(EnergyAsia, May 4 2011, Wednesday) — Asia’s rapid economic growth is being fuelled by both exports and domestic demand, said the International Monetary Fund (IMF) in its latest Regional Economic Outlook (REO) for Asia and the Pacific.

The region’s economy is expected to grow by nearly seven percent this and next year, said Anoop Singh, director of the IMF’s Asia & Pacific department. The output gap is closing in much of emerging Asia, where growth is expected to reach around 8%, led by China and India.

The IMF said the Japanese government’s response to the earthquake-related tragedy in March has helped to contain the economic impact and spill-overs to activity in the rest of Asia for now, but the situation remains uncertain.

Overall, risks to the outlook for Asia are balanced, although new downside risks have surfaced such as the unrest in the Middle East and North Africa as well as uncertainties about the effects of the tragedy in Japan. Also, fiscal and financial vulnerabilities in advanced economies could affect Asia mainly through the trade channel, the IMF report notes.

Within Asia, potential overheating pressures are rising, and inflationary risks remain on the upside, the REO cautions. For the region as a whole, CPI inflation accelerated to about 4.5% in February 2011, largely due to the rise of fuel and food prices, which are beginning to feed into core inflation and to affect the poor.

Headline inflation is generally expected to increase further in 2011, before decelerating modestly in 2012. Signs of overheating are also building up in some of the region’s asset markets.

The IMF report notes that the need to tighten macroeconomic stances in Asia has become more pressing than it was last year. Further monetary tightening and macro-prudential measures will be necessary in several economies that face growing overheating pressures, in order to contain credit dynamics, bring interest rates more closely in line with robust growth, and mitigate risks to the financial sector.

“In many economies, exchange rate flexibility is a key line of defence against overheating. In addition, several economies have scope for more fiscal consolidation, which will also help contain demand while building the fiscal space that would allow governments to respond more effectively to future shocks,” the report says.