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World Economic and Financial Surveys
Regional Economic Outlook
Asia and Pacific
Sailing into Headwinds
OCT 22
INTERNATIONAL MONETARY FUND
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©2022 International Monetary Fund
Cataloging-in-Publication Data
Names: International Monetary Fund, publisher.
Title: Regional economic outlook. Asia and Pacific : sailing into headwinds.
Other titles: Asia and Pacific : sailing into headwinds. | Sailing into headwinds. | World economic and financial surveys.
Description: Washington, DC : International Monetary Fund, 2022. | World economic and financial surveys. | Oct. 22. | Includes bibliographical references.
Identifiers: 9798400220517 (paper)
9798400221200 (ePub)
9798400221224 (Web PDF)
Subjects: LCSH: Economic forecasting—Asia. | Economic forecasting— Pacific Area. | Asia— Economic conditions. | Pacific Area—Economic conditions. | Economic development—Asia. | Economic development— Pacific Area.
Classification: LCC HC412.R445 2022
The Regional Economic Outlook: Asia and Pacific is published annually in the fall to review developments in the Asia-Pacific region. Both projections and policy considerations are those of the IMF staff and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management.
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Contents
Acknowledgments
Definitions
Executive Summary
1. The Outlook for Asia and Pacific: Sailing into Headwinds
Recent Developments
The Return of Inflation
Global and Regional Headwinds to Growth
The Outlook for Asia and Pacific
Prospects for the Medium Term—Greater Scarring from the Pandemic
Risks to the Outlook Are to the Downside
Beyond the Conjunctural Downside Risks
Policies
Annex 1. Estimated Drivers of Core Inflation
References
2. Medium-Term Output Losses after COVID-19 in Asia: The Role of Corporate Debt and Digitalization
Expected Output Losses after the COVID-19 Crisis: Magnitudes and Determinants
Lower Investment in Asia: The Role of Corporate Debt in Amplifying Output Losses
Decline in Labor Inputs in Asia: Implications for the Long Term
Policies to Mitigate Scarring
Conclusion
References
3. Asia and the Growing Risk of Geoeconomic Fragmentation
Trade Fragmentation: What Is at Stake and Early Signs
The Effect of Trade Policy Uncertainty
Long-Term Losses from a World Divided into Trading Blocs
Will Financial Fragmentation Add Further Downside Risks?
Conclusion
References
Boxes
Box 1.1. Growth Spillovers to the Rest of the World from a Slowdown in China
Box 1.2. How Are Inflation Expectations Measured in Asia?
Box 1.3. The Effect of Food and Energy Price Inflation on Households in Asia
Figures
Figure 1.1. REO 14: Growth Surprises
Figure 1.2. Trade Volumes
Figure 1.3. Manufacturing and Services PMI
Figure 1.4. Headline Inflation
Figure 1.5. Contributions to Headline Inflation
Figure 1.6. Drivers of Core Inflation
Figure 1.7. Sovereign Borrowing Costs
Figure 1.8. JPM Asia Credit Index Corporate Z-Spreads
Figure 1.9. Exchange Rate and Commodity Terms of Trade
Figure 1.10. Contributions to Nominal Effective Exchange Rate Changes in 2022
Figure 1.11. Cumulative Portfolio Flows from EM Asia Akin to Previous Episodes of Stress
Figure 1.12. Revisions to China’s Growth
Figure 1.13. China: Real Estate Indicators
Figure 1.14. Projected Inflation Revised Up Again
Figure 1.15. Medium-Term GDP Loss: Difference in Cumulative Growth Rates (2020–25)
Figure 1.16. Impact of a Global Downside Scenario on Growth in Asia and Pacific
Figure 1.17. Fiscal and Monetary Policy in Asia
Figure 1.18. Core Inflation and Output Gaps
Figure 1.19. Professional Forecasts of Inflation in Asia
Figure 1.20. Estimated Persistence of Core Inflation
Figure 1.21. Response of Asian Core Inflation to Global Shocks
Figure 1.22. Impact of a Global Inflation Expectations Shock Scenario on Asia
Figure 1.23. Asia: Cyclically Adjusted Primary Balance
Figure 1.24. Asia: General Government Debt
Figure 1.25. Share of NFC Debt in Vulnerable Firms
Figure 1.26. Credit-to-GDP Gap
Figure 1.27. Total Crypto Asset Volume
Figure 2.1. Output Losses in Asia
Figure 2.2. Corporate Debt and Education Losses during COVID-19: Implications for Asia
Figure 2.3. Digitalization in Asia
Figure 2.4. Digitalization and Resilience
Figure 3.1. Trade Fragmentation: What Is at Stake and Early Signs
Figure 3.2. Impact of Trade Policy Uncertainty
Figure 3.3. Long-Term Losses from Fragmenting World Trade along the Lines of the UN Vote on Ukraine
Figure 3.4. Financial Fragmentation: What Is at Stake and Early Signs
Tables
Table 1.1. Asia: Real GDP Growth
Annex Table 1.1. Surveys of Inflation Expectations
Acknowledgments
This Regional Economic Outlook was prepared by a team led by Shanaka J. Peiris and Davide Furceri, under the overall direction of Krishna Srinivasan and Sanjaya Panth. The report is based on data available as of October 3, 2022. Chapter 1 was prepared by Yan Carrière-Swallow (lead) and Yizhi Xu, with contributions from Chris Redl (Box 1.1), Daniel Jiménez (Box 1.2), and Alessia De Stefani, Giacomo Magistretti, Anh Ti Ngoc Nguyen, and Modeste Some (Box 1.3). Chapter 2 was prepared by Alexander Copestake, Julia Estefania-Flores, Pablo Gonzalez Dominguez, Daniel Jiménez, Siddharth Kothari (co-lead), and Nour Tawk (co-lead). Chapter 3 was prepared by Diego A. Cerdeiro (co-lead), Alexander Copestake, Julia Estefania Flores, Siddharth Kothari (co-lead), Pablo Gonzalez Dominguez, Rui C. Mano, and Chris Redl, with contributions from Brad McDonald. Mariam Souleyman and Judee Yanzon assisted in the preparation of the report. Cheryl Toksoz of the IMF’s Communications Department edited the volume and coordinated its publication and release.
