International analysts recorded that economic activity in Asia and the Pacific outperformed expectations in the second half of 2023, despite a challenging environment characterized by still-tight monetary policies and muted external demand. The region grew by 5.0 percent last year, 0.4 percentage point stronger than forecast in October. Upside surprises were concentrated in emerging markets, driven primarily by robust domestic demand. Still, headline inflation has continued to decline, especially in emerging Asia, reflecting timely monetary tightening in 2022 and early 2023, retreating commodity prices, lower global manufactured goods price inflation, and supply capacity coming back on stream following the COVID-19 pandemic. The pace and degree of disinflation has differed among Asian economies, however, with some still seeing sustained price pressures and others facing deflationary risks.
Most activity data for early 2024 have been encouraging. For the year as a whole, growth in Asia and the Pacific is projected to slow modestly to 4.5 percent—an upward revision of 0.3 percentage point from last October, reflecting, among other things, carryover from stronger 2023 outturns and policy support. The region is expected to remain the world’s most dynamic, contributing about 60 percent of global growth. Provided countries stay the course on macroeconomic policies, inflation trajectories are projected to converge: price pressures would ease in economies where inflation is above target and pick up in economies where inflation is low. Growth in 2025 is projected to moderate further to 4.3 percent, with the structural slowdown in China a key factor. Near-term risks are now broadly balanced. Retreating inflation and, consequently, the prospect of earlier monetary easing have increased the likelihood of a soft landing, both in Asia and globally. Stronger-than-expected growth in Europe and the United States is an upside risk for Asia’s exporters. At the same time, increased geoeconomic fragmentation and geopolitical tensions continue to pose serious downside risks to medium-term growth in the region. In China, a deeper-than-anticipated property sector correction is a downside risk, while greater-than expected policy support is an upside risk—both could be sources of spillovers to China’s neighbors. Japan’s exit from negative interest rate policy has proceeded smoothly thus far, easing previous concerns about spillovers from sudden repricing.
Central banks should ensure that inflation returns smoothly to target, both in countries experiencing persistent price pressures and in countries facing deflationary risks. Policymakers should continue to focus firmly on domestic price stability and avoid making policy decisions overly dependent on anticipated interest rate moves by the Federal Reserve. Higher debt levels and interest costs weigh on public balance sheets—a renewed effort to advance fiscal consolidation is thus in order, especially as addressing medium-term structural challenges— including from aging populations and climate change—will require additional fiscal space. As the tighter monetary policies of the last two years are still passing through to corporate and household balance sheets, supervisors should continue to vigilantly monitor the buildup of risks.
