Record-high oil prices, slower exports and lower growth in regional powerhouses China and Singapore are expected to reduce East Asia's economic growth rate to 6.8 percent this year from 7.6 percent last year, the Asian Development Bank (ADB) said yesterday.
GDP growth next year is expected to slow down further, to 6.6 percent, the ADB's Asia Economic Monitor said.
It said China's economic growth is likely to slow to 8.9 percent from 9.5 percent last year, and Singapore is expected to be among the economies hardest hit by weaker export prospects.
Singapore's growth will likely fall to 3.7 percent this year from 8.4 percent last year, the bank said.
"Being a highly open economy, Singapore's economy would be adversely affected by the weak export prospects," the report said.
The East Asian economies include ASEAN's 10 members plus China and South Korea.
"We now face a backdrop of moderately slowing growth, a gradual buildup of inflationary pressures, and a tightening of US monetary policy," said Pradumna Rana, senior director of ADB's Office of Regional Integration.
"The key challenge for East Asia is to calibrate fiscal, monetary and exchange rate policies while at the same time pursuing structural reforms to strengthen domestic demand," he said.
The report said the forecasts were subject to risks posed by a further rise in oil prices. It cited the loss of economic momentum in major industrial markets and softness in the information technology cycle as the main reasons for the worsening economic environment.
Exports grew at a slower rate in the first half of this year in all of East Asia's larger economies except China, continuing the trend since the middle of last year, the report said.
Coupled with higher oil prices and a general bias to increase interest rates, the result has been a more tepid growth in domestic demand in most of the region's economies, it said.
The bank cited earlier studies, showing that if the price of oil remained at US$55 a barrel, East Asia's GDP growth would fall by 1.6 percentage points while the inflation rate would rise 2.2 percentage points.
The bank also praised China and Malaysia for moving away from fixed pegs for their currencies and towards more flexible exchange rate regimes, saying this would have "profound economic implications."
By removing the fixed pegs of the yuan and ringgit, China and Malaysia now have greater freedoms in utilizing monetary policies to achieve their domestic macroeconomic goals.
It would also lessen the need for "costly sterilization of foreign exchange inflows" by the two countries' central banks, the ADB said.
Other countries in the region that were previously constrained from letting their currencies appreciate for fear of losing export competitiveness in the face of the yuan and ringgit's pegs to the dollar would also benefit, the banksaid.
"These measures by China and Malaysia would foster greater exchange rate flexibility in Asia as a whole," the bank said.
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