensus Forecasts; ${\tilde{y}}_{t}$ is the output gap—computed as the cyclical deviation from trend estimated by the Hodrick-Prescott–filtered quarterly real output series; e_t is the annualized growth rate of the bilateral exchange rate versus the US dollar (expressed as local currency units per US dollar); and $π_{t}^{I}$ is the annualized growth rate of the import price index in US dollars.¹

The model is estimated separately for each of 12 Asian and Pacific economies at the quarterly frequency using data since 1992 (or when the first data are available).² Recursive estimates are produced since 2018:Q4 to allow for changes in the parameters.

To calculate the contribution of each component in driving core inflation over 2020–22, the analysis follows Yellen (2015) and the October 2016 World Economic Outlook. The contributions are computed as the difference between realized core inflation and counterfactuals obtained by setting each of the independent variables to zero.³ The simulations consider deviations of core inflation from the central bank’s inflation target, or in the absence of an explicit target (for example, Malaysia and Singapore), the long-term average rate of headline inflation.

Counterfactuals for the output gap are computed by substituting the model’s Hodrick-Prescott– filtered estimate with the forecasts reported in the October 2022 World Economic Outlook, to avoid end-point problems and ensure consistency with the forecasts discussed in this chapter.

^{Annex Table 1.1.}

Surveys of Inflation Expectations

Source: IMF staff compilation based on national agencies. Note: Respondent takes values of H (households), F (frms), and P (professional forecasters). EOP = end of period; M = month; Y = year.

^¹Indonesia’s Consumer Expectation Survey of inflation expectations was discontinued in March 2020.

^²Denotes value for household survey.

^{Annex Table 1.1.}

Surveys of Inflation Expectations

Country	Respondent	Survey	Entity	Year Started	Frequency	Sample Size	Horizons
*Asia and Pacific*
	F	Quarterly Business Survey	National Australia Bank	1989	Quarterly		3M
Australia	H	Survey of Consumer Inflationary and Wage Expectations	Melbourne Institute	1995	Monthly	1,200	1Y
	P	Quarterly Survey of Union Officials	Reserve Bank of Australia	1993	Quarterly		1Y, 2Y
	P	Quarterly RBA Survey of Market Economists
	1996	Quarterly		1Y, 2Y
India	H	Households’ Inflation Expectations Survey	Reserve Bank of India	2008	Bimonthly	6,000	3M, 1Y
Indonesia	F	Business Survey	Bank Indonesia	2013	Quarterly		1Y
	H	Consumer Expectation Survey		1999	Monthly	4,600	3M, 6M, 1Y¹
	F	TANKAN (Short-Term Economic Survey of Enterprises in Japan)	Bank of Japan	2014	Quarterly	2,800	1Y, 3Y, 5Y
	H	Bank of Japan Opinion Survey		2004	Quarterly		1Y, 5Y
Japan	H	Consumer Confidence Survey	Economic and Social Research Institute: Cabinet Office	2004	Monthly		1Y
Korea	H	Consumer Survey Index (CSI)	Bank of Korea	2006	Monthly		1Y
Malaysia	H	BNM Consumer Sentiment Survey	Bank Negara Malaysia	2013	Monthly	1,000	1Y, 2Y, 3Y
Mongolia	H, F, P	Citizens Inflation Expectations	Bank of Mongolia	2017	Quarterly		3M, 1Y
New Zealand	H	Household Inflation Expectations Survey	Reserve Bank of New Zealand	1995	Quarterly	1,000	1Y, 5Y
Philippines	F	Business Expectations Survey	Bangko Sentral ng Pilipinas	2013	Quarterly	600	3M, 1Y
	H	Consumer Expectations Survey		2007	Quarterly	5,500	1Y
	H	Singapore Index of Inflation Expectations	DBS Bank and SMU	2011	Quarterly	500	1Y, 5Y
Singapore	F	MAS Survey of Professional Forecasters	Monetary Authority of Singapore	2000	Quarterly	1	Y, 2Y (EOP)
Thailand	F	Business Sentiment Survey (BSI)	Bank of Thailand	2007	Monthly		1Y
*Rest of the World*
Brazil	H	Consumer Confidence Survey	Instituto Brasileiro de Economia	2002	Monthly	2,000	6M
	P	Market Expectations – Focus Survey	Banco Central do Brasil	1999	Monthly	140	1Y, 2Y
Canada	H	Canadian Survey of Consumer Expectations	Bank of Canada	2014	Quarterly	1,000	1Y, 2Y, 5Y
	F	Business Outlook Survey		2001	Quarterly	100	2Y
Chile	P	Encuesta de Expectativas Económicas	Banco Central de Chile	2001	Monthly	70	1Y, 2Y
Colombia	P	Encuesta mensual de expectativas de analistas económicos	Banco de la República	2003	Monthly		1Y, 2Y
	H	Encuesta de opinión al consumidor	Fedesarrollo	2001	Monthly		1Y
Czech Republic	H	Quarterly Survey of Households	Czech National Bank	1999	Quarterly	600	1Y, 3Y
	P	Financial Market Analysts		1999	Monthly	15	1Y, 3Y
	H	National Survey on Consumer Confidence	Institutio Nacional de Estadística y Geografía	2017	Monthly	400	1Y
Mexico	F	Encuestas Sobre las Expectativas de los Especialistas en Economía del Sector Privado	Banco de México	1999	Monthly		1Y
	P	Encuestas Sobre las Expectativas de los Especialistas en Economía del Sector		1999	Monthly		1Y
South Africa	H, F, P	Inflation Expectation Survey	South African Reserve Bank/ Bureau for Economic Research	2000	Quarterly	2,500²/500	1Y²,2Y,5Y
Sweden	H	Consumer Tendency Survey	National Institute of Economic Research	2001	Monthly	1,500	1Y
	P	Inflation Expectations Survey	Prospera	1995	Quarterly		1Y, 2Y, 5Y
United Kingdom	H	Inflation Attitudes Survey	Bank of England/ Ipsos	1999	Quarterly		1Y, 2Y, 5Y
United States	H	Survey of Consumers (MSC)	University of Michigan	1978	Monthly	500	1Y, 5Y
	H	Survey of Consumer Expectations (SCE)	New York Federal Reserve	2013	Monthly	1,300	1Y, 2Y, 5Y

