ADB raises Asia's growth rate estimate to 8.3%

Asia's developing economies will expand faster than earlier estimated in 2007 and 2008, and are well placed to weather any US slowdown and turmoil in global credit markets, the Asian Development Bank said.

Growth in Asia excluding Japan and Australia is predicted to be 8.3 per cent this year, beating a March estimate of 7.6 per cent, the Manila-based lender said in a report released in Singapore today. The region will expand 8.2 per cent in 2008, faster than an earlier forecast of 7.7 per cent, according to the ADB.

Rising incomes in China and India, the world's two fastest- growing major economies, are boosting consumer and corporate spending. External debt has fallen since the 1997 Asian financial crisis while foreign-exchange reserves have risen sevenfold to $3.6 trillion, and the ADB said the region is better placed to cope with adverse developments.

"Developing Asia's defenses against external shocks are solid and it can weather a slowdown in the US,'' ADB chief economist Ifzal Ali said. "It has stout financial defenses and some scope for policy adjustment.''

The global credit crisis sparked by the collapse of the US subprime-mortgage market shook equity markets around the world, sending benchmark indexes plunging as investors withdrew from riskier investments. The Morgan Stanley Capital International Asia-Pacific Index tumbled 15 per cent from its July 24 record high to a seven month low on August 17. It has since rebounded 11 per cent.

While volatility in credit markets is making the outlook for growth more 'hazy', the ADB said the region's growth will depend on how domestic challenges are met.

"While the jury is still out on the events unfolding in credit markets and the broader global economy, a sharp dive in Asia's economic growth still seems unlikely,'' according to the Asian Development Outlook 2007 Update report. The ADB is funded by governments to promote development in the region.

Still, the region will not be immune to a US recession. Asia's developing nations are almost twice as reliant on exports as the rest of the world, with 60 per cent of their sales abroad ultimately destined for the US, Europe and Japan.

"A steep downturn in the US, with knock-on effects in Japan and the euro zone, would mark a significant deterioration in the external environment and would undoubtedly cut into regional growth going into 2008,'' Ali wrote. Any impact would be 'modest and short-lived', he said.

A recession in the world's largest economy would reduce the Asian region's growth rate by as much as 2 percentage points, the ADB said.

Global economic expansion may suffer a modest slowdown to about 4.75 per cent should growth in the US slip below 2 per cent from an average of 2.3 per cent in the first half, forecasters at Morgan Stanley & Co, Global Insight and the Economist Intelligence Unit predict. Contagion from a US recession would cut global growth to 3.5 per cent or less.

"Asia still has a long way to go before it has its own engine of growth,'' Frank Harrigan, ADB's assistant chief economist, said in an interview in Singapore. "If Asia continues to grow at 8.3 per cent, then local demand is going to become a much more important part of growth, but I don't think consumption alone can sustain growth in the context of a broader slowdown.''

More currency flexibility is needed to help policy makers address economic imbalances, today's report said.

"Some countries are trying to juggle too many objectives given the instruments at their disposal,'' the ADB said. "While exchange-rate regimes are certainly more flexible than they once were, there is scope for still-greater flexibility.''

'Robust' momentum in the economies of China and India is driving Asia's expansion, curbing the impact of any easing of demand for the region's goods.

The ADB raised its 2007 forecast for economic growth in China to 11.2 per cent from 10 per cent estimated six months ago. It increased its prediction for expansion in India to 8.5 per cent from 8 per cent estimated in March.

Chinese and Indian policy makers will remain alert on inflation pressures, the ADB said. China raised interest rates on September 14 for the fifth time since March to curb the fastest inflation rate since 1996 and to cool a surging stock market.

Premier Wen Jiabao is trying to prevent overheating without triggering a sudden slowdown that may cost jobs and leave factories idle.

"Stoked by rising food prices, inflation pressures are building in China,'' the report said. "Credit is expanding, and equity and property markets have posted strong gains. Further steps to cool the rapid investment expansion are likely.''

The Reserve Bank of India is likely to hold off any interest rate reductions, the ADB said. The central bank raised its policy rates by 2.25 percentage points in the past three years and since December has increased the cash reserve ratio by 2 percentage points to 7 per cent.

"Inflation risks persist,'' the ADB said. "The central bank remains vigilant and shows no signs yet of easing interest rates.''