The International Monetary Fund (IMF) on Tuesday revised down its forecast for the Asian economy amid the mounting COVID-19 fallout, projecting a 1.6-percent contraction in 2020, and warning of "clouds on the horizon."
The latest projection is a downgrade to the forecast of zero growth in the April World Economic Outlook (WEO), indicating stronger global headwinds as the pandemic's impacts continue to ripple throughout the world.
"Projections for 2020 have been revised down for most of the countries in the (Asian) region due to weaker global conditions and more protracted containment measures in several emerging economies," Chang Yong Rhee, director of the IMF's Asia and Pacific Department, wrote in a blog post.
Rhee noted that Asia's economic growth in the first quarter of 2020 was better than previously projected, partly owing to early stabilization of the virus in some countries.
In the absence of a second wave of infections and with an unprecedented policy stimulus to support the recovery, growth in Asia is projected to rebound strongly to 6.6 percent in 2021, according to Rhee.
"But even with this fast pickup in economic activity, output losses due to COVID-19 are likely to persist," he wrote.
According to an update to April WEO released last week, the IMF revised down its forecast for the global economy, projecting a 4.9-percent contraction in 2020, 1.9 percentage points below the April forecast, followed by a growth of 5.4 percent in 2021.
"The downgrade from April reflects worse than anticipated outcomes in the first half of this year, an expectation of more persistent social distancing into the second half of this year, and damage to supply potential," IMF Chief Economist Gita Gopinath said in a virtual news conference.
Advanced economies are projected to contract 8 percent this year, and emerging markets and developing economies are projected to shrink by 3 percent this year, according to the updated report.
China is expected to grow by 1 percent, the only major economy that could see growth this year, followed by an 8.2-percent growth in 2021.
The IMF projects Asia's economic output in 2022 to be about 5 percent lower compared with the level predicted before the crisis, and this gap "will be much larger" if China is excluded, where economic activities have already started to rebound, Rhee said.
The IMF official also noted that projections for 2021 and beyond assume a strong rebound in private demand, though there are "clouds on the horizon," which could undermine Asia's recovery.
Such "clouds" include slower growth in trade, longer than expected lockdowns, rising inequality, weak balance sheets and geopolitical tensions.
"Asia is heavily dependent on global supply chains and cannot grow while the whole world is suffering," Rhee said. "Asia's trade is expected to contract significantly due to weaker external demand."
He added that 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.
Noting that not all recent developments have been negative, Rhee said many Asian countries have been able to provide significant monetary and fiscal policy support -- often in the form of guarantees and loans to households and firms.
Additionally, lower oil prices and improved market sentiment and financial conditions are helping the recovery, he said, adding that these factors "may not last."
"Asian countries are experimenting re-opening, and policies must be geared toward supporting the nascent recovery without exacerbating vulnerabilities," the IMF official said. "They must use fiscal stimulus wisely and complement it with economic reforms."
The priorities, he argued, include close coordination between monetary and fiscal policies, ensuring resources are reallocated appropriately, as well as addressing inequalities.
Inequality had already been rising in Asia, Rhee said, noting that IMF's recent research shows how past pandemics led to higher income inequality and hurt employment prospects of those with limited education.
"These effects are likely to be exacerbated in Asia due to the large proportion of informal workers, making the recovery more protracted," he said.
The IMF officials urged Asian policymakers to broaden access to health and basic services, finance, and the digital economy, and expand social safety nets to extend unemployment insurance coverage to informal workers.
Addressing pervasive informality will also require comprehensive labor and product market reforms to improve the business environment and removing onerous legal and regulatory obstacles (especially for startups), and policies to rationale the tax system, he added.