Source: IMF staff compilation based on national agencies. Note: Respondent takes values of H (households), F (frms), and P (professional forecasters). EOP = end of period; M = month; Y = year.

^¹Indonesia’s Consumer Expectation Survey of inflation expectations was discontinued in March 2020.

^²Denotes value for household survey.

^{Annex Table 1.1.}

Surveys of Inflation Expectations

Country	Respondent	Survey	Entity	Year Started	Frequency	Sample Size	Horizons
*Asia and Pacific*
	F	Quarterly Business Survey	National Australia Bank	1989	Quarterly		3M
Australia	H	Survey of Consumer Inflationary and Wage Expectations	Melbourne Institute	1995	Monthly	1,200	1Y
	P	Quarterly Survey of Union Officials	Reserve Bank of Australia	1993	Quarterly		1Y, 2Y
	P	Quarterly RBA Survey of Market Economists
	1996	Quarterly		1Y, 2Y
India	H	Households’ Inflation Expectations Survey	Reserve Bank of India	2008	Bimonthly	6,000	3M, 1Y
Indonesia	F	Business Survey	Bank Indonesia	2013	Quarterly		1Y
	H	Consumer Expectation Survey		1999	Monthly	4,600	3M, 6M, 1Y¹
	F	TANKAN (Short-Term Economic Survey of Enterprises in Japan)	Bank of Japan	2014	Quarterly	2,800	1Y, 3Y, 5Y
	H	Bank of Japan Opinion Survey		2004	Quarterly		1Y, 5Y
Japan	H	Consumer Confidence Survey	Economic and Social Research Institute: Cabinet Office	2004	Monthly		1Y
Korea	H	Consumer Survey Index (CSI)	Bank of Korea	2006	Monthly		1Y
Malaysia	H	BNM Consumer Sentiment Survey	Bank Negara Malaysia	2013	Monthly	1,000	1Y, 2Y, 3Y
Mongolia	H, F, P	Citizens Inflation Expectations	Bank of Mongolia	2017	Quarterly		3M, 1Y
New Zealand	H	Household Inflation Expectations Survey	Reserve Bank of New Zealand	1995	Quarterly	1,000	1Y, 5Y
Philippines	F	Business Expectations Survey	Bangko Sentral ng Pilipinas	2013	Quarterly	600	3M, 1Y
	H	Consumer Expectations Survey		2007	Quarterly	5,500	1Y
	H	Singapore Index of Inflation Expectations	DBS Bank and SMU	2011	Quarterly	500	1Y, 5Y
Singapore	F	MAS Survey of Professional Forecasters	Monetary Authority of Singapore	2000	Quarterly	1	Y, 2Y (EOP)
Thailand	F	Business Sentiment Survey (BSI)	Bank of Thailand	2007	Monthly		1Y
*Rest of the World*
Brazil	H	Consumer Confidence Survey	Instituto Brasileiro de Economia	2002	Monthly	2,000	6M
	P	Market Expectations – Focus Survey	Banco Central do Brasil	1999	Monthly	140	1Y, 2Y
Canada	H	Canadian Survey of Consumer Expectations	Bank of Canada	2014	Quarterly	1,000	1Y, 2Y, 5Y
	F	Business Outlook Survey		2001	Quarterly	100	2Y
Chile	P	Encuesta de Expectativas Económicas	Banco Central de Chile	2001	Monthly	70	1Y, 2Y
Colombia	P	Encuesta mensual de expectativas de analistas económicos	Banco de la República	2003	Monthly		1Y, 2Y
	H	Encuesta de opinión al consumidor	Fedesarrollo	2001	Monthly		1Y
Czech Republic	H	Quarterly Survey of Households	Czech National Bank	1999	Quarterly	600	1Y, 3Y
	P	Financial Market Analysts		1999	Monthly	15	1Y, 3Y
	H	National Survey on Consumer Confidence	Institutio Nacional de Estadística y Geografía	2017	Monthly	400	1Y
Mexico	F	Encuestas Sobre las Expectativas de los Especialistas en Economía del Sector Privado	Banco de México	1999	Monthly		1Y
	P	Encuestas Sobre las Expectativas de los Especialistas en Economía del Sector		1999	Monthly		1Y
South Africa	H, F, P	Inflation Expectation Survey	South African Reserve Bank/ Bureau for Economic Research	2000	Quarterly	2,500²/500	1Y²,2Y,5Y
Sweden	H	Consumer Tendency Survey	National Institute of Economic Research	2001	Monthly	1,500	1Y
	P	Inflation Expectations Survey	Prospera	1995	Quarterly		1Y, 2Y, 5Y
United Kingdom	H	Inflation Attitudes Survey	Bank of England/ Ipsos	1999	Quarterly		1Y, 2Y, 5Y
United States	H	Survey of Consumers (MSC)	University of Michigan	1978	Monthly	500	1Y, 5Y
	H	Survey of Consumer Expectations (SCE)	New York Federal Reserve	2013	Monthly	1,300	1Y, 2Y, 5Y

