IMF Raises Asia Growth Forecast

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Chinese workers at a construction site in Hefei, in eastern China's Anhui province.

SINGAPORE -- The International Monetary Fund Thursday raised its growth forecasts for Asia's economy for this year and next, but warned that a stalled recovery in advanced economies and lingering problems in the global financial system pose risks to its rosier outlook.

The Washington-based body also said Asia has three major policy challenges: striking a balance between growth and inflation, ensuring growth is sustainable, and making foreign exchange rates more flexible.

In its latest Regional Economic Outlook, the IMF forecast Asia's economy will grow 2.8% this year and 5.8% next year, higher than its previous forecasts of 1.2% and 4.3%, respectively, in May. In 2008, Asia's gross domestic product grew 5.1%.

This growth, it said, is below the 6.7% averaged over the past decade as overseas demand for Asian products remains soft.

"So far, private demand remains weak, and the outlook far from encouraging, both in Asia and abroad," the IMF said. "Consequently, Asian countries will likely need to maintain policy support for some time."

Based on its latest forecast, output in the Group of Seven economies will grow by 1.3% next year, recouping only half of the estimated contraction in 2009.

The strength of the regional economy varies across countries.

Growth in emerging Asia--which excludes advanced countries such as Japan and Australia--will likely be 5.1% this year and 7.0% next year, higher than the IMF's previous projections of 3.3% and 5.4%, respectively.

China is expected to continue leading Asia's economy, growing 8.5% in 2009 and 9.0% in 2010, fueled by a rapid expansion in investment.

India's growth could accelerate to 6.4% in 2010 from 5.4% in 2009 due to strong domestic demand.

The newly industrialized economies of Hong Kong, Singapore, Taiwan and South Korea collectively could see their GDP contract 2.3% in 2009 before recovering to growth of 3.7% next year.

The IMF also warned that financial stresses could linger if efforts to restore balance sheets aren't sustained. If this results in renewed risk aversion, capital outflows could follow, weakening equity valuations and confidence.

While the IMF cautioned against prematurely ending economic stimulus measures, it also pointed out that countries over the near term must ensure that economic support isn't kept for so long that it triggers inflationary pressures.

"Striking the right balance will be difficult," it said.

Over the medium term, countries must devise a way to return to sustained, rapid growth in a new global environment of softer G-7 demand.

Finally, Asia will need to be willing to live with smaller current account surpluses and more flexible exchange rate management.

Despite recent gains, most Asian currencies remain below their precrisis levels, both against the dollar and in real effective terms. One exception has been the yen, which has appreciated strongly over the last year.