IMF cuts economic outlook for Asia, as COVID-19 devastates growth, but China remains a bright spot

IMF cuts economic outlook for Asia, as COVID-19 devastates growth, but China remains a bright spot
A priest walks in front of the body of a person who died of the coronavirus disease, as he collects woods to make a funeral pyre at a crematorium in New Delhi, India, on July 3, 2020.Anushree Fadnavis/Reuters
  • The IMF has cut its estimate for Asian economic growth to -2.2% for 2020, down 0.6% from it last forecast in June, citing steep contractions in India, Philippines and Malaysia.
  • The fund upgraded its outlook for China, raising its growth forecast for this year to 1.9%, up 0.7% from a previous estimate.
  • Recovery rates in countries that imposed effective confinement and exit strategies, as well as contact testing and tracing programs, will outpace those of countries that did not, thereby creating a "multi-speed" recovery, the fund said.

The Asian economy will suffer its worst recession on record this year, as some of its powerhouses are still struggling to contain the fallout from the coronavirus pandemic, which prompted the International Monetary Fund to downgrade its outlook for the region on Wednesday.

The IMF now expects economic growth across Asia to contract by 2.2% this year, a full 0.6% less than it forecast in June and what Jonathan Ostry, the acting director of the IMF"s Asia and Pacific department, called "the worst outcome in living memory. "

"This reflects a sharper contraction, notably in India, the Philippines, and Malaysia," the IMF said in its regional economic outlook.
Advertisement
Global growth is forecast to shrink by 4.4% this year, marking a 0.6% improvement on the IMF's most recent estimate. In 2021, the fund expects growth to increase by 5.2 percent, 0.3 percentage point lower than projected in June 2020, reflecting the persistence of social distancing into next year.

"The good news is that we expect the region to grow by 6.9 percent in 2021. But even with this boost, output will be lower at the end of 2021 than our pre-pandemic projection," Ostry said.

Read More: Market wizard Jim Rogers started trading with $600 and now has a reported net worth of $300 million. He shares the 8 trading rules that ensured his success.
Advertisement

China is the notable exception in Asia. Having been the first major economy to have to battle COVID-19, when the initial outbreak of the disease was traced back to a market in Wuhan province, China has all but stamped out death and infection rates. Economic activity has almost returned to pre-pandemic levels.

"China, which suffered the blow from the pandemic earlier than other countries, has seen a very strong recovery since the first quarter lockdown, and growth has now been revised up to 1.9 percent this year, a rare positive figure in a sea of negatives," Ostry said. Next year, the Chinese economy is expected to expand by 8.2%, but this is still a full percentage point lower than the IMF estimated six months ago.
Advertisement

The IMF said the scars left by the pandemic, which has already killed over a million people around the world so far, will be deep, with falling labor force participation and battered confidence cutting private investment. Potential output by the middle of the decade could be as much as 5% below pre-pandemic levels, the IMF said.

India has been one of the worst-hit countries in the region, accounting for around 10% of global deaths so far. The economy shrank by almost a quarter in the three months to June and the IMF only expects gradual recovery from here.

In the longer run, the pandemic will create a "multi-speed" Asia, in which those countries that introduced effective containment measures early on and timed their exit accordingly outperform those that did not, the IMF said.
Advertisement
IMF cuts economic outlook for Asia, as COVID-19 devastates growth, but China remains a bright spot
Asia real GDP growth rates in percent (IMF)IMF World Economic Outlook

A comprehensive approach to testing and tracing in the early stages and the exit phase have also played an important role, together with fiscal stimulus that helped revive economic activity.

The IMF said countries need a full arsenal of policy responses to ensure growth remains on track and outlined four in particular.

Firstly, governments and central banks should not withdraw fiscal and monetary support too quickly to enable the recovery to gain traction.
Advertisement
Secondly, countries need to protect their poorest and most vulnerable citizens, in particular women and girls, who have suffered unduly throughout, the IMF said. Failure to do so could lead to social unrest.

Thirdly, national central banks and governments must look out for emerging, or potential, credit risks to corporates and households. High debt burdens are a key vulnerability, given companies' weakened financial positions, the fund said.

Lastly, governments must enable structural change, including corporate restructuring and resource reallocation. "Economic policies should be laser-focused on the world of tomorrow, not yesterday," the fund said.
Advertisement

"The message is clear: the region has the wherewithal to craft a better future for its citizens. With the right policies and international support when needed, Asia's engines can work together again and power the region ahead," the IMF said.

Read More: MORGAN STANLEY: Buy these 61 stocks that will offer major earnings-driven upside following an imminent 10% market sell-off
{{}}