IMF raises Asia's economic forecast on China recovery, warns of risks

“The International Monetary Fund (IMF) raised Asia's economic forecast on Tuesday as China's recovery underpinned growth, but warned of risks from persistent inflation and global market volatility driven by Western banking-sector woes,” reported Reuters.

The news piece also reports that Asia's economy is expected to expand 4.6% this year after a 3.8% increase in 2022, contributing around 70% of global growth, per the IMF report, upgrading its forecast by 0.3 of a percentage point from October.

Key statements from IMF report

The reopening of China's economy will be pivotal for the region with the spillover to Asia seen focused on consumption and service-sector demand rather than investment.

Asia and Pacific will be the most dynamic of the world's major regions in 2023, predominantly driven by the buoyant outlook for China and India.

As in the rest of the world, domestic demand is expected to remain the largest growth driver across Asia in 2023.

China and India will be key drivers with an expansion of 5.2% and 5.9%, respectively, though growth in the rest of Asia is also expected to bottom out this year.

While spillovers to the region from stress in U.S. and European financial sectors have been relatively contained thus far, Asia remains vulnerable to tightening financial conditions and to sudden and disorderly repricing of assets.

While Asia has strong capital and liquidity buffers to fend off market shocks, the region's highly leveraged corporate and household sectors are "significantly" more exposed to a sharp increase in borrowing costs.

The costs of failing to bring inflation below target are likely to outweigh any benefits from keeping monetary conditions loose.

Insufficient tightening in the short term would require disproportionately more monetary tightening later to avoid high inflation becoming ingrained, making a larger contraction more likely.

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