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The growth outlook for Asian economies remains strong, but the region is vulnerable to sudden tightening in global financial conditions, further market corrections and a shift towards protectionist policies, the International Monetary Fund (IMF) said on Wednesday.
In its regional economic outlook update, the IMF projected Asia to grow 5.6 percent this year and next, up 0.1 percentage point from its last update in October and accounting for about two thirds of global growth.
The slight improvement in near-term prospects reflects "strong and broad-based" global growth and trade, reinforced by fiscal stimulus in the United States.
But in the medium term, risks are tilted to the downside. "Asia remains vulnerable to a sudden and sharp tightening of global financial conditions, while too long a period of easy conditions risks a further buildup of leverage and financial vulnerabilities," the Fund said.
"The gains from globalization have not been shared equally, and, as highlighted by recent tariff actions and announcements, a shift toward inward-looking policies is another risk, with the potential to disrupt international trade and financial markets."
Among other risks, the Fund cited geopolitical tensions, cyber attacks and climate change. Longer term, ageing demographics could be a substantial drag on economies and digitalisation may be a source of uncertainty.
Most economies should therefore look to strengthen policy buffers as closing output gaps means they do not need further fiscal support, the Fund said.
For now, with pressure on wages and prices still "moderate", monetary policy can remain accommodative in most of Asia. But central banks should stand ready to adjust their stances as inflation picks up, and should use macroprudential policies to contain credit growth, it said.
An abrupt change in global risk appetite, which could be triggered by an inflation surprise in the United States or an escalation of Sino-U.S. trade tensions, could lead to a sudden tightening of global financial conditions.
Tensions between the United States and China escalated earlier this year, when President Donald Trump threatened tariffs on up to $150 billion of Chinese goods to punish Beijing over unfair joint-venture and intellectual property practices.
China, which denies allegations it coerces technology transfers through these channels, has warned of retaliation, including tariffs on U.S. soybeans and aircraft.
Meanwhile, assets from Asia's three major economies running current account deficits — India, Indonesia and Philippines — have come under pressure in recent weeks following a rise in U.S. Treasury yields to 3 percent and a surge in oil prices to 3-1/2 year highs.
While Asia's rapid growth and improved external buffers "should help, the region remains vulnerable to a global risk-off event," the report said.