The Manila-based Asian Development Bank today forecast an economic slowdown in Asia's developing economies after 11 years of sustained growth.
Ever since 1995, the region has witnessed sharp economic growth with an average high of 8.3 per cent in 2006, the highest in the 11 year period. In its projection for 2007, the ADB has forecast growth in Asia's developing economies, including China and India, to slow down to 7.6 per cent and to 7.7 per cent in 2008. These projections imply that growth would move onto 'a more sustainable footing and that overheating pressures that surfaced in 2006 would begin to abate.'
According to the ADB, the Chinese economy, which grew by from 10.7 per cent in 2006 was expected to slow down to 9.8 per cent. However, India, the bank says, will grow by a higher 8.3 per cent, than an earlier projection of 8 per cent.
Chinese industrial output growth would slow to 11 per cent from about 12 per cent in the last two years, indicating significant oversupply in some sectors. However, the service sector would grow by 10.4-10.5 per cent from 10.3 per cent due to efforts to promote consumption and spending related to the 2008 Olympic Games due in Beijing.
In India, the Reserve Bank's efforts to temper inflation were seen as slowing India's pace of investment and consumption spending in 2007, the report noted. "But if inflation proves stubborn, further tightening by the central bank is likely to follow." The two countries also have the highest levels of foreign exchange reserves - China has over $1 trillion, while India has about $200 billion. In its outlook for 2007, the bank also said that the region needed to put its growing foreign exchange reserve to more productive use.
The report says that Asia, excluding Japan, has nearly $2.3 trillion in international reserves, most of which were invested in short-term, secure assets that earned low yields.
According to ADB's chief economist Ifzal Ali, these countries needed just half the reserves to protect against short-term debt and trade requirements and to cushion against unexpected risks. He said that almost $1 trillion could be used more meaningfully.
If half these reserves were invested in a globally diversified portfolio that generated a 5 percentage points higher yield, these countries would have an extra $50 billion or about 0.8 per cent of regional GDP.
However, Ali cautioned, saying, that these investments were not entirely risk-free and as a result governments and central banks could be expected to be cautious on the pace at which they would pursue such an initiative. The bank also said that reigning in inflation, keeping up the reform momentum and improving infrastructure were the other challenges facing the region. According to Ali, poverty reduction remained the overreaching objective of the ADB as it was the 'most important challenge in developing Asia now and over the next generation'.
The report also warns that a moderate slowdown in the US would pull down South Korea's export-led growth to 4.5 per cent from 5 per cent. In South East Asia, growth would maintain its pace from 2006, it said.
On the brighter side, the report concludes, "As 2007 progresses, the external environment could turn more favourable with the global downturn bottoming in the second half."