HONG KONG, CHINA - The Asian Development Bank (ADB) is significantly scaling back 2012 and 2013 growth forecasts for developing Asia, saying that after years of rapid growth, the region must brace for a prolonged period of moderate expansion amidst an ongoing slump in global demand.

"Developing Asia must adapt to a moderate growth environment, and countries will need to do more to reduce their reliance on exports, rebalance their sources of growth, and increase their productivity and efficiency," said Changyong Rhee, ADB's Chief Economist. "These measures are critical if the region is to continue lifting its people out of poverty."

In its Asian Development Outlook 2012 Update, released today, ADB projects the region's gross domestic product (GDP) growth dropping to 6.1% in 2012, and 6.7% in 2013, down significantly from 7.2% in 2011. The deceleration of the region's two giants - the People's Republic of China and India - in tandem with the global slowdown, is tempering earlier optimism.

The report notes that the ongoing sovereign debt crisis in the euro area and looming fiscal cliff in the US could have disastrous spillovers to the rest of the world, particularly developing Asia.

The projected slowdown is likely to ease price pressures, however, with inflation falling from 5.9% in 2011 to 4.2% for both 2012 and 2013, assuming there are no spikes in international food and fuel prices.

The People's Republic of China (PRC) is forecast to grow 7.7% this year and 8.1% in 2013, a dramatic drop from the 9.3% posted in 2011. The slowdown in the PRC is having a knock-on effect elsewhere in East Asia, with diminished demand for intraregional exports. Weak demand from industrialized countries is impacting East Asia's exports, and growth in the subregion are now forecast at 6.5% in 2012, with an uptick to 7.1% in 2013.

For India, GDP growth will slow to 5.6% in 2012, down from 6.5% in 2011. The downward revision in India's prospects, due in significant part to weak investment demand, is expected to slow South Asia's growth to 5.6% and 6.4% for 2012 and 2013, respectively.

Growth in Southeast Asia is expected to quicken to just over 5% in 2012, mainly due to Thailand's recovery from severe flooding in 2011. Higher levels of government spending have contributed to growth in Malaysia and the Philippines, while investment and private consumption in the subregion are generally buoyant with inflationary pressures abating.

Economic activity in Central Asia is moderating as oil prices stabilize and external demand cools. GDP growth is now projected at 5.7% in 2012 and is expected to edge up to 6.0% in 2013.

The growth forecast remains unchanged for the Pacific region at 6% for 2012, where the resilience of larger Pacific countries, such as Papua New Guinea, is masking the weakening of some smaller economies.

If an extreme shock were to materialize, most economies in the region have room to use fiscal and monetary tools to respond. However, there is currently no region-wide need to pursue aggressive demand management. Rather, efforts should focus on the medium-term issue of continued soft external demand.

Developing a vibrant service sector in the region can supplement growth.

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 October, respectively.

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