Asia slowdown to cool inflation; global threats grow

SINGAPORE (Reuters): Asia’s major economies are set for a modest slowdown in coming months, while next year’s growth prospects hinge on how quickly inflation cools at home and demand recovers abroad, a Reuters poll showed.

Economists have trimmed their 2011 and 2012 growth forecasts for China, India, and a handful of the other economies in the region since the last quarterly poll of Asian countries excluding Japan, conducted three months ago.

However, they see little risk of a severe downturn. In China, for example, they predicted that growth would stay well above the 8 per cent level needed to create enough jobs to keep up with a rapidly urbanising population.

Debt troubles in the United States and Europe are a big wild card. What was once unthinkable – a U.S. debt default – has become a legitimate concern. If it happens, Asia’s economists would need to rethink their assumptions.

But for now, the biggest worry for Asia’s largest emerging markets is that inflation remains hot while growth slows, forcing central banks into a more aggressive round of interest rate hikes or tighter restrictions on bank landing.

“The bigger risks confronting the Chinese and Indian economies at present stem more from domestic than international developments,” said Robert Prior-Wandesforde, Credit Suisse’s Asia economist based in Singapore.

“In particular, the presence of high and sticky inflation has forced the central banks of both countries to tighten policy, with potential adverse consequences for domestic activity,” he said.

Credit Suisse’s forecasts for China were among the most bearish in the Reuters poll of 19 economists, calling for 8.7 per cent growth for this year and 8.5 for next. In contrast, the median forecast was for 9.3 per cent growth in 2011 and 8.8 per cent for 2012.

As goes the West

For India, economists cut their 2011 forecast to 7.9 per cent from 8.3 per cent in the previous poll, with the inflation rate outstripping growth at 8.5 per cent. A string of interest rate rises may finally start to cool prices next year. The median forecast called for inflation to slow to 6.5 per cent.

For some of the smaller, export-focused economies, their fate is tied to that of the United States and Europe. Both regions are struggling with slack domestic demand and debt troubles that show no sign of a quick resolution. In Taiwan, growth prospects for this year look brighter than they did three months ago, but forecasts for 2012 have come down. Economists also predict inflation will keep building over the next 18 months, prompting at least two interest rate hikes.

Taiwan’s exports looked disappointingly soft in June, with dramatic slowdowns in shipments to the major Western economies.

South Korea’s exports have also turned sluggish, casting doubt on its growth prospects. Economists nudged down South Korea’s growth estimate for 2011 to 4.2 per cent from 4.5 per cent in the prior poll but kept 2012’s unchanged at 4.7 per cent.

Australia recorded the region’s sharpest downward revision to 2011 growth forecasts since the last poll. Economists now expect a 2.1 per cent year-on-year gain, far smaller than the 2.9 per cent rise they predicted three months ago.

But Australia’s troubles are linked primarily to extensive flooding earlier in the year, and 2012 looks considerably brighter. Economists see growth bouncing back to a strong 4.3 per cent in 2012, powered by natural resources.

Nomura’s Australia economist, Stephen Roberts, predicted that 2012 would mark the “strongest year ever for mining investment.”

In Indonesia, economists predict back-to-back years of 6.4 per cent growth in 2011 and 2012, but inflation pressures may pick up. Bank Indonesia has been among the slowest in Asia to raise interest rates, and may need to do some catching up.

Economists on average predicted hikes totalling three-quarters of a percentage point over the next 18 months, which would bring the benchmark rate to 7.5 per cent.