Source: IMF staff compilation based on national agencies. Note: Respondent takes values of H (households), F (frms), and P (professional forecasters). EOP = end of period; M = month; Y = year.

^¹Indonesia’s Consumer Expectation Survey of inflation expectations was discontinued in March 2020.

^²Denotes value for household survey.

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This chapter uses “core inflation” as shorthand for headline inflation excluding food and energy categories. National definitions of core inflation vary across countries.

See Annex 1 for technical details on the Phillips curve estimations that underpin Figure 1.6.

The Pacific island countries’ regional growth rate is calculated using a simple average across the 12 economies in the group.

The scenario assumes that inflation expectations rise by 1 standard deviation (about 1.4 percentage points) in 2023 for all countries except for China and Japan. This leads to a more persistent rise in core inflation.

The more modest inflation surprises across Asia have also meant that the region did not accrue substantial falls in their debt-to-GDP ratios, as were observed in many advanced economies (October 2022 Fiscal Monitor).

Prepandemic estimates for total spending needs to achieve a high Sustainable Development Goal performance in 2030. See García-Escribano and others (2021) for details.

A bright spot in this dimension was observed in the Pacific Island Countries, which experienced only limited school closures during the pandemic because they avoided local transmission of COVID-19 until vaccines became available.

Import prices are expressed as a relative price by subtracting the lagged year-over-year growth rate of the core consumer price index.

The sample includes Australia, Hong Kong Special Administrative Region, India, Indonesia, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan Province of China, and Thailand.

The counterfactual incorporates the original model residuals ϕ_t.

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Regional Economic Outlook: Asia and the Pacific, October 2022: Sailing into Headwinds

Author:

International Monetary Fund. Asia and Pacific Dept

ISBN:: 9798400220517

ISSN:: 2707-8086

Publication Date:: 28 Oct 2022

Publisher:: International Monetary Fund

DOI:: https://doi.org/10.5089/9798400220517.086

Pages:: 66

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^{Figure 1.1.}

REO 14: Growth Surprise

(Percentage points, April 2022 WEO forecast errors)

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^{Figure 1.2.}

Trade Volumes

(Percent, year-over-year change)

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^{Figure 1.3.}

Manufacturing and Services PMI

(Diffusion index, 50 = no change)

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^{Figure 1.4.}

Headline Inflation

(Percentage points, deviations from central bank targets)

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^{Figure 1.5.}

Contributions to Headline Inflation

(Percent)

