By Leika Kihara

(Reuters) – Tuesday’s cut in Asia’s forecast of economic growth for this year was made by the International Monetary Fund. The fund warned that a new wave COVID-19 infection, disruptions to supply chains and rising inflation could pose serious risks to the outlook.

China’s economy will expand by 8.0% and 5.6% this year, respectively, however, its recovery is still “unbalanced”, as multiple coronavirus infections and fiscal tightening continue to weigh on consumption.

According to the IMF, any U.S. Federal Reserve “untimely” policy normalization or misinterpreted communication could cause significant capital outflows and increased borrowing costs in the Asia-Pacific emerging economies.

IMF reduced its Asia-specific economic growth projection to 6.5% in its April regional outlook report. The reason was a drop in Delta variant case numbers that impacted consumption and manufacturing output.

In April, the IMF increased its Asia growth projections to 5.7%. This is in response to improvements in vaccines.

The report stated that “Although Asia Pacific continues to be the fastest-growing region in the world,” but the gap between Asian developed economies and emerging market economies and developing economies was deepening.

It stated that “Risks are tilted towards the downside”, mainly due to uncertainty about the pandemic and supply chain disruptions, as well as potential spillovers from U.S. policies normalization.

China’s third quarter saw its slowest growth rate in one year. This highlights the challenges policymakers have to face in trying to support a weakening recovery and rein in the realty sector.

The IMF predicted that India will expand 9.5% in the coming year. Meanwhile, advanced economies such as Australia, South Korea and New Zealand, like Taiwan, benefit from commodity and high-tech booms.

However, ASEAN-5 countries (Indonesia, Malaysia, Philippines and Singapore) still face serious challenges due to a resurgent disease as well weakness in service consumption.

The IMF stated that “new infections will continue to be a major concern” in the following months.

Inflation expectations in Asia are generally well-anchored, but rising commodity prices, shipping costs and continued disruption to global value chains are increasing concerns about persistent inflation.

It stated that while most Asian emerging economies need to maintain monetary support in order to sustain their recovery, central banks should be ready to respond quickly to any acceleration or rises in inflation.