Asia: Growth Slows A Touch, But Still Strong

As we pointed out in Air Weekly last Friday, the Asian region is a beacon of economic growth and stability, despite the shockwaves from the eurozone and the stuttering US economy rolling over the area.

Growth remains solid, confidence is equally solid and inflation seems to be under control in some economies.

Since then we have had another good monthly report on the Chinese economy and yesterday the Asian Development Bank updated its 2011 economic outlook with the prediction of moderating growth in the region this year and next.

The news is important for Australia because even though we are a developed economy, our biggest economies are in Asia.

Excluding Japan, the ADB outlook covers the likes of China and India, two of our major export destinations.

The ADB said growth in the developing countries of Asia will cool slightly in the second half of this year, but it should remain healthy given firm domestic demand and recent increases in intra-regional trade.

The "healthy" is relative given forecasts from the OECD for slowing growth over the rest of this year and into 2012 in Europe and the US in particular.

Some economies in Europe, such as France, Italy and Germany, could see a quarter of negative growth in the next three quarters and the US continues to dip towards stalling speed.

Interestingly the ADB saw a mild cooling in China, but a bigger slowdown in India which is wracked by troublesome inflation, weakening confidence and possibly another rate rise on Friday.

The ADB said China is expected to grow 9.3% in 2011 and 9.1% next year, compared with the April forecasts of 9.6% and 9.2%.

India is now likely to grow 7.9% this year and 8.3% - lower than forecasts made in April of 8.2% for this year and 8.8% for 2012.

The Bank revised down its growth forecast for the region to 7.5% for this year, from a 7.8% projection forecast in April.

The bank lowered its forecast because worsening economic conditions from developed nations will weigh on export-focused Asian economies.

But it says growing levels of private consumption will cushion Asian economies from the worst of the global slowdown.

The Update expects developing Asia to sustain its robust growth over the next two years, despite the tepid outlook for the US, the eurozone, and Japan.

"Rising private consumption accounted for most of first-half 2011 GDP growth in Hong Kong, China, Malaysia, the Philippines and Thailand, as well as a large portion of growth in other economies," according to the report.

"The strength of private domestic demand bodes well for more durable, market-led growth in the region."

In addition, the report said, "with ample fiscal space and low debt, governments also have room to support domestic demand".

For 2012, the ADB now predicts 7.5% growth, down from 7.7% projected in April.

The forecast is based on the assumption that the US and Europe don't slip back into recession.

The development bank's region-wide estimates include all 44 of the bank's member nations, from giants like China and India to tiny Nauru, and stretching from Georgia to the Cook Islands.

Inflation will remain a challenge for policymakers in the region, though a cooling in commodity prices has eased price pressures a bit, the ADB said.

The ADB upped its region-wide inflation forecast for 2011 to 5.8% from a previous forecast of 5.3%, and kept its 2012 inflation forecast at 4.6%.

Policymakers should also be on guard for volatility in capital flows given global uncertainty, the bank warns. More flexible exchange-rate regimes and the imposition of selective and carefully designed capital control measures, in a regionally coordinated manner "could be part of the policy mix," the ADB said.

The slowdown in demand from the US and Europe continues to cast a cloud over the region, with export growth easing substantially in the second quarter of 2011 in leading economies, including the People's Republic of China.

"At the same time, strong domestic consumption and expanding intraregional trade are helping to underpin still solid growth levels," said Changyong Rhee, ADB's Chief Economist. "Since the onset of the global recovery, the growth in exports to the PRC from several Asian economies has been stronger than their exports to the rest of the world."

The share of intraregional exports among the largest economies in the region has increased from 42% in 2007 to 47% in the first half of 2011, the report noted.

Within the region, East Asia - which includes China, South Korea, Mongolia and Taiwan - will enjoy the fastest growth rates at 8.1% and 8% this year and next, respectively.

Southeast Asia will lag other parts of Asia, with 5.4% growth in 2011 and 5.6% in 2012, the ADB said.

Growth projections for Southeast Asia and Central Asia have also been lowered slightly to 5.4% and 6.1%, respectively, for 2011, although overall economic activity in both regions remains buoyant on the back of solid private consumption, investment and remittances, and favourable export prices.

Oil production problems in Azerbaijan are weighing on Central Asia as a whole, while a pruning of estimates for Malaysia, Philippines, Thailand and Viet Nam has offset expectations for a stronger performance by Indonesia.

In the Pacific, the resource-rich economies of Papua New Guinea, Timor-Leste and the Solomon Islands will underpin expected growth of 6.4% this year, but this will be partly offset by lacklustre performances elsewhere, including the Cook Islands and Vanuatu.

Next year the growth rate is likely to ease further to an aggregate 5.5% with inflation expected to average 8.3%.