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^{Figure 1.6.}

Drivers of Core Inflation

(Percent, deviation from target; rolling window estimation)

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^{Figure 1.7.}

Sovereign Borrowing Costs

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^{Figure 1.8.}

JPM Asia Credit Index Corporate Z-Spreads

(Basis points)

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^{Figure 1.9.}

Exchange Rate and Commodity Terms of Trade

(Percent, year-to-date change)

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^{Figure 1.10.}

Contributions to Nominal Effective Exchange Rate Changes in 2022

(Percent)

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^{Figure 1.11.}

Cumulative Portfolio Outflows from EM Asia Akin to Previous Episodes of Stress

(Percent of IIP liabilities)

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^{Figure 1.12.}

Revisions to China’s Growth

(Percent)

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^{Figure 1.13.}

China: Real Estate Indicators

(Percent, 12-month moving sum year-over-year change)

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^{Figure 1.14.}

Projected Inflation Revised Up Again

(Percent, year-over-year)

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^{Figure 1.15.}

Medium-Term GDP Loss: Difference in Cumulative Growth Rates (2020–25)

(Projection relative to pre-COVID forecast, percentage points)

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^{Figure 1.16.}

Impact of a Global Downside Scenario on Growth in Asia and Pacific

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^{Figure 1.17.}

Fiscal and Monetary Policy in Asia

(Percent)

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^{Figure 1.18.}

Core Inflation and Output Gaps

(Percent)

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^{Figure 1.19}

Professional Forecasts of Inflation in Asia

(Deviation from target, year-over-year)

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^{Figure 1.20}

Estimated Persistence of Core Inflation

(Coefficient on autoregressive term in Phillips curve; deviation from global mean)

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^{Figure 1.21}

Response of Asian Core Inflation to Global Shocks

(Percentage points)

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^{Figure 1.22.}

Impact of a Global Inflation Expectations Shock Scenario on Asia

(Percentage points)

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^{Figure 1.23.}

Asia: Cyclically Adjusted Primary Balance

(Percent of potential GDP)

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^{Figure 1.24.}

Asia: General Government Debt

(Percent of GDP)

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^{Figure 1.25.}

Share of NFC Debt in Vulnerable Firms

(Percent of total debt in NFCs with ICR less than 1)

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^{Figure 1.26.}

Credit-to-GDP Gap

(Percent)

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^{Figure 1.27.}

Total Crypto Asset Volume

(Billions of US dollars)

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^{Box Figure 1.1.1.}

China Activity Spillovers by Shock

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^{Box Figure 1.1.2.}

Differential Effect of Trade Exposure

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^{Box Figure 1.3.1.}

Share of Food, Energy, and Transportation in Total Expenditure across Regions and Household Income Groups

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^{Box Figure 1.3.2.}

Share of Food, Energy, and Transportation in Total Expenditure in Asia and Pacific across Country and Household Income Groups

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^{Box Figure 1.3.3.}

Effects of Food and Energy Prices on Relative Poverty

(Percentage points change)

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^{Box Figure 1.3.4.}

Impact of Food and Energy Price Increases on Consumption Inequality

(Percent)

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^{Box Figure 1.3.5.}

Cost of Shielding Vulnerable Households from Rising Prices

(Percent of 2021 GDP)

