Virus resurgence hits Asia recovery

Virus resurgence hits Asia recovery

In its recent Regional Economic Outlook (REO), the IMF notes that the pandemic has taken a turn for the worse in Asia since the spring, along with the region's growth outlook. The growth projection for the Asia and Pacific region is downgraded by more than 1% to 6.5% compared to the April 2021 forecasts -- more than for any other region. The downgrade is mostly due to the fast spread of the Delta variant amid initially low vaccination rates, which has tragically led to further devastating loss of lives, especially in the densely populated South and Southeast Asia. Although demand for Asian manufacturing and exports from Europe and the US has supported recoveries, real GDP outcomes in the first half of 2021 have disappointed.

Despite the downward revision, Asia Pacific remains the fastest-growing region in the world. But the divergence between Asian advanced economies and emerging and developing economies is deepening. High-tech (eg China, South Korea) or commodity exporters (eg Australia, New Zealand) can take full advantage of favourable external demand and accommodative financial conditions. By contrast, tourism-dependent economies such as the Pacific island countries and Thailand, as well as economies with limited room for fiscal stimulus (mostly low-income countries), have been lagging.

As vaccination rates accelerate, the region is expected to grow by 4.9% in 2022, 0.4 percentage point faster than projected in April. But output levels in emerging and developing economies are expected to stay below pre-Covid trends in the coming years.

Accelerating inflation remains a concern for the global economy, though price increases in Asia are more subdued than in other regions. Higher commodity prices, supply chain bottlenecks, and rising shipping costs have impacted exports more than domestic production. And thus, domestic consumer price increases have been contained.

As a result, monetary policies in the region have not tightened as much as in the rest of the world. While New Zealand was the first advanced economy to taper asset purchases and Korea the first to raise policy interest rates, emerging Asia has maintained an accommodative monetary policy to foster the recovery, unlike other emerging markets.

There are downside risks to the region's economic outlook. On the health front, the uncertain path of the pandemic and weakening vaccine efficacy against virus variants is a risk. On the economic side, global supply disruptions and potential financial spillovers from the Federal Reserve scaling back its support for the US economy is a concern for the region.

Higher financing costs can interact with domestic financial vulnerabilities (rising leverage in the corporate and housing sectors in some countries) and slow the recovery further. Natural disasters also pose a growing threat to low-income countries.

Given these challenges, our latest assessment calls for policymakers to carefully navigate the uncertainties and adjust their policy responses accordingly. Their first priority should be to address the health crisis. Swift and broad vaccinations and equitable sharing of vaccines globally are critical. In addition, macroeconomic policy support should remain in place where possible with improved targeting of support for the most vulnerable people and sectors, until the recovery is more firmly established, and the pandemic is under control. We also advise that fiscal policies should be undertaken within medium-term frameworks to maintain credibility and keep borrowing costs low, while central banks should be prepared to act quickly if the recovery strengthens faster than expected or where there is a tangible risk of rising inflation expectations.

Structural reforms and investments to develop new growth engines, including in the digital, education, and green sectors, would help raise productivity and ensure more equitable outcomes for students and workers dealt setbacks by the pandemic's upending of their learning and lives.

In the case of Thailand, successive waves of the pandemic have delayed reopening of the economy to international tourists -- a key source of economic activity. Thus, the growth forecast was revised down to 1% in 2021. However, recent data from Thailand reporting a decline in Covid-19 infection rates and a sharp increase in vaccinations is encouraging. The immediate priority for Thailand is continued progress in vaccinations, as this is the best way to support both lives and livelihoods. At the same time, with growth still far below potential, Thailand would benefit from further stimulus to protect the vulnerable, help scale up investment, and limit long-term scarring, particularly in the hard-hit tourism sector.

Over the medium term, structural reforms via more flexible labour and product markets, greater infrastructure investment, and enabling innovation are critical to raise potential growth. These efforts should be reinforced by well-designed green policies to help transition to a decarbonised economy.

Changyong Rhee is director of Asia and Pacific Department, International Monetary Fund (IMF).

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