WASHINGTON: Asia-Pacific will continue to outperform the rest of the world but a slower growth in China and Japan poses new risks to the region, says the International Monetary Fund.

The Fund’s biannual Regional Economic Outlook for Asia and the Pacific says that the region’s gross domestic product growth will hold steady at 5.6 per cent in 2015, before moderating to 5.5pc in 2016.

The IMF attributes the region’s strong growth to robust domestic consumption spurred by healthy labour markets, low interest rates and the recent fall in oil prices.

But it warns that rising debts, a stronger dollar and weaker-than-expected performances from China and Japan pose new risks to the broader Asia-Pacific region.

The report projects that India’s growth rate will rise to 7.5pc this year and next, “making it one of the fastest growing economies in the world.”

But the IMF also notes that while India’s near-term growth outlook has improved, its medium-term prospects remain constrained by longstanding structural weakness.

With higher political certainty, improved business confidence, reduced external vulnerabilities and lower commodity prices, India’s real GDP is forecast to rise to 7.2pc in 2014-15, accelerating to 7.5pc in 2015-16.

The IMF notes that China’s economy is slowing to a more sustainable pace — 6.8pc GDP growth in 2015, and 6.3pc in 2016, while growth in Japan is picking up to 1pc this year, and 1.2pc next year.

Asia will also benefit from lower commodity prices, although several commodity exporters (Australia, Indonesia, Malaysia, and New Zealand) will be adversely impacted.

While Asia accounts for nearly 40pc of global output, it contributes nearly two-thirds of global growth. Asia’s leading role in world growth is set to continue over the medium term despite slowing potential growth, which reflects weaker productivity gains, the effects of aging, and infrastructure bottlenecks.

The global recovery, although moderate and uneven, will continue to support demand for Asia’s exports.

“These factors are expected to offset the effect of tighter financial conditions from capital flow reversals triggered in part by the prospect of monetary tightening by the (US) Federal Reserve,” the report says.

Persistent US dollar strength can also affect some Asian economies by ramping up debt-servicing costs for firms with sizable dollar-denominated debt and curtail demand.

“Debt levels — including foreign currency-denominated debt — have increased rapidly in recent years, and Asia is now more vulnerable to financial market shocks,” the IMF says.

On the flip side, lower energy prices present an upside risk for Asia’s growth if more of the savings on oil import bills is spent.

“The decline in oil and food prices provides a window of opportunity to further reform or phase out subsidies, thereby improving spending efficiency and shielding public spending from future commodity price fluctuations,” the report says.

Published in Dawn, May 8th, 2015

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