IMF taps Asia for global economic growth

Asia will continue to lead global economic growth over the next two years even as it grapples with risks including inflation, turmoil in the Middle East and the effects of Japan's tsunami, the International Monetary Fund said Thursday.

"Robust" regional growth of close to 7 per cent will be fueled by exports and domestic demand, Anoop Singh, director of the Washington-based body's Asia & Pacific department, said in the twice-yearly report. Asia's overall economy grew 8.3 per cent in 2010.

Growth will be driven by economic powerhouses China and India. The IMF forecasts China's economy will grow 9.5 per cent while India will expand about 8 per cent over the next two years.

But the fund warned of "pockets of overheating" across the region as consumer price inflation rose to 4.5 per cent in February. Higher oil and food prices are starting to feed into broader inflation and will affect the poor, the fund said. Inflation is also being driven by low interest rates in many Asian countries.

"In most economies in Asia, further monetary tightening is needed as interest rates in those economies remain below levels generally consistent with stable growth and low inflation," said Singh, who also urged countries to adopt more flexible exchange rates as a weapon against overheating.

The IMF forecasts inflation will continue rising this year before easing modestly in 2012.

Earlier this week, the Asian Development Bank warned that surging food prices threaten to push millions more people into poverty and shave up to 1.5 percentage points off regional economic growth.

The IMF said turmoil in the Middle East and North Africa could also pose a risk by causing further spikes in oil prices, which would shave economic growth in countries reliant on oil imports, such as China and Japan.

Asian economies could also be affected if higher oil prices result in a global slowdown, which would result in a drop in demand from wealthy countries for their exports.

The IMF cut its forecast for Japan's economic growth in 2011 to 1.4 per cent from 1.6 per cent because of the March 11 earthquake, tsunami and subsequent nuclear disaster, which left about 27,000 people dead and missing and is estimated by the government to have caused up to $305 billion US in damage.

Economic damage is much greater than from the 1995 Kobe earthquake, the IMF said. Power supply interruptions are affecting a much larger region, including the Kanto region around Tokyo, which accounts for about 40 per cent of Japan's economy.

Japan's economic recovery will take longer because of the damage to power plants and electronics and auto component suppliers. The government has much less space to maneuver because interest rates are already near zero while public debt is very high, the report said.

Japanese economic growth is expected to pick up to 2.1 per cent in 2012 because of reconstruction spending.

Prolonged production disruptions could affect other economies, especially those reliant on industries where Japanese producers dominate, such as silicon wafers for microchips.

"Over time there could also be a switch to alternative suppliers, although Japan's status as a highly specialized supplier of electronic components and capital goods suggest limits to this strategy," the report said.