ADB: Developing Asia on Firm Rebound but Must Tackle Inflation

Developing Asia will continue to expand solidly over the next two years, even as inflation, geopolitical uncertainties and the need to develop new sources of growth present looming challenges to policy makers, the Asian Development Bank (ADB) said in a new major report.


The report forecasts regional GDP growth of 7.8% in 2011 and 7.7% the following year. The projected growth rates are lower than the 9% posted in 2010, but show that the region continues its firm recovery from the global economic crisis.


"Developing Asia, having shown resilience throughout the global recession, is now consolidating its recovery and rapid expansion in the region's two giants - the People's Republic of China (PRC) and India - will continue to lift regional and global growth," says Changyong Rhee, ADB's Chief Economist.


At the same time, rising food and oil prices, stoked by upheaval in the Middle East and North Africa, along with the recent emergency in Japan, present a potential threat to sustained, inclusive growth. Inflation will need to be carefully managed using a mix of policy measures, including more flexible exchange rate management and coordinated capital controls, rather than simply relying on tighter monetary policy, the report says. After expanding at 4.4% in 2010, consumer prices are set to accelerate further to 5.3% in 2011 before easing back slightly to 4.6% in 2012.


"Developing Asia is home to two-thirds of the world's poor and it is they who are most vulnerable to the effects of price increases," says Rhee. "Policy makers must therefore consider preemptive action to control inflation before it accelerates."


In the longer run, developing Asia will have to forge stronger links with non-traditional markets to maintain growth and to make it more inclusive, the report says. It notes that there is considerable potential to broaden South-South links with fast growing emerging economies, both within Asia, as well as in Latin America, Africa and the Middle East. To do this, however, policy makers will need to remove barriers to trade and investment within the South, which are currently higher than those with the industrial world.


East Asia will continue to lead the region's post-crisis recovery with projected growth of 8.4% in 2011 and 8.1% in 2012, although the forecast expansion rates are below the 9.6% recorded in 2010, as the unwinding of fiscal stimulus measures, slower investment and less heated export growth kick in. China is expected to post growth of 9.6% in 2011, down from 2010's heady 10.3% rise, while Hong Kong, China; the Republic of Korea; and Taipei, China settle back to more sustainable growth of around 5% after a sharp 2010 rebound. Most economies are tightening monetary policy amid rising commodity prices with inflation forecast to pick up to 4.3% in 2011 from 3.1% in 2010.


Southeast Asia's expansion will moderate after an exceptionally strong recovery in 2010, with growth coming in at 5.5% for 2011 and 5.7% in 2012. The figures are well below the 7.8% recorded last year, and reflect a higher base, slower export growth and fiscal and monetary policy tightening. Inflation is set to accelerate to 5.1% in 2011, from 4.0% in 2010, with Viet Nam likely to post a double digit rate. With appropriate policy measures, Southeast Asia's average inflation is expected to come down to 4.2% in 2012.


South Asia will maintain its recent robust economic performance with forecast growth of 7.5% in 2011 and 8.1% in 2012, following a 7.9% expansion in 2010. India's 2010 performance was particularly strong and broad-based, even with fiscal consolidation and monetary tightening, and the economy is set to strengthen further to post 8.2% growth in 2011 and 8.8% in 2012.



Pakistan's devastating floods weighed on its growth performance, while the end of the conflict in Sri Lanka continued to help underpin its economic expansion.


Central Asia has been benefiting from higher international prices for its key commodities including oil and gas, metals, cotton and gold. Growth is forecast to quicken to 6.7% in 2011 and 6.9% in 2012, from 6.6% in 2010. Inflation is set to accelerate to 8.2% in 2011 from 7.1% in 2010, driven by higher food prices in all countries and higher energy prices in those which import oil.


The resource-rich economies of Papua New Guinea, Timor-Leste and Solomon Islands will drive growth in the Pacific this year as they benefit from higher global prices for commodities, new investment and increased government revenue from mineral resources, the report says. The growth rate for 2011 is projected to come in at 6.3% before settling back to 5.4% in 2012. Inflation is set to hit 6.5% in 2011, from 5.9% in 2010, before falling back to 5.6% in 2012.





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