Asia to see more inflation pressure, says IMF


The International Monetary Fund said Friday the Asia-Pacific region faces a challenging year, having to cope with an expected global slowdown led by the United States and a sharp spike in inflation.

It said growth will likely fall 1.25 percentage points to 6.2 per cent as exports to the United States and the European Union weaken this year.

"At the same time as growth is starting to slow, inflation is rising across the region," David Burton, director of the IMF's Asia and Pacific Department, told a news conference, citing Indonesia, China and Vietnam as notable cases.

Burton said rising prices for food, especially rice, had begun pushing up headline figures and had also begun to produce "second-round effects" as inflation expectations became entrenched.

Inflation "is a significant, important issue which needs to be addressed ... Worrying about inflation ... is now more important than worrying about growth" in some countries, he said.

In Singapore, he noted, the authorities had felt the need Thursday to tighten monetary policy as official figures showed inflation soaring from 0.8 per cent in the first half of last year to 6.6 per cent in January-February.

At the same time, Burton expressed confidence that the expected economic slowdown itself would moderate demand and take some pressure off prices, while market forces should in turn see more food and raw materials produced.

Food export restrictions were understandable but not the best way forward, he said, adding "it is desirable to avoid those sorts of responses."

The IMF regional economic outlook report said that despite such concerns, activity remained fairly buoyant although the unfolding global financial crisis added uncertainty and the balance of risks was on the downside.

Policymakers must remain vigilant and act when needed, the IMF said.

"While growth remains high, led by China and India, and domestic demand is still robust, key activity indicators in recent months suggest that momentum is easing. Confidence indicators also point to a slowing pace of activity."

Asia's trade performance remained positive, despite lackluster electronics, helped by strong growth of exports to "non-traditional" markets in Latin America, Eastern Europe and Russia and the Middle East. Import growth had also picked up in recent months, suggesting strength in domestic demand.

The report said markets have functioned well overall and there were few signs of a credit squeeze in the region - its banks having relatively limited exposure to the US high-risk subprime home loan crisis - while investor sentiment on the long-term prospects remained positive.

The IMF said that while Asia had developed greater inter-regional economic ties, its links with the United States had also increased and so the spillover impact from problems there could be significant.

"While spillovers have been moderate on emerging Asia on average - a one percentage point slowdown in the United States has led to a 0.25-0.50 percentage point average slowdown - there are reasons to believe that the current US slowdown could have a significantly larger impact," the IMF said.

There was evidence that spillover effects from the United States, in particular to China, have risen in recent years and that financial contagion and global confidence links could increase the impact significantly, it said.

The IMF put growth in China this year at about 9.3 per cent, down some two percentage points, while India would cool to just below 8.0 per cent.  (AFP)