In its May edition of the Regional Economic Outlook for the Asia Pacific region, the International Monetary Fund has upgraded its 2023 economic growth outlook for the region by 0.3% compared to October 2022, now expecting a growth of 4.6%. The improved Asia economy outlook comes despite the weakening external demand and the decline in tech exports.

The financial agency expects Asia-Pacific to contribute around 70% of the global growth in 2023, primarily driven by the recovery in China and the resilient growth in India. In fact, the IMF believes that the two emerging economies will contribute nearly half of global growth.

Asia-Pacific reported an economic growth of 3.8% in 2022, and while the improved forecast paints a better picture of the Asia economy outlook, the IMF also warns of potential risks due to inflation, the financial sector issues in the US and Europe and the continuing impact of Russia’s war in Ukraine.

India and China at the centre

The UN agency says that inflationary pressures in Asia have shown early signs of easing thanks to prompt action by central banks and the decline in prices of commodities. IMF says Asia and the Pacific will be the most dynamic in 2023, with India and China leading the pack as other economies in the region see growth bottoming out.

China’s economic rebound, induced by increased private consumption, is a key catalyst for the region’s improved growth outlook. IMF says that domestic demand will be largest growth driver across Asia in 2023. IMF sees China’s economy grow at 5.2% in 2023.

“China’s reopened economy is rebounding strongly, and this will generate positive spillovers to its trading partners, providing fresh momentum for Asia’s growth,” said Krishna Srinivasan, Director of the IMF’s Asia and Pacific Department in a statement.

However, the financial agency has cut India’s economic growth forecast to 5.9% from its previous 6.1% predicted in October 2022, as softening domestic demand offsets external services demand.

ASEAN growth to shrink in 2023

For ASEAN nations, the IMF sees economic growth falling to 4.6% in 2023 from 5.7% in 2022. Malaysia and Thailand will see a moderation in domestic demand momentum, the Philippines is seeing an impact of monetary policy tightening and commodity price easing has ended the party for Indonesia and Malaysia. Separately, the reduced overseas demand from US and Europe will also impact growth prospects of the ASEAN region.

Advanced economies suffer

Within the developed countries in the region, Japan’s growth is expected at 1.3% for 2023, 0.3% lower than the October 2022 forecast, as weak external demand and investments weigh. Australia and New Zealand will see weakening domestic demand due to monetary tightening, with economic growth now expected to fall to 1.6% and 1.1%, respectively.

Meanwhile, the slowdown in the tech sector is expected to erode the momentum in South Korea, whose growth outlook has been cut to 1.5%. Taiwan is another country which will see the impact of the technology downturn, impacting the overall Asia economy outlook.

Potential risks to growth

The IMF sees inflation as one of the key risks for the region, however, believes prices will start declining in 2023.

“Additional shocks to commodity prices or further disruptions in supply chains could raise headline inflation and pass through into core inflation and inflation expectations,” said the IMF in its report.

The other threat to the Asia economy outlook is an escalation of the Russia-Ukraine war, which could again disrupt supply chains and raises the costs of certain goods.

The key here is central bank action, which the IMF says that abrupt repricing of policy tightening would have adverse spillovers to Asia.

The IMF also talks about the impact of the trouble in the US and European financial sectors. “Asia remains vulnerable to tightening financial conditions and to sudden and disorderly repricing of assets,” says the IMF, but says that the strong capital and liquidity buffers of Asian banks will help mitigate any ill effects.

Some other risks include the high public debt of some countries amid rising interest rates and the decline of growth in the medium-term.

“Asian economies must also prioritize policy initiatives that foster long-term growth. Structural reforms are needed to boost innovation and digitalization, accelerate the green energy transition, reduce risks from fragmentation, and ensure food security,” said Srinivasan.