The International Monetary Fund (IMF) raised Asia's economic forecast on Tuesday as China's recovery underpinned growth, but warned of risks from persistent inflation and global market volatility driven by Western banking-sector woes.

The reopening of China's economy will be pivotal for the region with the spillover to Asia seen focused on consumption and service-sector demand rather than investment, the IMF said.

"Asia and Pacific will be the most dynamic of the world's major regions in 2023, predominantly driven by the buoyant outlook for China and India," the IMF said in its regional economic outlook report.

"As in the rest of the world, domestic demand is expected to remain the largest growth driver across Asia in 2023."

Asia's economy is expected to expand 4.6 percent this year after a 3.8 percent increase in 2022, contributing around 70 percent of global growth, the IMF said, upgrading its forecast by 0.3 of a percentage point from October.

China and India will be key drivers with an expansion of 5.2 percent and 5.9 percent, respectively, though growth in the rest of Asia is also expected to bottom out this year, the report said.

Thomas Helbling, deputy director of the IMF’s Asia and Pacific Department, said the mainland property market is a cause for concern.

"What remains to be addressed are the weaker developers which are still suffering, and also the status of the pre-sold and incomplete housing stock which is weighing on household confidence and on sentiment in the market," he said.

"And there we have argued that the government should more proactively support restructuring of weak developers and also of property that has been pre-sold but not yet completed."

The IMF cut next year's Asian growth forecast by 0.2 of a point to 4.4 percent, and warned of risks to the outlook such as stickier-than-expected inflation, slowing global demand as well as the impact of US and European banking-sector stress.

"While spillovers to the region from stress in US and European financial sectors have been relatively contained thus far, Asia remains vulnerable to tightening financial conditions and to sudden and disorderly repricing of assets," the IMF said.

And while Asia has strong capital and liquidity buffers to fend off market shocks, the region's highly leveraged corporate and household sectors are "significantly" more exposed to a sharp increase in borrowing costs, it added.

The IMF also urged central banks in Asia – excluding Japan and China – to keep monetary policy tight to bring down inflation, which could remain stubbornly high due in part to robust domestic demand.

On Hong Kong, the IMF is projecting GDP growth of 3.5 percent this year, 0.4 percentage points lower than its forecast last October.

"Overall, we see the recovery, the rebound on track," Helbling said. "With the reopening of the border, with the easing of mobility restrictions, there will be a strong rebound in consumption, in household-related activity, and that we still see on track." (Reuters, additional reporting by RTHK)
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Last updated: 2023-05-02 HKT 13:05