ADB Cuts Its 2011-2012 Forecasts

The Asian Development Bank has cut its 2011 and 2012 growth forecasts for developing Asia, citing uncertainty over global economic prospects including the downgrade of United States log-term sovereign debt, tensions in the Eurozone over debt and the knock-on effects of the devastating March 11 earthquake in Japan.

“Setbacks to their recovery have spilled over to the region,” said Haruhiko Kuroda, the ADB president, in a foreword to the bank’s mid-year reassessment of the regional outlook for 2011, titled the Asia Development Outlook Update 2011. The report is the bank’s flagship document.

However, Kuroda said, the bank is forecasting steady growth averaging 7.5 percent across the region, led by the Chinese and Indian economies.

Overall, Kuroda paints a relatively benign picture, saying that private domestic demand and intraregional trade boosted output in the first half of the year, as did rising employment and incomes, buoyant export prices, and investment.

With ample fiscal space and low debt, governments also have room to support domestic demand, he continued.

Consumer price inflation, however, remains a concern, driven by strong growth in commodity prices and rapid regional economic growth. Regional inflation is expected to hit 5.8 percent for the full year, easing slightly to a still-worrisome 4.6 percent in 2012.

The report calls attention to the region’s demographic transition, with age structures already acting as a drag to some countries as the birth rate continues to drop in the heavily industrialized countries.

To provide economic security for a significantly older population, governments, he wrote, “need to develop reliable and sound social security systems, to complement and possibly take over from the weakening informal family support system.”

Although capital has so far been flowing into the region at a relatively manageable pace, the report notes, economic uncertainty in the US and Eurozone means hot money flows could pick up markedly as western investors seek safe harbor for their funds, destabilizing the region, as happened in the 1997-1998 Asian Financial Crisis.

The region’s policymakers must prepare for more volatile capital flows, the bank warned. More flexible exchange rate regimes could help to provide an automatic filter to fend off speculative short-term flows, and, the bank suggested, “imposing selective and carefully designed temporary capital control measures that are conducted in a regionally coordinated manner could be part of the policy mix.”

Although the continuing downturn in the western economies will continue to be a drag on Asia in the second half of the year, strong domestic demand and intraregional trade are likely to underpin regional growth momentum. The lion’s share of intraregional trade is being driven by China, making the region possibly more resilient to external shocks. Intraregional exports increased from 42 percent of total exports in 2007 to 47 percent in the first half of 2011, a signal, the bank says, that there is further confidence that the regional momentum can continue.

All of the subregions posted solid growth for the first half, with growth momentum distributed widely across the region.

Encouragingly, the region is diversifying its sources of growth, with private domestic demand firming up. Rising private consumption, long a goal of economists and government planners, may finally be kicking in. It accounted for most of the first-half 2011 GDP growth in Hong Kong, China, Malaysia the Philippines and Thailand, according to the report. Fixed capital investment recovered in 2010 and contributed strongly to first-half growth in Indonesia, Malaysia and the Philippines, the latter two of which have long suffered from nagging problems in attracting investment.

However, weaker industrial activity and investment, with persistent inflation pressure, impelled the bank to reduce its 2011 and 2012 fiscal year growth forecasts somewhat for India. Second-half 2011 growth is now forecast at a still-strong 7.9 percent as higher interest rates have cut consumer spending and investment.

Bangladesh and Sri Lanka have ridden the Indian boom, with favorable export prices keeping growth brisk, the report says. Pakistan, however, has been the weakest gross domestic product performer in 2009 and 2010 and is unlikely to do much better.

The bank expressed concern over demographic trends, saying older countries must start to pursue structural reforms such as retraining workers and planning for flexible working arrangements to take care of older workers. Traditional family support for the elderly, a long-term stabilizing social phenomenon in Asia, has been weakening, however, meaning that governments of all the countries must prepare to play a larger role in providing economic security for the elderly.

In a region that has largely been hostile to cross-border economic migration, the bank says that “enhancing worker mobility through regional cooperation and integration may benefit both sets of countries.”