Eurozone crisis dampening developing Asia’s growth prospects, warns ADB

• South Asia expected to grow 6.2% in 2012 and 6.9% in 2013

BANGKOK, THAILAND: Europe’s worsening financial and banking crisis and a sluggish recovery in the United States are weighing on developing Asia’s growth prospects, according to figures released yesterday from the Asian Development Outlook Supplement (ADOS), published by the Asian Development Bank (ADB).

“Economic growth in developing Asia moderated during the first half of 2012 as slower growth in the US and euro area reduced demand for the region’s exports,” the report says. “Worries over the economic strength of important developing economies have also emerged recently.”

ADB’s latest figures predict developing Asia will expand by 6.6% in 2012 and 7.1% in 2013, lower than the 6.9% and 7.3% forecast in ADB’s Asian Development Outlook published in April.

In addition to the impact of Europe’s malaise, the region’s development in the first half of the year has been hampered by slower growth in the two largest economies — the People’s Republic of China (PRC) and India — as well as the effect of the unwinding of policy stimulus in some countries.

The PRC has seen a fall in net exports, industrial production, and in fixed asset investment, although government spending on health, education and big infrastructure projects should give the economy something of a boost. As the PRC moves to a more sustainable growth model, growth may slow down more than expected. ADB is predicting that gross domestic product in the PRC will increase by 8.2% in 2012 and 8.5% in 2013. In April, an 8.5% expansion was forecast for 2012, rising to 8.7% next year.

India’s outlook, meanwhile, is clouded by a combination of high inflation and poor demand, both externally and internally. Inflation is expected to persist, primarily due to accelerating food prices. India’s economy is now expected to grow by 6.5% in 2012, down from the previous forecast of 7.0%. In 2013, growth should go up to 7.3%, less than the previously expected 7.5%.

While the weaker global environment is expected to affect growth in Southeast Asia, domestic demand and reconstruction activities should keep growth robust. A strong rebound in Thailand, healthy growth in the Philippines, and increasing consumer demand in Indonesia have helped the subregion, and most governments have sufficient policy space to ease monetary policy and provide fiscal stimulus if needed. Southeast Asia’s economies are expected to post growth of 5.2% in 2012 and 5.6% in 2013, virtually unchanged from predictions made in April.

Weaker global demand is helping ease international oil and food prices, which is reducing inflationary pressures in the region. Developing Asia’s inflation rate should slow to 4.4% in 2012—a slight reduction from the 4.6% forecast in April—and will likely continue at the same pace next year.

The chapter on South Asia said economic growth will moderate as the weaker global environment reduces exports and investment inflows. Although somewhat offset by stable inward remittances, widening trade deficits have led to the depreciation of most currencies in the subregion and have helped drive inflation up since early 2012. While manufacturing growth is slowing in most countries, domestic conditions vary among major economies.

 Foreign investments have been declining in India and Pakistan. Based on the government’s latest survey, however, real private consumption in Pakistan is expected to grow in FY2012 by a significantly higher rate than in FY2011, supported by inward remittances.

The unpromising export outlook requires South Asia to curtail imports to ensure inflation and currency values stay healthy, while maintaining growth momentum.

Given these developments, South Asia is expected to grow 6.2% in 2012 and 6.9% in 2013.