The International Monetary Fund has cut its growth forecasts for Asia this year and next, citing concern over the escalation of euro area financial turbulence and a renewed slowdown in the United States.
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In its biannual report on the Regional Economic Outlook for the Asia and Pacific region, the IMF cuts its growth forecast for Asia to an average of 6.25% in 2011 and 6.75% in 2012. In April, the IMF predicted close to 7% growth in both years.
“Risks for Asia are decidedly tilted to the downside,” according to the report. The report’s authors are concerned that problems abroad “could have severe macroeconomic and financial spillovers to Asia,” and foresee “weakening external demand.”
Of course, in addition to a drop in global demand for Asian exports, the report’s authors are also concerned that foreign investors could retrench from the region, reversing their large positions, and that European banks could reduce cross-border lending, causing credit flows to dry up.
Furthermore, the report recognizes that inflation is still high in a number of Asian countries, and that low-income countries will particularly struggle in the near and medium term.
“The fight against inflation is complicated by strong second-round effects, the need to phase out subsidies, and less well-anchored inflation expectations. Pacific Island economies need to undertake further structural reforms to lift potential growth,” according to the report.
Asian policymakers are faced with “a delicate balancing act,” needing to both guard against risk to growth “but also limit the adverse impact of prolonged easy financial conditions on inflation.”