Asia’s long-term growth potential slowing –IMF

Asia is still the world’s fastest- growing region but its long-term growth potential is slowing, the International Monetary Fund (IMF) said yesterday.

Its muted forecast stemmed from what it sees as less efficient credit allocation in the region and dwindling gains from participating in global value chains – factors that are dragging down productivity growth, said Changyong Rhee, the IMF’s director of the Asia and Pacific department.

Rhee told a briefing here yesterday that the “new mediocre” of slower growth is not unique to Asia, but is likely to be “more manifest” here than in other regions largely because of the ripple effects of China’s move towards more sustainable growth.

The IMF also said it expects the Singapore economy to expand 3 per cent both this year and next year.

This is in line with the government forecasts of 2 per cent to 4 per cent growth.

However, the IMF forecast may be revised downwards slightly when it completes a review of the Singapore economy by the end of this week.

The downgrade may be due in part to the impact of a slower China, said Geoffrey Heenan, the IMF’s resident representative in Singapore, who was also at yesterday’s briefing.

The economic outlook for the Asia-Pacific region remains solid, with the IMF expecting it to grow 5.6 per cent this year and 5.5 per cent next year.

Domestic demand will drive growth, supported by the boost to real incomes from lower global oil prices.

These factors are expected to offset the tighter financial conditions from capital flow reversals triggered by the prospect of higher interest rates in the United States, the IMF said.

While the oil price plunge has sparked concerns about deflation – the phenomenon of persistent falling prices – taking root in advanced economies, this is not a cause for concern in Asia’s emerging economies or in Singapore, the IMF said.

Current low or negative rates of inflation are a temporary phenomenon, given that global oil prices are gradually showing signs of recovery, Rhee said.

In Singapore, low or negative rates of headline inflation in recent months were due not only to lower oil prices but also deliberate government policies to cool the car and housing markets, Heenan noted.

He added that inflation here is expected to return to positive territory by the end of the year.