IMF Sees Asia’s Economic Pain Persisting as Virus Curbs Limit Recovery

(Bloomberg) — Asia’s loss of economic output resulting from the deadly coronavirus pandemic is likely to persist until 2022, according to the International Monetary Fund.

The assessment is a warning of grim prospects for a global recovery after the pandemic tipped the world economy into its worst collapse since the Great Depression. The Asia region contributed about 68% of global growth in 2019, according to the IMF.

While regional growth is projected to rebound to 6.6% next year, that won’t be enough to replace all of the output lost as a result of the crisis.

“We project Asia’s economic output in 2022 to be about 5% lower compared with the level predicted before the crisis, and this gap will be much larger if we exclude China,” according to Chang Yong Rhee, director of the IMF’s Asia and Pacific Department.

“Even when lockdown measures are fully relaxed, economic activity is not likely to return to full capacity due to changes in individual behaviors and measures put in place to maintain physical distancing and reduce contagion,” Rhee said.

The fund now expects global gross domestic product to shrink 4.9% this year, compared with the 3% contraction predicted in April, the international financial organization said last week. For 2021, the fund sees growth of 5.4%, down from 5.8%. Asia is expected to contract by 1.6% this year — the first such outcome in living memory according to Rhee and a downgrade from the fund’s April projection of unchanged output.

Still, Asia continues to provide ballast. If the region’s growth were expected to be as negative as that of the rest of the world, then the global forecast would be for a contraction of 7.6%, according to Rhee.

Close coordination between central banks and finance ministries will be an important part of the policy response, given the limited room to borrow that many emerging economies in Asia face, Rhee said.

Policy options include making more use of central bank balance sheets to funnel lending to smaller businesses. Temporary capital controls may be needed in the event of large outflows.

While portfolio outflows from the region have stabilized, net outflows remain high compared with those during the global financial crisis, Rhee said.

Governments will also need to keep an eye on borrowing even as more crisis spending is needed.

“They must use fiscal stimulus in the short term but complement it with a credible medium-term reform plan to mitigate debt overhang concerns,” Rhee said. “That will help to maintain sovereign credit ratings.”