The Asian Development Bank (ADB) yesterday cut most of its growth estimates for developing Asia for this year and next year as a slump in global demand weighs on the region’s powerhouses China and India and on its other export-dependent economies.
The ADB cut its GDP growth estimate for China by nearly 1 percentage point to 7.7 percent from the previous 8.5 percent, warning that risks to the world’s second-largest economy were likely to intensify in the short run given bleak global demand and the uncertain outlook for its largest trading partners.
However, it believed China would still be able to avoid a hard economic landing, given that policymakers in Beijing have considerable scope for further stimulus measures.
“The global slump in demand, especially from Europe, will remain a serious drag on growth in the near term,” ADB chief economist Changyong Rhee said in a news release as the Manila-based bank released an update of its regional outlook.
“The government has the means to cushion the economy from global turmoil, however. Its strong fiscal position, receding inflation and expansionary policy measures should ensure a soft economic landing, but it needs to expedite its effort to diversify the source of growth and strengthen structural reforms for inclusive growth,” Rhee said.
Highlighting the extent of China’s slowdown, an official survey also released yesterday indicated its normally robust services sector lost considerable momentum last month, with a key activity index falling to near two-year lows, as slow growth in manufacturing began to feed through to the rest of the economy.
The eurozone’s unresolved sovereign debt crisis and the US’ looming fiscal cliff were the biggest risks to the regional growth outlook, with Asia’s most open economies particularly vulnerable to spillover effects, the ADB warned.
The risk of rapid reversals in capital flows to developing Asia also remained a concern, although the region’s capital markets have not shown excessive volatility, it added.
Still, most countries in the region have enough room to use monetary and fiscal policy tools if necessary to protect domestic growth, with inflation expected to be slower than earlier anticipated this year and the next, the ADB said.
The region must brace itself for a prolonged period of moderate expansion after years of rapid growth, the bank said.
Developing Asia — comprised of 45 countries in Central, East, South, and Southeast Asia and the Pacific — is now forecast to grow 6.1 percent this year and 6.7 percent next year.
The figures are substantially slower than April estimates of 6.9 percent and 7.3 percent respectively, and last year’s 7.2 percent expansion.
As China struggles with slower investment and weaker demand at home and abroad, the ADB also cut its next year’s growth forecast for the country to 8.1 percent from the previous 8.7 percent.
Growth in India is expected to hit 5.6 percent and 6.7 percent this year and the next, weaker than previous forecasts of 7 percent and 7.5 percent, respectively, as it battles persistently high inflation, a large fiscal deficit and weaker consumption.
East Asia will remain the region’s fastest-growing area, although it will not be immune to the overall deceleration in the region, the ADB said.
The bank kept its growth forecast of 5.2 percent this year for Southeast Asia, lifted in part by recovery efforts in Thailand from last year’s flooding, and higher state spending in Malaysia and the Philippines.
The ADB urged Asian economies to diversify their growth drivers and capitalize on its booming service industries, as seen in India and the Philippines, to sustain domestic growth during times of prolonged weakness in external demand.
The development lender said policies such as education reform, improved infrastructure and easier regulation geared towards boosting the services sector — now contributing nearly half of the region’s GDP and employing 34 percent of developing Asia’s workers in 2009 — would help lift productivity and promote inclusive growth.