ADB Raises Outlook For Developing Asia

Developing Asia will likely grow this year at a faster rate than initially expected, as its main economic engines - China and India - continue to hum despite a slight uptick in inflation, says the Asian Development Bank.

In its Asian Development Outlook 2007 Update, the Manila-based regional development bank raised its 2007 growth forecast for Asia excluding Japan to 8.3% from 7.6% in the March outlook, and its forecast for 2008 to 8.2% from 7.7%. "This reassessment stems from the exceptionally strong performance of Asia's giants - the People's Republic Of China and India," said ADB Chief Economist Ifzal Ali in his foreword to the publication. "The headline numbers for 2007 have also been lifted by faster-than-expected growth in Indonesia and the Philippines." Despite the upgrade, economic expansion in developing Asia will still be slower than the 8.5% posted last year. The improved prospects for developing Asia also have pitfalls, and the ADB said these include volatile oil prices, possible trade protectionism, political uncertainties, and the impact of credit market strains on the U.S. economy. The ADB's Ali said that as a deep downturn in the U.S. with knock-on effects in Japan and the eurozone would mark a significant deterioration in the external environment, it would undoubtedly cut into the region's growth going into 2008. He said these adverse effects would be transmitted through trade and financial channels. Ali said a recession in the U.S. lasting four quarters - which the ADB believes "unlikely" - might shave as much as two percentage points off Asian growth. "There will be a slowdown but not a recession," he said. The bank forecasts U.S. growth this year at 1.9%, versus 2.9% last year, and a partial recovery to 2.6% in 2008. In the bank's March outlook, the U.S. was expected to grow 2.5% this year and 3.0% in 2008. Ali said past recessions in the U.S. triggered by domestic factors have had limited spillover effects in Asia.

Stout Defenses For External Shocks

"At the same time however, developing Asia is in a much better position to cope with adverse external developments: it has stout financial defenses and some scope for policy adjustments," Ali said. "A key message of the update is that beyond the gyrations in the global economy, developing Asia's growth prospects will continue to depend on how well economies cope with their own domestic challenges," he said. The ADB said it expects strong exports, investment and consumption to lift China's economic growth to 11.2% this year, up from its prior estimate of 10%. It expects growth to moderate to 10.8% in 2008, although that is an upward revision from its 9.8% projection in March. "Further steps to cool the rapid investment expansion (in China) are likely, and the government will put more emphasis on improving energy efficiency and on cutting pollution," the report said. The ADB expects India's economy to grow 8.5% in 2007 and 2008, up from its prior forecasts of 8.0% for 2007 and 8.3% for 2008. If China and India are excluded, the other economies in developing Asia are expected to grow by a more modest 5.7% in 2007 and 5.6% in 2008. China and India combined account for 55% of developing Asia's GDP. The report said the risks to growth next year "are elevated, and much will depend on whether distress in credit markets deepens and spills over into the wider financial system and real economy." Ali said there are also increasing signs that China's economy is overheating and that a mere appreciation of the yuan could help damp investor exuberance and lead to a soft landing for Asia's economic powerhouse.

Inflation To Pick Up Slightly

Although expected to pick up slightly, inflation for most of the region will remain subdued, the ADB said. Inflation is now expected to average 4.0% this year from the initial estimate of 3.0% and the 3.3% in 2006, before easing to 3.8% in 2008 for the 43 countries in the ADB's developing Asia grouping. In March, the bank forecast 2008 inflation at 3.2%. The ADB significantly raised its forecast for inflation in China, to 4.2% this year from 1.8% in the prior outlook, and 3.8% in 2008 from 2.2% previously, due to rising global grain prices and a pig disease outbreak that has driven up food prices. The development bank kept its forecasts for inflation in India unchanged. It expects inflation in India will likely ease to 5.0% this year from 5.4% in 2006, and remain stable at 5.0% in 2008. As a percentage of GDP, developing Asia's current account balance is expected to be little-changed from 2006, the ADB said. The revised estimate for the current account surplus in 2007 is 6.1% for developing Asia, compared with 5.8% in 2006. Ali said that although growth in the past decade has trimmed poverty in developing Asia, economic expansion has also widened the income gap between the rich and the poor in the most populous region in the world. "It is not that the rich are getting richer and the poor getting poorer," said Ali. "But the rich are getting richer faster than the poor."