Washington: Noting that a further downturn in Europe will have a significant spillover effect on the Asian economy, the International Monetary Fund (IMF) on Thursday said that Asia nonetheless has the capacity to respond to any new crisis.

Events unfolding far from Asia's shores could shape the region's economic outlook for 2012, the IMF economists said.

However, if the global economic situation deteriorates -- particularly in the troubled economies of the euro zone -- Asia's policymakers still have the room to respond aggressively, it said.

Asia's heavy reliance on trade is likely to make 2012 a difficult year, suggest economists from the Asia and Pacific Department of the IMF.

Asia is one of the world's most trade-dependent regions, exporting everything from commodities such as metals and rice to sophisticated electronic products and cars.

In this regard, the level of external demand will be crucial in determining the region's economic performance, they said.

"Regional growth has already started to slow due to weaker demand, although domestic factors such as tighter macroeconomic policy stances have also played a role, especially in India and China," the IMF said.

IMF economists expect only relatively soft demand for exports from Asia, it added.

If the threatened risks materialise, Asian policymakers have the room to react aggressively.

There is still ample policy space in the region, though less than at the onset of the 2008 global financial crisis in some countries, it said.

Some economies have already started monetary easing.

Fiscal policy consolidation could be appropriately delayed if external demand were to collapse, especially where low levels of public debt afford space for measures, it said.

Apart from these conventional measures, Asian economies can use an arsenal of additional policies, as many did in response to the global crisis in 2008, it said.

Noting that Asia remains home to some of the world's most dynamic economies, the IMF said several reforms are still needed to sustain the region's excellent historical performance and reduce vulnerabilities to external shocks.

In this regard, the IMF economists said the challenges vary widely across countries.

"In China, further actions are needed for a sustained rebalancing of growth away from investment and exports toward private consumption. These include reform and liberalization of the financial system, fiscal support to household consumption and a further expansion of the social safety net," it said.

"In Japan, lowering public debt and raising potential growth are the key challenges. These would be aided by raising labour force participation, boosting the activity of small and medium-sized businesses and deregulating the service sector," the IMF said.

"In Korea, productivity gains in the service sector should be targeted. And many countries within the Association of South East Asian Nations should focus on infrastructure investment to boost potential growth," it said, adding that structural reforms are also needed to make growth more inclusive.

Despite notable progress in reducing poverty, income inequality has increased in most of Asia over the last two decades.

(Agencies)