By Leika Kihara

TOKYO (Reuters) – Risks to Asia’s economy have increased with escalating trade tensions, China’s property sector woes and the potential for further market turbulence clouding the outlook, the International Monetary Fund (IMF) said on Friday.

Persistent downward price pressures from China can “provoke trade tensions” by hurting sectors in neighboring countries with similar export structures, the IMF said, urging Beijing to take steps to achieve a more demand-driven recovery for its economy.

“A longer and larger-than-expected slowdown in China would be harmful for both the region and the global economy,” the IMF said in its regional economic outlook report for Asia.

“China’s policy response is critical in this context,” it said, calling on the need for steps to facilitate property sector adjustment and strengthen private consumption.

In its latest forecast, the IMF expects Asia’s economy to expand 4.6% in 2024 and 4.4% in 2025 with looser monetary policy across the globe seen boosting private demand next year.

The projections for 2024 and 2025 were both revised up by 0.1 percentage point from the IMF’s forecasts made in April, but lower than the 5.0% expansion in 2023.

Risks were “tilted to the downside” as past monetary tightening steps and geopolitical tensions could hurt global demand, increase trade costs and jolt markets, the IMF said.

“An acute risk is the escalation in tit-for-tat retaliatory tariffs between major trading partners,” which would aggravate trade fragmentation and hurt growth in the region, it said.

The IMF said recent market turbulence could also foreshadow future bouts of volatility as markets price in additional, large interest rate cuts by the U.S. Federal Reserve, and gradual rate hikes by the Bank of Japan.

“Sudden changes in expectations of these policy paths could cause exchange rates to adjust sharply, with spillovers into other financial market segments,” the report said.

“Although volatility by itself would not necessarily be harmful, it could undermine consumer confidence and investment,” it said.

The IMF expects China’s economy to expand 4.8% in 2024, up 0.2 point from its forecast in April but slower than last year’s 5.2% increase. The country’s growth is expected to slow further to 4.5% in 2025, the IMF said.

(Reporting by Leika Kihara; Editing by Lincoln Feast.)