4. Outlook

Growth in the EAP region is projected to decelerate from 7.2 percent in 2021 to 3.2 percent in 2022, which is about two percentage points slower than was expected in April 2022. The slowing growth is mostly due to China, where activity is projected to decelerate sharply to 2.8 percent in 2022, after the 8.1 percent rebound seen in 2021, owing to recurrent COVID-19 outbreaks, mobility restrictions, and real estate sector stress. Growth in the rest of the region is projected to rebound to 5.3 percent in 2022 from 2.6 percent in 2021, and up from 4.8 percent projected in April 2022 (table 3). This improvement reflects a recovery in domestic demand thanks to the relaxation of CoViD-19 related restrictions as well as support from the strong goods export growth at the start of the year and the services export rebound expected in the latter part of 2022.

The forecast assumes continued fiscal and monetary policy support in China but recognizes that its effectiveness will be limited by lingering COVID-19 outbreaks and mobility restrictions. Nevertheless, the severe Covid-19 related economic shock seen in China in the first half of 2022 is likely to be followed by a gradual bounce back in the second half of the year. At the same time, the ability of the real estate sector to bounce back is subject to downside risks. A sharper, more severe, and more prolonged downturn in the real estate sector could have significant economy-wide reverberations, with negative feedback loops linked to the financial sector. in the rest of the region, the outlook assumes a gradual fiscal and monetary policy tightening.

According to the IMF’s updated forecast, global growth and international trade are projected to be significantly lower than expected in April 2022. Global inflation has been revised up due to food and energy prices as well as lingering supply-demand imbalances. financial conditions are also expected to be significantly tighter and more volatile than expected earlier. Global commodity prices are expected to decline from their current highs but will remain significantly higher than before the war in Ukraine because of disruptions in production and trade, geopolitical tensions, and lingering sanctions.

Export dependent economies like Cambodia, Malaysia, and Vietnam are particularly vulnerable to slowing global demand. In contrast, a relaxation of border closures and the related recovery in tourism activity is expected to boost growth in the Philippines, Malaysia, Thailand, and several tourism-dependent Pacific island countries, especially fiji. Countries with large external financing needs, either in the form of short-term capital (Cambodia, indonesia, and Malaysia), or because of high overall debt (Lao PDR and Mongolia), are more vulnerable to the tightening of global financing conditions than are their peers.

Country-specific circumstances will continue to weigh on growth. Price pressures remain elevated, the external position is worsening, and instability and policy uncertainty persist in Myanmar. This will prevent a strong recovery, following the estimated 18 percent contraction in fY2021. The prolonged border frictions and supply bottlenecks continue to limit growth in Mongolia despite some rebound in domestic activity following a relaxation of Covid-19 restrictions. Growth in the solomon islands is expected to shrink by 4.5 percent in 2022, reflecting the negative impact of recent civil unrest and widespread community transmission of the coronavirus. Investments to replace damaged productive capacity caused by the riots are unlikely to gain pace until later in the year. A volcanic eruption and subsequent tsunami in early 2022 have damaged economic prospects in Tonga.

EAP annual median headline inflation is now expected to surpass 5 percent in 2022 as opposed to the 3 percent expected in April 2022. This implies that inflation will overshoot the upper band of the inflation target in several EAP economies. Higher food and fuel prices represent a significant risk to the upward-revised inflation outlook. in addition, capital outflows triggered by faster-than-expected monetary policy tightening in the United States could put pressure on