Asia’s developing economies will experience lower levels of growth than previously forecast over the rest of 2008 and next year, according to the Asian Development Bank.
But growth in China will remain robust, not headlong.
It remains the key to the region (and the world next year and into 2010).
That will be good news in particular for Australia where analysts are forecasting an 18% rise in iron ore prices in the 2009 contracts talks starting in November. The forecasts were based on slowing, but still strong levels of activity in China.
The bank says growth in China will fall to 10% this year from 11.9% in 2007, and then slow to 9.5% next year on the back of a smaller trade surplus and slower investment as the result of the global economic downturn.
But China isn’t immune to the global pressures.
It cut interest rsates this week for the first time in six years: while planned before the crisis broke, the move was aimed at stabilising economic growth.
And yesterday the Government eliminated stamp duty on share purchases after the local market’s recent fall had wiped out 70% in value since late 2006.
But the Chinese economy will still perform.
The ADB predicts inflation in China will hit 7% this year, instead of 5.5%. Consumer inflation slowed to 4.9% last month from 8.7% at the start of the year, but Producer Price Inflation remains high, running at 10.1% annual in August.
Across the region, the ADB didn’t mention the financial turmoil and association problems to any great depress, but growth will be above 7% for both years, which compared to growth levels in Europe, the US and Australia, will be almost breakneck.
The continuing drop in oil and other commodity prices, plus easing cost pressures on food (especially wheat and other gains), will also be a positive factor in favour of cooling inflation levels, perhaps cooling a bit quicker than the ADB thought.
The ADB said this week that it has lifted its inflation forecast in its 44 developing Asia member countries, predicting it would average 7.8% over the rest of this year and 6% in 2009. The forecast was contained in the bank’s Asian Development Outlook 2008 update.
In April it had forecast 5.1% and 4.6%, so the new forecast is significantly higher.
“Although central banks have begun to tighten monetary policy some may have let the inflation genie out of the bottle by doing too little, too late, since interest rates in most countries are still lower than inflation,” said Ifzal Ali, ADB’s chief economist.
The ADB said that “contrary to popular belief” developing Asia’s current inflation surge was largely home¬grown, attributing two-thirds of consumer price rises to “years of lax monetary policies which have bumped up aggregate demand and led to widespread expectation of higher prices”.
"Surging global oil and food prices have fanned the inflation flames which were already burning in Asia.”
The ADB forecast its member countries would post an average growth rate of 7.5% this year, a slight fall on its April forecast, and expand by 7.2% in 2009, or 0.6% lower than its previous estimate.
India seems to be the major worry and the ADB reserved particular concern for India’s economy.
The Agency said India would experience a marked slowdown in the 2008 and 2009 financial years, ending its run of five consecutive years of high growth.
The study predicts that India’s growth rate will decrease to 7.4% in the current financial year and then slow to average 7% in the 2009 financial year.
In the fiscal year ending March 2008, India posted 9%, so compared to the region; the slowdown in that country will be noticeable.
India’s slowdown will end its run of five consecutive years of very high growth.
Higher interest rates to contain inflation, which is running at above 12% a year, would constrain India’s growth rates.
Clouding the outlook for the region, the report notes, are the continued elevated level of international oil and food prices, the persistence of high inflation, and a prolonged slowdown in industrial countries.
The report highlights that a supply shortage will remain a dominant issue in global commodity markets.
“While oil prices are likely to soften somewhat in the short run, they will remain high and volatile in the long run.
“High oil prices are here to stay. And as food prices are heavily influenced by oil prices, high food prices are here to stay as well,” says Ifzal Ali, Chief Economist of the Manila-based bank.
The report also warns that the inflation spike now seen throughout developing Asia cannot be blamed solely on cost-push factors, such as high global commodity prices.
Analysis in the ADB Update shows that demand-pull factors, in particular excess aggregate demand and inflation expectations, account for a larger share of variations in domestic price inflation.
“The impact of high food and oil prices on inflation has been muted in most of Asia,” says Mr. Ali. “This central finding has vast implications for monetary policies in the region. In particular, it means that monetary tightening will continue to be a principal instrument for fighting inflation in Asia.
“It’s time to tighten our belts and for governments to cut subsidies, on fuel for example, that have shielded consumers from the brunt of the increases.
“These subsidies are not sustainable. When the subsidies are removed, renewed upward pressure will commence and will raise inflation.”
The ADB Update u
