Press Release No. 11/150

Press Release: Asia Remains World’s Most Dynamic Region, Although Pockets of Overheating Pose Risks

April 28, 2011

In Asia both exports and domestic demand are fueling rapid economic growth, the International Monetary Fund (IMF) said today in its latest Regional Economic Outlook (REO) for Asia and the Pacific, which was released in Hong Kong SAR, People’s Republic of China.

Economic growth in the Asia and Pacific region is expected to remain robust this year and next, Mr. Anoop Singh, Director of the IMF’s Asia & Pacific department said, noting that growth is expected to be close to 7 percent in 2011 and 2012, as the region continues to lead the global recovery. The output gap is closing in much of emerging Asia, where growth is expected to reach around 8 percent, led by China and India. For Hong Kong SAR, growth in 2011 is expected to be close to 5.5 percent.

The earthquake-related tragedy in Japan in mid-March caused terrible losses of life and property. The government’s response helped to contain the economic impact, and spillovers to activity in the rest of Asia should be limited. The situation is, however, still uncertain.

Overall, risks to the outlook for Asia are balanced, although new downside risks have surfaced such as the unrest in the Middle East and North Africa as well as uncertainties about the effects of the tragedy in Japan. Also, fiscal and financial vulnerabilities in advanced economies could affect Asia mainly through the trade channel, the report notes.

Within Asia, potential overheating pressures are rising, and inflationary risks remain on the upside, the REO cautions. For the region as a whole, CPI inflation accelerated to about 4.5 percent in February 2011, largely due to the rise of fuel and food prices, which are beginning to feed into core inflation and to affect the poor. Headline inflation is generally expected to increase further in 2011, before decelerating modestly in 2012. Signs of overheating are also building up in some of the region’s asset markets. In Hong Kong SAR, for example, there is the risk of a property bubble developing, and the government is taking proactive policy steps to resist this prospect, such as putting in place a range of prudential measures.

The REO notes that the need to tighten macroeconomic stances in Asia has become more pressing than it was last year. Further monetary tightening and macro-prudential measures will be necessary in several economies that face growing overheating pressures, in order to contain credit dynamics, bring interest rates more closely in line with robust growth, and mitigate risks to the financial sector. “In many economies, exchange rate flexibility is a key line of defense against overheating. In addition, several economies have scope for more fiscal consolidation, which will also help contain demand while building the fiscal space that would allow governments to respond more effectively to future shocks,” the REO says.

“Looking ahead, a key challenge for Asia’s policymakers remains to achieve balanced, sustainable, and more inclusive growth over the medium term,” Mr. Singh said. He noted the need to reduce inequality through inclusive labor markets, which would guard against risks to social stability, and to develop new engines of growth by strengthening private domestic demand.

“Last but not least, I would like to express my sincere gratitude to the Hong Kong Monetary Authority (HKMA) and Mr. Norman Chan, Chief Executive of HKMA, for their kind hospitality to have hosted the REO launch event today,” Mr. Singh added.