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Friday, June 14, 2024

Recovery unabated amid uncertainty

By Francois Painchaud (*)

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2023 looks to be a challenging year for the global economy, with global growth decelerating owing to monetary tightening and the Russia-Ukraine military conflict continuing to weigh on activity. Persistent inflation pressures, and now financial sector problems in the U.S. and Europe, are injecting additional uncertainty into an already complex economic landscape.

Against this somber backdrop, Asia-Pacific remains a dynamic region. Despite weakening external demand—such as the downturn in demand for tech exports towards the end of 2022—and monetary tightening, domestic demand has so far remained strong, with China’s reopening providing fresh impetus. Growth in Asia and the Pacific is projected to increase this year to 4.6%, up from 3.8% in 2022, an upgrade of 0.3% from the October 2022 World Economic Outlook. This means the region would contribute around 70% to global growth. Asia’s dynamism will be driven primarily by the recovery in China and resilient growth in India, while growth in the rest of Asia is expected to bottom out in 2023, in line with other regions.

However, this dynamic Asian economic outlook does not imply that policymakers in the region can afford to be complacent. The pressures from diminished global demand will weigh on the outlook. Headline inflation has been easing, but remains above targets in most countries, while core inflation has proven to be sticky. Although spillovers from turmoil in the European and U.S. banking sectors have been limited thus far, vulnerabilities to global financial tightening and volatile market conditions, especially in the corporate and household sectors, remain elevated. Growth is expected to fall to 3.9% five years out, the lowest medium-term forecast in recent history, thus contributing to one of the lowest medium-term global growth forecasts since 1990.

Risks to the outlook are to the downside, reflecting the possibility of stickier global and regional price pressures, the disconnect between markets’ anticipation of monetary policy paths and major central banks’ communications, additional turmoil in global financial markets, adverse spillovers to the region from China’s medium-term growth slowdown, and deeper geo-economic fragmentation.

Monetary policy should remain tight until inflation falls durably back within target. The exceptions are China and Japan, where output is below potential and inflation expectations have stayed muted. Unless strains in financial markets increase and financial stability is at stake, central banks should separate monetary policy objectives from financial stability goals, using available tools aimed at addressing financial stability risks to allow them to continue to tighten policy to address inflationary pressures.

Elevated public debt and rising interest costs call for continued—and, in some cases accelerated—fiscal consolidation, which can also support the battle against inflation while protecting the vulnerable through targeted measures. Monitoring pockets of vulnerability linked to elevated debt burdens in the corporate and household sectors, and market risks and corporate credit risk exposure in the financial sector, is essential for safeguarding financial stability. Structural reforms are needed to improve growth potential, through innovation and digitalization; accelerate the green energy transition; reduce risks from fragmentation; and ensure food security.

In Vietnam, economic performance was strong in 2022 with growth reaching 8%, but the outlook for 2023 is more uncertain with heightened downside risks. Indeed, weak demand from key trading partners and real estate and corporate bond markets jitters have already started to take a toll on economic activity. Growth is therefore expected to slow to 5.8% in 2023, despite an expected pickup in public investment under the Program for Recovery and Development (PRD). Risks to the growth outlook are to the downside. Core inflation is expected to remain elevated in the short term, before gradually returning towards 4%.

In response to these challenges, macroeconomic policies need to be carefully calibrated, coordinated, and communicated to manage downside risks and alleviate policy trade-offs, especially between growth, inflation and financial stability. The State Bank of Vietnam (SBV) should continue relying on policy rates to contain inflation and avoid exchange rate pressures while ensuring well-functioning financial markets. Safeguarding financial stability remains a priority. Fiscal policy should be agile and targeted and implementing the public investment plan should be a priority. More decisive efforts at implementing structural reforms are needed to increase productivity and achieve sustained and inclusive growth.

(*) Francois Painchaud – IMF Resident Representative for Vietnam and Lao PDR.

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