Asia Pacific economies will improve at a gradual pace in 2013 as the global economic outlook has brightened, but the risk of financial imbalance is growing in some parts of the region, the International Monetary Fund said in a report released Monday.
The IMF said the region as a whole should manage 5.7% growth in 2013, lower than its most recent forecast in October of 5.9%, partly because the region-wide slowdown in 2012 was deeper than IMF officials had expected. The IMF estimated 2012 growth at 5.3%.
The IMF defines the Asia Pacific region to include Australia and New Zealand and South Asian countries Bangladesh, India and Sri Lanka.
Buoyant domestic demand and strong capital inflows, fueled by easy monetary policies in the U.S., European Union and Japan, are the main factors underpinning expected steady growth in Asia, according to the IMF report.
Those inflows should continue in the near-term. “In particular, portfolio equity flows are estimated to boost private consumption and investment in Asia mainly by raising asset prices and boosting credit growth,” the IMF report said.
But the IMF flashed a caution signal that those inflows also create overheating risks, especially when combined with the effects of already loose credit in some countries that has fueled asset buying. Countries that have seen the highest growth in credit in recent quarters include Malaysia, the Philippines and Singapore, according to a chart in the IMF report.
“Markets have clearly warmed up, notably in several Southeast Asian economies, although they are not yet overheating,” according to the IMF report.
That means policymakers in Asia will need to walk a fine line between guarding against asset bubbles and continuing to support growth. “Monetary policymakers should stand ready to respond early and decisively to any prospective risks of overheating,” the IMF wrote.
China will remain the region’s growth engine, adding 8.0% and 8.2% to gross domestic product in 2013 and 2014, respectively, the IMF said. Growth in Southeast Asian economies will be stable at 5.5% in 2013 and 2014, according to the report.
But China remains at risk of slowing, particularly if its new government reform program stumbles, which would exert a drag on the rest of the region. Such a slowdown “could be triggered by financial stress related to rapid growth in alternative financial products or uneven progress in reforms that would affect confidence, foreign direct investment, and private investment,” according to the IMF report.