“Real estate risk”.. IMF raises Asia's economic forecast on China

The International Monetary Fund raised its economic outlook for Asia on Tuesday, as China's recovery boosted growth, but warned of persistent inflation risks and global market volatility driven by problems in the Western banking sector.

The International Monetary Fund said the reopening of the Chinese economy will be pivotal for the region as it spreads to Asia as it is seen as focusing on consumption and demand in the services sector rather than investment.

“The Asia-Pacific will be the most dynamic of the world’s major regions in 2023, mostly driven by the booming prospects of China and India,” the International Monetary Fund said in its Regional Economic Outlook report.

The biggest driver of growth

“As in the rest of the world, domestic demand is expected to remain the largest driver of growth across Asia in 2023.”

The International Monetary Fund said that Asia's economy is expected to expand by 4.6% this year after an increase of 3.8% in 2022, contributing about 70% of global growth, and raised its forecast by 0.3 percentage points from October.

The report said China and India will be the main drivers with expansions of 5.2% and 5.9% respectively, although growth in the rest of Asia is also expected to moderate this year.

Downgrade Asian growth forecasts

But the International Monetary Fund cut its forecast for Asian growth next year by 0.2 points to 4.4%, and warned of risks to the outlook such as more-than-expected inflation, slowing global demand, as well as the impact of banking sector pressures in the United States and Europe.

"While spillovers to the region from stresses in the US and European financial sectors have been relatively contained so far, Asia remains vulnerable to a sudden and disorderly tightening of financial conditions and a sudden and disorderly repricing of assets," the IMF said.

the IMF added that while Asia had strong capital and liquidity reserves to buffer market shocks, the region's corporate sectors and highly indebted households were "significantly" more vulnerable to a sharp increase in borrowing costs.

The IMF also urged central banks in Asia - with the exception of Japan and China - to keep monetary policy tight to bring down inflation, which may remain stubbornly high in part due to strong domestic demand.

"The costs of failing to reduce inflation below target are likely to outweigh any benefits from keeping monetary conditions loose," the IMF said.

“Inadequate tightening in the short term will require disproportionately more monetary tightening later to avoid rising inflation becoming entrenched, making larger deflation more likely.”

Real estate risk

The International Monetary Fund said that while China will be a key driver of growth for the region, the country's real estate sector remains a risk that policymakers need to address to ensure an even recovery in the sector.

Large developers have benefited greatly from recent moves by the government to facilitate financing for developers. However, Thomas Helbling, deputy director of the IMF's Asia and Pacific Department, said areas in China with smaller, weaker players are yet to show signs of recovery.

"While the government's (recent) efforts have stabilized the market, it should proactively support the restructuring of weaker developers who are still struggling," Helbling said at a media briefing in Hong Kong.

China's policymakers are trying to stabilize the sector, which accounts for a quarter of national gross domestic product, after a series of defaults among developers and slumping home sales.

"For areas with weaker housing markets, recovery has not happened yet. We need more policy measures to reduce potential risks," Helbling said.