Asian economies face “severe headwinds”, the International Monetary Fund warned today as it trimmed its growth forecasts for the coming two years.
Growth in the Asia Pacific economies is expected to decelerate from the 5.4% it posted in 2015 to 5.3% both this year and in 2017, partly reflecting the sluggish global recovery, the IMF said in its regional economic outlook.
It said that although this still made it the “most dynamic part of the global economy [it] is facing severe headwinds from a still weak global recovery, slowing global trade, and the short term impact of China’s growth transition.”
Launching the report, Changyong Rhee, director of the Asia and Pacific department at the IMF, said: “Asia is impacted by the still weak global recovery, and by the ongoing and necessary rebalancing in China.”
The report, which was unveiled in Hong Kong, said that the region was well positioned to meet the challenges ahead, as long as it strengthened its reform efforts.
The main downside risk for economic growth in the region was slower than expected global growth. The IMF slashed it forecast for global GDP growth by 0.4 percentage points to 3.2% for 2016 in its April World Economic Outlook, from the 3.6% it had expected in October 2015 Growth for 2017 was cut to 3.5% from 3.8%.
It highlighted the impact that a sharper slowdown in Chinese growth would have on the region. It estimated that each percentage point change in China’s growth would lower growth in the rest of the region by 0.15–0.30 of a percentage point.
China is forecast to grow by 6.2% in 2017, a deceleration of more than one percentage point from the 7.3% growth it posted in 2014, and then to hit 6.0% by 2018.
“Although China’s economic transition toward more sustainable growth is critical over the medium term for both China and the global economy, adverse spillovers could emerge in the near term,” it said.
DEBT THREAT
It said that downside risks continued to “dominate” the economic outlook for the region. In particular, the turning of the credit and financial cycles amid high debt posed a significant risk to growth in Asia, especially because debt levels have increased markedly over the past decade across most of the major economies in the region, including China and Japan.
Corporate debt-to-GDP ratios have increased faster in Asia than in other major parts of the global economy since 2009 and are particularly high in China, Hong Kong and South Korea.
Its warning came a day after Christopher Lee, Standard & Poor’s chief ratings officer of corporate ratings for Greater China, told Emerging Markets that China might have already reached a tipping point and must start to manage its debt effectively or risk impacting the bond markets.
But the problem is not isolated to China. In a recent report, Standard Chartered put Hong Kong, Malaysia and Japan in its high-risk category in terms of leverage risk as well as China.
Malaysia now has a higher household debt servicing ratio than the US did at the peak of the sub-prime boom in 2006, while Indonesia has external debt of 2.5 times in foreign exchange reserves.
The IMF also highlighted its worries over the Japanese economy, saying that while Abenomics — the three arrows of fiscal, monetary and structural reform policy — had been “supportive”, durable gains in growth had so far not materialised.
“A further growth slowdown there could lead to an over-reliance on expansionary monetary policy,” it said.
Looking to the future, it urged policymakers across the region to embark on structural reform.
“Pushing ahead with structural reforms will be critical to ensure that Asia remains the global growth leader,” it said. “Structural reforms are needed to help rebalance demand and supply, reduce vulnerabilities, and increase economic efficiency and potential growth.”