The IMF has painted a gloomier picture for Asia. On Wednesday (Oct 21), the International Monetary Fund revealed Asia’s economic contraction this year will be worse than previously thought. In its latest Regional Economic Outlook report for Asia and Pacific, the IMF predicts the region’s economy to shrink by 2.2%, worse than an earlier 1.6% contraction the fund forecast in June.

 

Although Asia and Pacific has started to recover, the economic activity in the region is moving at “multiple speeds”. In general, the outlook varies by country depending on infection rates and containment measures, the scale and effectiveness of the policy response, reliance on contact-intensive activities, and reliance on external demand.

 

The downward revision of 0.6 percentage points was due to a sharper-than-expected downturn in key emerging markets, especially in India, Philippines and Malaysia. Asia is divided into 3 categories – Advanced Economies (8 countries), Emerging Markets and Developing Economies, EMDE (15 countries), and other small states (15 countries).

Here’s the fund’s forecast for the three economies:

• India’s economy is expected to shrink by 3% in the fiscal year ending March 31, 2021 – worse than the 4.5% contraction forecast in June.
• The Philippines’ economy is forecasted to plunge 3% in the calendar year 2020 – worse than the 3.6% contraction projected in June.
• Malaysia’s economy will likely shrink by 6% this year – worse than the IMF’s June forecast of a 3.8% contraction.

 

Citing ongoing fears of infection, social distancing measures and border closures that will especially affect countries that rely on tourism, IMF wrote – “Returning to full capacity will be a long slog“. While India and the Philippines are particularly affected due to a continuous rise in virus cases and extended lockdown, Thailand’s dependency on tourism saw its economy shrank 12.2% in the second quarter.

 

In India, activity plunged by 24% year-on-year in the second quarter, with large contractions across all sectors except for agricultural production, where record crops and fewer virus cases have supported the rural economy. In the Philippines, a fall in remittances compounded the hit on economic activity and the Pacific island countries.

Malaysia, on the other hand, is still struggling to revive its economic engine after a 17.1% contraction in the second quarter of 2020 from a 0.7% growth in the first quarter. The country has just re-imposed a nationwide lockdown – Conditional Movement Control Order (CMCO) – as new cases of Coronavirus spiked and fast approaches 1,000 cases, largely due to Sabah state election.

 

Among advanced economies in Asia, all countries – except Taiwan – are expected to see negative economic growth of between minus 1.9% (Korea) and minus 52.3% (Macao). Australia and Japan’s economies are predicted to contract by 4.2% and 5.3% respectively in 2020. Overall, advanced economies are forecasted to shrink by 4.2% this year.

 

However, not all Asian economies had their economic numbers cut. As expected, China is leading the region’s recovery. The Washington-based IMF has upgraded the Chinese economic growth to 1.9% from its June projection of 1% for 2020. The fund said China’s upgrade was because of “a faster-than-expected rebound” in the second quarter.

Learning from China, the IMF said the Asian giant’s exit strategy shows that a sequenced approach that prioritizes essential sectors and reopens regions based on forward-looking risk assessments can reduce the economic costs of lockdowns while minimizing health risks. After hitting a trough in February 2020, China’s growth received a boost from infrastructure, real estate investment, and a surge in exports.

 

Like China, Vietnam has adopted a sequential approach, reopening lower-risk regions or sectors first, and has also reimposed localized lockdowns if needed to control new virus clusters. It has used a comprehensive tracing system to quarantine all close contacts of positive cases. By acting swiftly at the start of the pandemic, Vietnam saw a reduction in infections by more than 95% relative to a baseline with no containment measures.

 

Among EMDE countries, several countries are expected to post positive GDP growths in 2020 despite the pandemic’s effects, including Bangladesh (3.8%), Myanmar (2%), Vietnam (1.6%) and of course, China (1.9%). Among Pacific small states, only Nauru and Bhutan’s economies are projected to deliver positive growth of 0.7% and 0.6% respectively.

Even though the recovery is expected to be sluggish, the Asia and Pacific region are projected to grow by 6.9% in 2021 – about 0.3 percentage points higher than projected in June by the IMF. The economic growth for China in 2021 is expected to pick up to 8.2%. However, geopolitical tensions – particularly U.S.‑China dispute – may affect the recovery in the region.

 

The stronger recovery in China, the United States and the Euro area will support growth in Asia. But a second wave of the pandemic at the global scale cannot be ruled out. Until a vaccine is developed, the fear of infection and social-distancing measures are at the same time dimming consumer confidence in the region.

 

The International Monetary Fund also pointed out that even though economic activity would begin to normalise, especially in badly hit emerging market economies next year, the overall regional output would remain “below” pre-Coronavirus pandemic levels in the medium term. To make matters worse, international borders are likely to remain closed for a considerable period.

More importantly, the IMF warned that the pandemic has a huge impact on low-income workers, women and youth in the job market – “Aggregate hours worked has declined as both employment rates and hours worked per employee have collapsed. Unemployment has surged, and labour force participation has plunged, particularly for women and younger workers.”

 

Therefore, maintaining appropriate fiscal support is critical and of paramount importance to ensure that the recovery does not unravel. The priorities should include spending on health care, targeted social protection, and assistance for small and medium enterprises. Investments in green energy and technological infrastructure should be prioritized to create jobs.

 

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October 22nd, 2020 by financetwitter

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