Asia to see high inflation in 2011

(Reuters) - Asia’s rapid economic growth will moderate slightly in 2011 even as policymakers combat rising prices with higher interest rates and try to keep local currencies from appreciating too sharply, a Reuters quarterly poll showed.

Most of the 13 Asia-Pacific economies covered in a Reuters survey are expected to see growth cool in 2011 from 2010 as economic recoveries in the United States and Europe remain uneven and China steps up its efforts to fight inflation and asset bubbles.

At the same time, higher prices for food to fuel mean governments and central banks in the region will have to tighten monetary policy further or take other measures even if it risks curbing growth, economists said.

China’s economy is expected to expand by 9.3 percent this year, throttling back from double-digit growth in 2010, but inflation is now tipped to quicken to 4.3 percent, a much faster build-up of price pressures than economists had expected in a similar Reuters poll in October.

Likewise, inflation in India is now seen at 8.8 percent, up from 8.3 percent expected in the October poll.

The prospect of further tightening is already spooking some foreign investors who flocked to the region last year, drawn by its robust growth and higher returns. Indonesian stocks have recoiled after a sizzling 46 percent gain in 2010, with selling attributed to profit taking and concerns that its central bank may be behind the curve in fighting price pressures.

“Later this year, Asian policymakers are going to have to be much more aggressive to get inflation under control and the consequence of that will be weaker growth,” Nomura Chief Economist Asia Robert Subbaraman said.

“For Asia, the challenging part is how to deal with inflation at the time when there is still capital inflows to the region. The risk in Asia is policy is either too slow to respond or the micro or piecemeal measures that have been introduced...are going to lose their effectiveness overtime,” he said.

China will likely record its slowest annual growth of the year in the first quarter of 2011, but it will still be a hearty 8.7 percent, giving the government more confidence to tighten policy further to rein in racing inflation, according to the Reuters poll.

The median forecast of 27 analysts is for China’s gross domestic product to grow 9.3 percent in 2011, stronger than the 8.9 percent forecast in the previous poll published on 14 October.

The world’s second-largest economy is expected to have grown around 10 percent in 2010. The government is due to release fourth-quarter and full-year data on 20 January.

India, Asia’s third-biggest economy, is set to grow at the same robust pace seen over the last fiscal year, averaging at 8.7 percent in the year-ending March 2011, before slowing slightly to 8.5 percent in the following year, the poll showed.

These figures are markedly above October’s consensus of 8.4 percent and 8.3 percent, respectively.

India’s uncomfortably high inflation will subside only gradually in the coming quarters, likely prompting the central bank to hike interest rates more aggressively than earlier thought, though the country will remain vulnerable to any food supply shortages which are far harder to fix.

The wholesale price index, India’s main inflation gauge, is expected to rise by an average 8.8 percent for the fiscal year ending March 2011 before declining to 6.4 percent in the following year.

This is considerably higher than 8.3 and 5.7 percent forecast in the October survey.

Floods may slow Australia for a time

Tapping on strong demand for resources, particularly from China, Australia will see its two-decade long economic expansion hit a speed bump this quarter as floods in Queensland curb coal exports and consumer demand. However, a massive rebuilding effort should then add significantly to growth, and likely fuel price pressures, for months to come.

A Reuters poll of analysts found forecasts for gross domestic product (GDP) growth for the current quarter had been halved to around 0.4 percent, down from 0.8 percent in the prior poll conducted in October.

Tech heavyweight South Korea will sustain its solid economic growth this year after expanding at its fastest pace in eight years in 2010, which may stoke consumer inflation already building from soaring food prices, the Reuters poll showed.

Officials have recently pointed to inflationary pressures in China as also having a knock-on effect on South Korea’s economy in the form of higher prices for imported Chinese goods and food.

Asia’s fourth-largest economy is forecast to grow 4.3 percent in 2011, according to a median forecast of 15 analysts, unchanged from the earlier survey published on 14 October and slightly below the Bank of Korea’s prediction in December of 4.5 percent.

Southeast Asia, Hong Kong and Taiwan share similar stories of rising prices, risks of assets bubbles and moderating growth, highlighting the need for policymakers to act sooner rather than later.

“The message is clear: Asia needs to tighten monetary policy rapidly. If it fails at this, it had better brace for a harsh landing,” HSBC economists said in their Asian Economics First Quarter 2011 released this month.