Developing Asia's Growth to Moderate Amid Global Uncertainty - ADB Report

HONG KONG, CHINA – The Asian Development Bank (ADB) has cut its 2011 and 2012 growth forecasts for developing Asia amid ongoing worries about weak external demand from its key trading partners.

In its Asian Development Outlook Update 2011, released today, ADB trimmed its full year forecast to 7.5% from 7.8% seen in April. The 2012 projection is also lowered slightly to 7.5% from 7.7% previously. Asian Development Outlook and Asian Development Outlook Update are ADB’s flagship economic reports analyzing economic conditions and prospects in Asia and the Pacific, and are issued in April and September, respectively.

The slowdown in demand from the United States (US) and Europe continues to cast a cloud over the region, with export growth easing substantially in the second quarter of 2011 in leading economies, including the People’s Republic of China (PRC).

“At the same time, strong domestic consumption and expanding intraregional trade are helping to underpin still solid growth levels,” said Changyong Rhee, ADB’s Chief Economist. “Since the onset of the global recovery, the growth in exports to the PRC from several Asian economies has been stronger than their exports to the rest of the world.”

The share of intraregional exports among the largest economies in the region has increased from 42% in 2007 to 47% in the first half of 2011, the report noted.

Accelerating price pressures remain a threat to many economies, with the inflation rate for developing Asia expected to average 5.8% this year, up from an April projection of 5.3%. The rate should cool in 2012 to 4.6% as commodity prices recede but central banks will still need to keep a close watch and may need to take remedial action.

Capital continues to flow into the region, although the pace has eased in recent months, and remains at manageable levels. However policy makers should be prepared to act in the event of any upsurge in capital volatility once the US and European debt markets settle and advanced economies pick up again.

The report notes that many economies in the region are well placed to cope with soft global economic conditions for a while, provided the major industrial economies do not fall back into recession.

“Ample fiscal space, even after the recent spate of fiscal stimulus measures, and large foreign reserves provide a buffer against further downside risks,” said Mr. Rhee.

In the longer term, the region must press forward with structural reforms that encourage domestic-led, inclusive growth, as demand from advanced countries is likely to remain subdued.

East Asia remains the key economic driver for developing Asia with expected growth of 8.1% this year, although more moderate activity in the PRC has seen the forecast trimmed from the April estimate of 8.4%. Next year, a further easing of growth in the PRC will see overall growth for the five economies dip further to 8.0%.

Growth in South Asia is also slowing this year as monetary authorities move to combat still high levels of inflation. GDP is expected to expand 7.2%, with the inflation forecast marked up to 9.1%. Next year growth should pick up to 7.7%, led by India, after higher interest rates crimped consumer spending and investment in 2011.

Growth projections for Southeast Asia and Central Asia have also been lowered slightly to 5.4% and 6.1%, respectively, for 2011, although overall economic activity in both regions remains buoyant on the back of solid private consumption, investment, and remittances, and favorable export prices. Oil production problems in Azerbaijan are weighing on Central Asia as a whole, while a pruning of estimates for Malaysia, Philippines, Thailand and Viet Nam has offset expectations for a stronger performance by Indonesia.

In the Pacific, the resource-rich economies of Papua New Guinea, Timor-Leste and the Solomon Islands will underpin expected growth of 6.4% this year, but this will be partly offset by lackluster performances elsewhere, including the Cook Islands and Vanuatu. Next year the growth rate is likely to ease further to an aggregate 5.5% with inflation expected to average 8.3%.