Foresee

^{Annex Table 1.1.}

Surveys of Inflation Expectations

Country	Respondent	Survey	Entity	Year Started	Frequency	Sample Size	Horizons
*Asia and Pacific*
	F	Quarterly Business Survey	National Australia Bank	1989	Quarterly		3M
Australia	H	Survey of Consumer Inflationary and Wage Expectations	Melbourne Institute	1995	Monthly	1,200	1Y
	P	Quarterly Survey of Union Officials	Reserve Bank of Australia	1993	Quarterly		1Y, 2Y
	P	Quarterly RBA Survey of Market Economists
	1996	Quarterly		1Y, 2Y
India	H	Households’ Inflation Expectations Survey	Reserve Bank of India	2008	Bimonthly	6,000	3M, 1Y
Indonesia	F	Business Survey	Bank Indonesia	2013	Quarterly		1Y
	H	Consumer Expectation Survey		1999	Monthly	4,600	3M, 6M, 1Y¹
	F	TANKAN (Short-Term Economic Survey of Enterprises in Japan)	Bank of Japan	2014	Quarterly	2,800	1Y, 3Y, 5Y
	H	Bank of Japan Opinion Survey		2004	Quarterly		1Y, 5Y
Japan	H	Consumer Confidence Survey	Economic and Social Research Institute: Cabinet Office	2004	Monthly		1Y
Korea	H	Consumer Survey Index (CSI)	Bank of Korea	2006	Monthly		1Y
Malaysia	H	BNM Consumer Sentiment Survey	Bank Negara Malaysia	2013	Monthly	1,000	1Y, 2Y, 3Y
Mongolia	H, F, P	Citizens Inflation Expectations	Bank of Mongolia	2017	Quarterly		3M, 1Y
New Zealand	H	Household Inflation Expectations Survey	Reserve Bank of New Zealand	1995	Quarterly	1,000	1Y, 5Y
Philippines	F	Business Expectations Survey	Bangko Sentral ng Pilipinas	2013	Quarterly	600	3M, 1Y
	H	Consumer Expectations Survey		2007	Quarterly	5,500	1Y
	H	Singapore Index of Inflation Expectations	DBS Bank and SMU	2011	Quarterly	500	1Y, 5Y
Singapore	F	MAS Survey of Professional Forecasters	Monetary Authority of Singapore	2000	Quarterly	1	Y, 2Y (EOP)
Thailand	F	Business Sentiment Survey (BSI)	Bank of Thailand	2007	Monthly		1Y
*Rest of the World*
Brazil	H	Consumer Confidence Survey	Instituto Brasileiro de Economia	2002	Monthly	2,000	6M
	P	Market Expectations – Focus Survey	Banco Central do Brasil	1999	Monthly	140	1Y, 2Y
Canada	H	Canadian Survey of Consumer Expectations	Bank of Canada	2014	Quarterly	1,000	1Y, 2Y, 5Y
	F	Business Outlook Survey		2001	Quarterly	100	2Y
Chile	P	Encuesta de Expectativas Económicas	Banco Central de Chile	2001	Monthly	70	1Y, 2Y
Colombia	P	Encuesta mensual de expectativas de analistas económicos	Banco de la República	2003	Monthly		1Y, 2Y
	H	Encuesta de opinión al consumidor	Fedesarrollo	2001	Monthly		1Y
Czech Republic	H	Quarterly Survey of Households	Czech National Bank	1999	Quarterly	600	1Y, 3Y
	P	Financial Market Analysts		1999	Monthly	15	1Y, 3Y
	H	National Survey on Consumer Confidence	Institutio Nacional de Estadística y Geografía	2017	Monthly	400	1Y
Mexico	F	Encuestas Sobre las Expectativas de los Especialistas en Economía del Sector Privado	Banco de México	1999	Monthly		1Y
	P	Encuestas Sobre las Expectativas de los Especialistas en Economía del Sector		1999	Monthly		1Y
South Africa	H, F, P	Inflation Expectation Survey	South African Reserve Bank/ Bureau for Economic Research	2000	Quarterly	2,500²/500	1Y²,2Y,5Y
Sweden	H	Consumer Tendency Survey	National Institute of Economic Research	2001	Monthly	1,500	1Y
	P	Inflation Expectations Survey	Prospera	1995	Quarterly		1Y, 2Y, 5Y
United Kingdom	H	Inflation Attitudes Survey	Bank of England/ Ipsos	1999	Quarterly		1Y, 2Y, 5Y
United States	H	Survey of Consumers (MSC)	University of Michigan	1978	Monthly	500	1Y, 5Y
	H	Survey of Consumer Expectations (SCE)	New York Federal Reserve	2013	Monthly	1,300	1Y, 2Y, 5Y

Source: IMF staff compilation based on national agencies. Note: Respondent takes values of H (households), F (frms), and P (professional forecasters). EOP = end of period; M = month; Y = year.

^¹Indonesia’s Consumer Expectation Survey of inflation expectations was discontinued in March 2020.

^²Denotes value for household survey.

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Abstract

Recent Developments

The Return of Inflation

Global and Regional Headwinds to Growth

Global Financial Tightening

War in Ukraine

The Sharp and Uncharacteristic Slowdown in China

The Outlook for Asia and Pacific

China, Japan, and South Asia

Association of Southeast Asian Nations

Pacific Island Countries

An Uncertain Inflation Outlook

Prospects for the Medium Term—Greater Scarring from the Pandemic

Risks to the Outlook Are to the Downside

Beyond the Conjunctural Downside Risks

Policies

Monetary Policy

Is There a Role for Intervention?

The Stance of Fiscal Policy

Rising Corporate Vulnerabilities and the Role for Financial Policies

Cryptoization and the Need for Greater Regulation

Boosting the Region’s Productive Potential

Annex 1. Estimated Drivers of Core Inflation

References

Contributor Notes

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