Asia faces the risk of stagflation – high inflation, low economic growth and high unemployment – stemming from the war in Ukraine, spiking commodity costs and China’s slowdown, a senior International Monetary Fund (IMF) official warned on Tuesday.
Anne-Marie Gulde-Wolf, acting director of the IMF’s Asia and Pacific Department, said inflation is starting to pick up in Asia, while China’s economic slowdown adds pressure to regional growth prospects.
And while the region’s trade and financial exposure to Russia and Ukraine are limited, she said its economies would be affected by the crisis through higher commodity prices and slower growth in European trading partners.
“Therefore, the region faces a stagflationary outlook, with growth being lower than previously expected, and inflation being higher,” she told an online news conference in Washington.
Monetary Tightening Needed
The headwinds to growth come at a time when policy space to respond is limited, Gulde-Wolf said, adding that Asian policymakers will face a difficult trade-off of responding to slowing growth and rising inflation.
“Monetary tightening will be needed in most countries, with the speed of tightening depending on domestic inflation developments and external pressures,” she said.
The US Federal Reserve’s expected steady interest rate hikes also present a challenge to Asian policymakers given the region’s huge dollar-denominated debt, Gulde-Wolf said.
In its latest forecast issued this month, the IMF said it expects Asia’s economy to expand 4.9% this year, down 0.5 percentage point from its previous projection made in January.
Inflation in Asia is now expected to hit 3.4% in 2022, 1 percentage point higher than forecast in January, it said.
A further escalation in the war in Ukraine, new Covid-19 waves, a faster-than-expected Fed rate hike trajectory and prolonged or more widespread lockdowns in China were among risks to Asia’s growth outlook, Gulde-Wolf said.
“There is significant uncertainty around our baseline forecasts, with risks tilted to the downside.” she said.
- Reuters with additional editing by Sean OMeara
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