The International Monetary Fund (IMF) has indicated that the Asia Pacific region is likely to see economic output remain below pre-pandemic trends over the medium term, even as China’s recovery leads the rest of the world.
In its latest assessment of the region, the IMF has warned of the significant downside risks and economic implications as the labour market participation falls, with the most vulnerable likely to be the hardest hit.
The IMF also said that Asia is slowly clawing its way out of its worst-ever recession, as it lowered its regional growth forecast to −2.2% in 2020, 0.6 percentage points lower than the forecast in June. The downgrade was mostly due to sharper contractions in India, the Philippines and Malaysia. The fund tips China to grow 1.9% this year.
“Returning to full capacity will be a long slog,” the IMF wrote in its Regional Economic Outlook report, based on current fears of infection, social distancing measures and border closures that will especially hit countries that rely on tourism.
The IMF’s China mission chief, Herge Berger added in an interview that, “Not being premature with withdrawing support both fiscally and monetary should be on the agenda for policy makers not just in China, but globally.”
The IMF’s downbeat outlook for Asia emphasizes how hard the road to recovery will be, even though the region drives global growth and countries like China and South Korea have largely contained the virus.
Also standing in the way of recovery is the fact that employment has taken a much bigger hit than during the global financial crisis, with women and younger workers suffering the most.
Among support measures governments and central banks can offer to their economies, the IMF said debt monetization can be an option.
“In some cases where inflation remains low, debt monetization could be appropriate, provided it is well communicated, limited in size, time-bound, and implemented within a clear operational framework that preserves central bank independence and does not impede monetary policy,” the fund said.
Earlier, World Bank President, David Malpass and IMF Managing Director Kristalina Georgieva had warned that far more debt relief is needed for low- and middle-income countries, including principal reduction, to avoid a “lost decade” as the pandemic destroys economic activity.
“Leaders of the debtor nations have been deferential to the creditors,” Malpass said. “It’s been very important that leaders of poorest nations speak up and speak out about the need for a lighter debt burden from the creditor nations. That dialogue hasn’t been as robust yet as I think is necessary to move this process along.”
The current crisis has prompted some central banks in Asia, like Bank Indonesia, to buy sovereign debt directly, while others have said it’s an option that can be used if needed.
Geopolitical tensions, particularly between the U.S. and China, can also put a break on the recovery given Asia’s central role in global value chains, the fund warned.
“Although China’s recovery can boost regional trade, weak global growth, closed borders, and festering tensions around trade, technology, and security have worsened the prospects for a trade-led recovery in the region,” the IMF said.
