East Asia growth to slow down to 8% next year, says ADB

Economic growth in  East Asia will ease to eight percent next year from 8.5 percent in 2007 as expansion in key industrialized nations moderates amid the volatility in financial markets and rising oil prices, according to a report by the Asian Development Bank (ADB).

The growth downside is due to expectations of a sharper slowdown in the US economy, further tightening of global credit, an abrupt adjustment in exchange rates and continued rise in oil and commodity prices, says the December issue of Asia Economic Monitor (AEM), an economic report released by the ADB, pointed out.

Growth in the People’s Republic of China, the region’s main engine, will slow to 10.5 percent in 2008 from 11.4 percent in 2007 as government measures to cool the economy begin to take hold.

Growth in ASEAN (Association of Southeast Asian Nations) is also expected to slightly moderate to 6.1 percent in 2008 from 6.3 percent in 2007.

“Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region’s policymakers,” said Jong Wha Lee, head of ADB’s Office of Regional Economic Integration.

He said a hard landing of the US economy could have a significant impact on the region’s growth as trade linkages with the major industrialized economies remain strong despite rising intra-regional trade.

“If we take into account the total share of intra-regional trade that is ultimately destined for the G3 markets (Japan, Europe and United States), the share of G3 markets in the region’s total exports is still over 60 percent,” the ADB report said.

The region’s macroeconomic managers will gain by adopting greater flexibility of exchange rates and exploring ways to maintain stability among intra-regional exchange rates.

The ADB added that improving investment climate to boost domestic demand, managing capital inflows and strengthening domestic financial systems will also help the region underpin growth.

The turmoil in the US subprime market has not spilled over into emerging East Asian markets and economies as the exposure of regional banks to such portfolios remain limited the report noted.

However, the region remains vulnerable as its banking sector expands into new lines of businesses and exposes itself to unknown risks.The changing structure of capital inflows, with volatile short-term capital accounting for more than 60 percent of total inflows, remains a cause for worry.

This also puts pressure on central banks when pursuing autonomous monetary policies.

The sharp rise in asset prices is also at risk of corrections if swings in global financial markets spread to the region. Changes in asset prices could impact growth through wealth effects and higher cost of capital.

“Despite the resurgent capital inflows after the August market turmoil, a sharp reversal in investor risk appetite remains a possibility in this climate of heightened uncertainty. This could lead to a broader re-pricing of risk and unwinding of so-called carry trade,” Jong said.

The report said policymakers should continue to enhance risk management systems, strengthen information disclosure policy and upgrade supervisory framework to better assess potential vulnerabilities.