Asia: ADB Cuts 2011, 2012 Forecasts For East Asia, Asia

The Asian Development Bank has trimmed its 2012 growth forecast for emerging East Asian economies including China, as the eurozone crisis threatens to further slow an already weakening global economy.

The lowered forecasts supports the rising level of concern seen in the post meeting statement yesterday from the Reserve Bank which has switched from an inflation fighting stance to bolstering domestic Australian demand in the face of a possible slowdown offshore caused by Europe's woes.

The ADB pointed out that the growing inter-regional trade in Asia (which we in Australia are well and truly part of) would help protect the region from much of any fallout from Europe, but clearly not all.

Despite trimming its growth estimates, the ADB says the region will still see growth next year, led by China, which is good news for Australia because the area is our most important export market.

The ADB remains cautiously optimistic for emerging East Asia, subject to a number of major downside risks: (i) a deep recession in both the eurozone and US; (ii) protectionism or tight trade finance; (iii) destabilising capital flows; and (iv) persistent or resurgent inflation, the bank said yesterday it its latest economic update.

No upside risks were listed, such as inflation, which, as in Australia, has been the main policy objective for much of the past year, especially in China (but not Japan with its deflationary experience).

The Manila-based ADB cut its gross domestic product growth (GDP) forecast to 7.2% for the 10-country Association of South-East Asian Nations (ASEAN) plus China, Hong Kong, South Korea and Taiwan from 7.5% in September.

The Bank said growth in China "is likely to moderate even as domestic demand continues to rise, and is now forecast at 8.8% in 2012 after expanding 9.3% this year.

In September, ADB had forecast growth of 9.1% in 2012."

That's still solid, but well under the 10.4% rate for 2010.

Still the ADB's new estimate for China for next year is still just above the April 2011 forecast of 8.7% from the World Bank (and 9.3% for 2011, which should be about on the money).

So for Australia's resource sector, it means still solid growth, but not the bonanza seen late in 2010 and in the first three quarters of this year.

"The newly industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China, will see slower growth both this year and next year in large part because they are more dependent on international trade than their neighbors," the ASB forecast.

"This leaves them highly vulnerable to an economic contraction in Europe and the US.

"ASEAN's economies will also grow more slowly than previously expected.

"Thailand, hit particularly hard by the recent floods, should recover from supply disruptions next year. ADB now sees Thailand's economy growing a smaller 2.0% this year, but is maintaining its 4.5% growth forecast for 2012.

"Japan's economy is forecast to bounce back from the effects of the recent natural disasters as supply chains are rebuilt, but the strong yen will likely hurt exports while domestic demand is likely to remain weak.

"As such, ADB continues to forecast a contraction of 0.5% this year followed by a 2.5% expansion next year."

It also mapped out an "extreme scenario" of European and US meltdowns, which could shave 1.2% off growth next year in East Asia including Japan, from a forecast 5.4% to 4.2%.

"The worst-case scenario is for both the US and eurozone to fall back into recession, pushing the global economy into a deep slump," the ADB's Emerging East Asia regional economic update said.

With strengthening headwinds blowing out of Europe, the bank said its "cautiously optimistic" outlook for the Emerging East Asia region excluding Japan, was under a thickening black cloud compared to its September forecasts.

"The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago," it said.

"The global economic recovery could flounder if the eurozone and the US fall back into recession, causing another global financial crisis."

It said "major downside risks" included a deep recession in Europe and the US, higher protectionism and persistent inflation.

If the eurozone's troubles turned into a full-blown crisis for the global economy, the impact on East Asia would be "serious yet manageable" as long as governments responded decisively and collectively.

Government spending could help maintain the growth momentum while central banks would have to deftly manage the monetary levers to keep inflation "anchored".

"With the eurozone's sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent," it said.

The ADB said a defence against trouble in Western markets lay in "increasing intra-regional trade and financial integration, and expanding links with other emerging economies".

China was the strongest performer in the region but even the world's second biggest economy was feeling the pressure, posting 9.1% growth in the third quarter compared to 9.6% in the first half of this year.

ASEAN's four middle-income economies - Indonesia, Malaysia, Philippines, and Thailand - are expected to grow 4.5% in the second half of 2011, compared to 4.9% in the first six months of the year.

The ADB said intra-regional trade and domestic consumption would shield the region from the worst of the global fall-out.

That is good news for Australia with the deep and growing links our trade has with the Asian region, starting with China, Japan, South Korea and Taiwan, and including India, Vietnam and Indonesia.