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Sailing into headwinds: Regional Economic Outlook for Asia and the Philippines


ASIA’s strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter. In the latest Regional Economic Outlook for Asia and the Pacific* of the International Monetary Fund (IMF), we have cut growth forecasts for Asia and the Pacific to 4% this year and 4.3% next year, well below the 5.5% average over the last two decades. For the Philippines, we project growth to reach a robust 6.5% in 2022 before slowing to 5% in 2023.

Waning momentum reflects three formidable headwinds, which may prove to be persistent:

• A sharp tightening of financial conditions, which is raising government borrowing costs and is likely to become even more constricting, as central banks in major advanced economies continue to raise interest rates to tame the fastest inflation in decades. Rapidly depreciating currencies could further complicate policy challenges.

• Russia’s invasion of Ukraine, which is still raging and continues to trigger a sharp slowdown of economic activity in Europe that will further reduce external demand for Asian exports.

• China’s strict zero-COVID policy and the related lockdowns, which, coupled with a deepening turmoil in the real estate sector, has led to an uncharacteristic and sharp slowdown in growth, that in turn is weakening momentum in connected economies.

Moreover, geopolitical tensions have raised the prospect that strategic competition and national security concerns may trump the shared economic benefits of global trade. Interdependencies between economies mean that such a prospect would be very costly, especially for Asia. For example, about half of the imports in the United States and a third in Europe come from Asia. And, in turn, Asian countries account for almost half of global demand for key commodities. Our analysis shows that a typical shock to trade policy uncertainty, like the 2018 buildup of US-China tensions, reduces investment by about 3.5% after two years. It also decreases gross domestic product by 0.4% and raises the unemployment rate by 1 percentage point. The effects on investment are even larger for emerging markets and more open economies, and for firms with high debt.

Amid lower growth, policymakers face complex challenges that will require strong responses. As in the Philippines, central banks will need to persevere with their policy tightening until inflation durably falls back to target. Exchange rates should be allowed to adjust to reflect fundamentals, including the terms of trade — a measure of prices for a country’s exports relative to its imports — and foreign monetary policy decisions. But if global shocks lead to a spike in exchange rates unrelated to domestic policy changes and/or threaten financial stability or undermine the central bank’s ability to stabilize inflation expectations, foreign-exchange interventions may become a useful part of the policy mix for countries with adequate reserves, like the Philippines, alongside monetary policy tightening. Countries in the region should urgently consider improving their liquidity buffers, including by requesting access to precautionary instruments from the Fund for those eligible.

Public debt has risen substantially in Asia over the past 15 years — particularly in the advanced economies and China — and rose further during the pandemic. Fiscal policy should therefore be geared at gradual consolidation to moderate demand alongside monetary policy, focused on the medium-term goal of stabilizing public debt. Accordingly, measures to shield vulnerable populations from the rising cost of living will need to be well-targeted and temporary. Credible medium-term fiscal frameworks remain an imperative, and the recent move in the Philippines to a six-year medium-term fiscal framework aimed at reducing public debt below the government’s indicative cap of 60% of GDP is welcome. Beyond the short term, policies must focus on healing the damage inflicted by the pandemic and Russia’s war in Ukraine. Scarring from the pandemic and current headwinds are likely to be sizable in Asia, in part because of elevated leverage among companies that will weigh on private investment and education losses from school closures that particularly affected the Philippines and could erode human capital if remedial measures aren’t taken today.

Finally, engagement and dialogue between policy makers from Asia and beyond will be vital to avoid the adverse effects from greater fragmentation and ensure that trade remains an engine of growth. Rolling back damaging trade restrictions and reducing uncertainty via clear communication of policy objectives should be a priority. Complementing regional agreements with reforms at the multilateral level, while also restoring a fully functional World Trade Organization dispute settlement system, can not only mitigate potential negative impacts of discriminatory policies on other trading partners but also help resolve some of the underlying sources of tensions.

*Regional Economic Outlook for Asia and Pacific, October 2022 (

Ragnar Gudmundsson is the IMF resident representative.

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