Definitions
In this Regional Economic Outlook: Asia and Pacific, the following groupings are employed:
“ASEAN” refers to Brunei Darussalam, Cambodia, Indonesia, Lao P.D.R., Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, unless otherwise specified.
“ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
“Advanced Asia” refers to Australia, Hong Kong SAR, Japan, Korea, New Zealand, Singapore, and Taiwan Province of China.
“Emerging Asia” refers to China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
“South Asia” refers to Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka.
“Asia” refers to ASEAN, East Asia, Advanced Asia, South Asia, and other Asian economies.
“EU” refers to the European Union.
The following abbreviation is used:
ASEAN Association of Southeast Asian Nations
The following conventions are used:
In figures and tables, shaded areas show IMF projections.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this report, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Executive Summary
The economies of Asia and Pacific have seen a strong rebound in 2021 and the first half of 2022 but are starting to show signs of a slowdown. While the region largely shrugged off a wave of Omicron infections in the first quarter, the pace of the recovery was somewhat slower than expected in the second quarter as growth of the Chinese economy came to a near standstill. After remaining relatively subdued last year, inflation has increased in 2022—and is now above central bank targets in most of the region. The outlook for Asia and Pacific faces three major headwinds. First, global financial conditions are tightening as major central banks persevere to tame inflation, with yields rising and exchange rates depreciating across Asia. Second, Russia’s war in Ukraine is dragging out and provoking a marked slowdown in Europe that will hurt external demand for Asia’s exports. Third, the Chinese economy is undergoing a sharp and uncharacteristic slowdown, with growth in 2022 forecast to be the second lowest since 1977.
Growth in Asia and Pacific is expected to decelerate to 4.0 percent in 2022, before rising to 4.3 percent in 2023. These forecasts have been revised down by 0.9 percentage point and 0.8 percentage point, respectively, since the April 2022 World Economic Outlook. Most of the region’s economies will slow further in 2023. Inflation is expected to peak in late 2022, because of falling global commodity prices and less accommodative macroeconomic policies. Risks to the outlook stem from the intensification of the three headwinds. In this challenging environment, appropriate policies will vary across the region according to available policy space, the degree of economic slack, and the persistence of shocks. Gradual fiscal consolidation will be required to stabilize public debt in a well-articulated medium-term framework, while protecting the most vulnerable through targeted and temporary measures. To rein in rising inflation, monetary policy will need to continue to tighten (except in China and Japan).
This Regional Economic Outlook also draws on two studies that emphasize the medium-term challenges and risks facing the region. Chapter 2 documents the large medium-term output losses expected in Asian emerging market and developing economies, driven by lower investment, productivity growth, and labor force participation. The chapter provides new empirical evidence on the role of high corporate debt in amplifying investment losses after a recession, a channel which is likely to be especially relevant in Asia given high corporate leverage. Furthermore, lower human capital accumulation due to school closures and a decline in fertility may add to long-term scarring. A renewed structural reforms push is essential to boost potential output, with the analysis in the chapter highlighting the role of digitalization in boosting productivity and building resilience.
Chapter 3 focuses on the growing risk of geoeconomic fragmentation and its implications for Asia. Early signs of trade and financial fragmentation have been visible for several years, with trade policy uncertainty spiking and countries imposing ever more trade restrictions. The war in Ukraine has further raised geopolitical tensions, bringing to the fore risks that trade will increasingly be driven by geopolitical rather than economic considerations. Empirical analysis presented in the chapter highlights the adverse short-term macroeconomic outcomes associated with higher trade policy uncertainty. Furthermore, model simulations show that a sharper fragmentation scenario where the world divides into separate trading blocs would carry large, permanent output losses, highlighting the need for collaborative solutions.