The International Monetary Fund (IMF) on Wednesday downgraded Asia Pacific’s regional economic growth to contract 2.2 per cent in 2020— the worst in living memory — and 0.6 per cent lower than its June projections.
The sharper contraction is led by declining growth in India, the Philippines, and Malaysia. However, it noted that green shoots were visible with Asia’s economic contraction appearing to have bottomed out in Q2, 2020.
Recovery may be sluggish, but growth will likely pick up to 6.9 per cent in 2021 — 0.3 per cent higher than its earlier estimates.
There’s more than one reason for the downgrade. Asia’s labour markets have been hit hard, and inequality has been rising much before the crisis struck.
Besides, geopolitical, trade and technology tensions are threatening Asia’s export-driven growth model.
In addition, corporate and households are overleveraged, while public debt burden is becoming a concern for many emerging markets and low-income nations.
E ven though recovery began in Q3, not all growth engines are firing with the same power across countries leading to a multispeed recovery, noted Jonathan D. Ostry, Acting Director, Asia and Pacific Department, IMF.
“But, in combination with the deep recessions this year, it nevertheless implies that a number of economies will still be smaller at the end of 2021 than before the pandemic,” Ostry added.
The IMF’s latest Regional Economic Outlook projects that potential output by the middle of this decade could be about 5% lower than before the pandemic -- due to the fall in labour force participation and weak confidence that dims private investment.
Hence, Ostry advocated that macroeconomic policy support should not be withdrawn prematurely and greater efforts to better target fiscal support and protect the most vulnerable were essential.
“The scars will be deep: with declining labour force participation and weak confidence dimming private investment, potential output by the middle of the decade could be some 5% lower than before the pandemic,” Ostry said adding that prospects for a global trade-led recovery look dim, because of weak global growth, closed borders, and festering tensions around trade, technology and security — despite boost to the region from China’s recovery.
With the pandemic seemingly far from over, policy support should be sustained and, in some cases, increased and targeted fiscal spending is needed until the recovery is entrentched. It should aim at the most vulnerable where fiscal multipliers are highest and to jobs-oriented, inclusive and green investment. Meanwhile, advanced economies, while still in recession, are expected to do somewhat better than expected in 2020, reflecting a faster pickup in activity following earlier exit from lockdowns.
6.9% Economy likely to rebound in 2021
What led IMF to lower its forecast?
The sharper contraction is led by declining growth in India, Malaysia and Philippines. Among other reasons are geopolitical tensions threatening Asia’s export-driven growth model.