Rising Covid cases in China and the war in Ukraine pose headwinds for Asia’s growth, the International Monetary Fund told CNBC on Wednesday.
“Asia is clearly facing headwinds, both from the war in Ukraine but also from the lingering effects of Covid now being much more pronounced in China than before,” said Anne-Marie Gulde-Wolf, the acting director of the IMF’s Asia and Pacific Department.
She said the outlook for Asia in 2022 had been downgraded by half a percentage point to 4.9% from the 5.4% estimate in January.
In its latest World Economic Outlook released on Tuesday, the IMF also trimmed growth projections for China’s economy to 4.4%, lower than its earlier estimate of 4.8%. China’s official target is at about 5.5%.
“Inflation is an issue in many of these countries,” Gulde-Wolf told CNBC’s “Squawk Box Asia.”
“In most countries, we are already seeing price pressures — the exception here being China and Japan, where price pressures remain subdued,” she said.
She said inflationary pressures in China were “quite contained,” as the government is prepared to step in.
“We are seeing China already taking policy measures, both monetary and fiscal. We expect fiscal policy to be expansionary in 2022. And the monetary policy actions are also helping,” she said.
The fiscal policies would be more effective if they were aimed at providing more direct support for the “most vulnerable,” she added.
She said the actions by the U.S. Federal Reserve to tame surging inflation were already factored into the fund’s calculations for Asia. Still, further tightening of monetary policy in the U.S would have serious impacts on output in Asia.
Most Asian countries now have comfortable reserve positions, better supervision, better monetary frameworks and the like. So we are cautiously optimistic.Anne-Marie Gulde-Wolfacting director of the IMF’s Asia and Pacific Department
However, there could be a positive impact on Asian trade too, she said.
“If demand is high in the U.S. that would mean that there would be more demand for Asia’s exports. And that would be positive,” she added.
“However, if the Fed action is on counteracting supply pressures and supply-side induced prices, this could lead to capital flows out of Asia,” the IMF official said.
Still, Asia as a whole is better prepared to handle these situations than before, she added.
“Most Asian countries now have comfortable reserve positions, better supervision, better monetary frameworks and the like. So we are cautiously optimistic,” Gulde-Wolf said.
She warned, however, that other challenges remain.
“At the same time, we have also seen leverage in Asia going up — higher consumer lending, increasing sovereign debt and foreign exchange pressures,” she said, pointing out that significant appreciation of the U.S. dollar could negatively impact Asia.
