IMF describes Asia''s near-term growth outlook as ''very positive''

12 Apr 2007

The International Monetary Fund today said the rapid growth in China and India, would lead Asia with prospects of a "very positive" near-term growth outlook that should be able to withstand a US slowdown.

In its twice-yearly World Economic Outlook report, the IMF said, questions remained, about the demand for electronics exports from countries like South Korea, Taiwan and ASEAN countries, and those countries that face the risk of a shock if the Japanese yen carry trade unwinds dramatically.

It observed that China was still experiencing excessive investment, much of it by inefficient state-owned enterprises whose investments were a burden on banks and on corporate profits.

The IMF forecast emerging Asia as a whole to grow 8.4 per cent in 2007 and 8.0 per cent in 2008, with China''s growth for the two years to be 10 per cent and 9.5 per cent, respectively. India''s growth was expected to expand 8.5 per cent this year and 7.8 per cent in 2008, the outlook said.

"One question in assessing growth prospects for the region is how a sharper-than-expected slowdown in the United States would affect the region," the report said.

The fallout from a US slowdown would be "relatively well contained" because, with the key exception of China, the importance of the US market to the region had declined amid growing inter-regional trade, the report said.

In addition, a US slowdown reflected by the US housing sector, would have a muted effect on demand for Asian exports, while demand for electronics remained mostly firm. "Against this background, the near-term outlook for growth in the region remains very positive," it said.

"On the downside, a sharper-than-anticipated slowdown in the demand for Asian exports in general, and electronic goods in particular, could undercut growth," the IMF warned.

The IMF also identified further risks coming from "financial markets in the region, especially those that appear richly valued," as they remain vulnerable to any unanticipated rise in global risk aversion.

It pointed out that some of the Asian economies could be hurt by any rapid unwinding of the yen carry trade, where investors borrow in low-yielding currencies like the Japanese Yen to invest in purchases of currencies with higher-returns or to invest emerging markets offering high returns. Such investments, the report cautioned, could unwind rapidly if investors were to revise their expectations of bilateral exchange rates and interest rate differentials.