• In April, the IMF had projected no growth in 2020 for Asia
  • IMF  warned Asia may take several years to recover from the pandemic
  • IMF expects Asia’s economy to deliver 6.6% growth next year

The International Monetary Fund downgraded its forecast for Asia’s gross domestic product this year to a contraction of 1.9% due to the effects of the coronavirus. (In April, the IMF projected no growth in 2020 for Asia)

Noting that Asia’s economy will shrink this year “for the first time in living memory,” the IMF further warned the region may take several years to recover from the pandemic.

In a blog published on Tuesday, IMF said the downgrade was made due to weaker global conditions and more protracted containment measures in several emerging economies in Asia.

“Asia is heavily dependent on global supply chains and cannot grow while the whole world is suffering,” IMF said.

However, the Asian economy will still outperform other parts of the world given that the IMF predicted global GDP will drop by as much as 4.9% this year.

Moreover, Changyong Rhee, director of the Asia and Pacific department at IMF, said he expects Asia’s economy to rebound by delivering 6.6% growth next year.

However, even with this expected pickup in economic activity in 2021, IMF cautioned that output losses due to COVID-19 are likely to persist.

“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, where economic activity has already started to rebound,” IMF indicated.

“What we are worried about [in] Asia is actually the recovery from 2020 [onward],” said Rhee, citing the region is heavily dependent upon trade, tourism and foreign remittances – all of which were badly hurt by the pandemic.

“Even if we develop new medical solutions [to the virus], the recovery of ... contact-intensive sectors will be slow, tourism for example. So because of that, I think Asia’s recovery will be protracted,” he said.

Rhee further warned that a second wave of infections may overload the health care and financial systems of less developed Asian countries.

“So I wonder, if the second wave happens, whether [some] Asian governments can use the same stimulus as in the ... first crisis,” he said. “So we have to be more concerned, more cautious.”

In addition, IMF cautioned that its projections for 2021 and thereafter are partly based on the resumption of private demand, which may be an overly optimistic assumption.

“Asia’s trade is expected to contract significantly due to weaker external demand, with total trade [exports plus imports] projected to decline by about 20% in 2020 in Japan, India, and the Philippines.” IMF stated. “Reorienting Asia’s growth model toward domestic demand and away from a heavy reliance on exports has begun but will take more time to be completed.”

IMF also cautioned that some Asian nations may prolong or reorder lockdowns to prevent the spread of the virus.

“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,” IMF declared. “While a lockdown may lead to a contraction in economic activity -- as measured by industrial production -- of about 12% a month, a full reversal in containment measures may increase economic activity by only about 7%.”

In addition, given the widening income inequality in many Asian states – job prospects for the less educated will likely rise after the pandemic passes. “These effects are likely to be exacerbated in Asia due to the large proportion of informal workers, making the recovery more protracted,” IMF said. “Weakened household and corporate balance sheets in many Asian countries can [also] weigh negatively on investor sentiment and amplify the effect of increasing uncertainties associated with geopolitical tensions.”

IMF emphasized the crucial factor of intra-regional trade for Asian economies.

"I think it's very important for us to emphasize that trade is important for every country's growth and everyone's welfare," said Rhee.

Rhee also pointed to the important role China must play in the recovery.

"China's growth is very critical for the maintaining [of] commodity prices for many commodity exporters," he said.

Rhee added that China's gradual transition to becoming a more consumption-driven economy will benefit its economy.

"In that sense, we are emphasizing the building of the social safety net, so people can reduce [their] precautionary saving and spend more domestically," he said.