IMF Headquarters
IMF HeadquartersREUTERS

The International Monetary Fund said the growth outlook for Asia Pacific remains solid for the second half of 2014 as the ongoing global recovery should help the region's exports.

Despite a deceleration earlier this year, the IMF predicts that global growth will pick up in the second half of 2014 and into 2015, partly due to accommodative monetary policies and a diminishing fiscal drag.

"Growth in the second quarter was propelled by stronger external demand from advanced economies and favorable financial conditions as well as idiosyncratic factors, which tended to bolster domestic demand," the IMF said.

It forecast a GDP growth of 5.5% for the third consecutive year in 2014, before rising slightly to 5.6% in 2015.

Overall financial conditions of Asia have remained accommodative and even eased further in Japan, Malaysia, and Thailand. Portfolio inflows have picked up since last spring, with strong equity flows contributing to boost domestic stock markets.

Long-term rates and sovereign CDS spreads have declined across the board, helping credit growth as well as house price appreciation, with the most notable exception of China where the housing market is undergoing a correction.

In India, growth based on GDP at factor cost has gathered steam as industrial production and other high-frequency indicators have started to turn around on the back of stronger business confidence.

IMF said financial dislocations associated with higher global interest rates, and protracted weak growth in advanced and emerging market economies are the main downside risks to the outlook.

"A sharper-than-anticipated downturn in China's real estate sector and less-effective-than-envisaged Abenomics in Japan would also adversely affect regional growth prospects."

The IMF warned geopolitical tensions could also disrupt trade and financial flows, with adverse effects on growth.

Overall countries in the region should focus on fiscal consolidation where debt levels are higher and monetary normalization where inflation pressures are high.

The IMF also said its short-term growth indicator model for Asia, which relies on regional high-frequency data, points to stronger momentum going into the fourth quarter and relatively low interest rates propel domestic demand.

"Rising confidence, coupled with strong equity market valuations, is also expected to help investment in a number of economies," it said.

Domestic demand has also benefited from strong credit growth, and banks in the region are well capitalized and profitable. With the exceptions of India, and to a lesser extent, Indonesia, inflation should remain generally low too.