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Asian economies to grow faster than initial estimates, says ADB

Asian economies to grow faster than initial estimates, says ADB
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First Published: Tue, Mar 27 2007. 09 18 AM IST
Updated: Tue, Mar 27 2007. 09 18 AM IST
By Shamim Adam, Bloomberg
Singapore: The Asian Development Bank(ADB) raised its growth forecast for Asia excluding Japan on expectations that a pick-up in spending by consumers and companies in the region will cushion the impact of weaker exports.
Asia’s developing economies will expand by 7.6 % in 2007, faster than the 7.1 % estimate in September, the Manila- based lender said today. The pace will accelerate to 7.7 % next year, it said.
“Growth is still set to remain brisk,” the ADB said in its Asian Development Outlook 2007 report. “Net exports’ contribution to growth will soften, but strengthening domestic demand will fill part of the gap.”
Rising incomes and increased employment across Asia are boosting consumer spending and encouraging companies to lift investment. That’s going to help sustain the region’s economies this year even as slowing growth in the US and Europe damps demand for made-in-Asia exports, according to the ADB.
China and India, the two fastest-growing major economies in the world, are expected to continue to drive Asia’s expansion. The ADB lifted its 2007 forecast for China to 10 % from 9.5 % estimated six months ago, while India may expand by 8 %, from 7.8 % predicted in September.
Asia’s rate of expansion this year is still expected to trail that of 2006, when the region grew an “exceptional” 8.3 %, the ADB said. The lender also expects growth in the US, Japan and euro zone to slow, pushing world trade volumes lower this year.
US Slowdown
Global export volumes may rise by 7.5 % this year, from 9.7 % in 2006, as production in major industrial countries eases and output in the US slows “markedly,” the ADB said.
Slowing inflation stemming from lower oil and commodity prices and as a result of previous interest rate increases may encourage central banks to cut borrowing costs this year, the lender said. Inflation pressures in Southeast Asia may “subside significantly,” the ADB said.
Asian central banks raised rates more than 25 times last year to curb inflation, control lending and limit inflows from overseas that were creating asset bubbles in their markets.
“As the pass-through effects of high oil prices comes to an end, there may be scope for interest rates to come down,” the lender said, citing Indonesia and Thailand which have already begun lowering rates.
Still, policy makers in India may add to the five rate increases carried out in the past year to cool price increases, the report said. Prices have stayed above the Reserve Bank of India’s tolerance level of 5 % since September.
‘Further Tightening’
“Steps taken by the Reserve Bank of India to cool inflation are seen slowing India’s pace of investment and consumption spending in 2007,” the ADB said. “If inflation proves to be stubborn, further tightening is likely to follow.”
The People’s Bank of China may also lift rates to reduce liquidity, the report said. The government raised the amount of money lenders must set aside as reserves five times in eight months, sold bills to soak up cash, and restricted property investment. The central bank on March 18 increased the benchmark one-year lending rate by 0.27 percentage point to 6.39 %.
Consumer spending in Hong Kong, South Korea and Taiwan may strengthen this year, boosting services industries, today’s report said.
China is taking steps to boost domestic demand and curb a reliance on exports and investment for growth. Premier Wen Jiabao this month said the nation’s economic expansion is unstable and environmentally unsustainable.
Brake Harder
“Softer external demand and policy curbs are expected to pull growth down gradually in China” in 2007 and 2008, the ADB said. “If growth does not begin to slow, the authorities will most likely press harder on the brakes. Failure to moderate growth in the near and medium term would raise risks of painful adjustments later on.”
China’s trade surplus may widen to $257 billion by 2008, from $177.5 billion last year, the ADB forecasts.
Risks to the region’s growth this year include slowing demand for electronic goods and a resurgence of inflation should oil or commodity prices rise, the ADB said. Crude oil has dropped about 20 % since reaching a record $78.40 per barrel on 14 July. It was $62.61 today.
“The global electronics cycle could turn in 2007, which would negatively affect export prospects particularly for East and Southeast Asia,” the report said. “The relief that lower prices are currently bringing to budgets, to inflationary pressures and to import bills is welcome, but should not be counted on.”
Political Uncertainties
Political uncertainties and conflicts in Thailand and Sri Lanka may also hurt expansion, the ADB said. Thailand’s government was installed after a 19 September coup, while confidence of local and foreign investors was shaken when the nation’s central imposed currency controls in December.
In Thailand, “some of the loss of investors and consumer confidence has had knock-on effects,” Ifzal Ali, the bank’s chief economist, said in an interview in Tokyo. “We expect growth rates to soften.”
Asia’s growing economies are attracting more money from investors and companies who want to benefit from a rise in expenditure as loans growth and higher wages encourage people to spend on property and other big-ticket items.
Emerging markets in Asia received net private capital flows of $197.3 billion last year, the ADB said. Increasing capital inflows are driving the appreciation of the region’s currencies.
“The global investment climate for developing Asia remains favourable,” the ADB said. “Expectations for strong growth will continue to underpin the strength of Asian currencies in 2007.”
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First Published: Tue, Mar 27 2007. 09 18 AM IST
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