ADB cuts Asia growth forecast, warns on inflation

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MANILA, Sept 16 (AFP): Asian growth will slow further this year and next as the turbulence on global markets fans inflation, the Asian Development Bank (ADB) warned today. Governments in the region will need to address inflation even if it means slower economic growth, the Manila-based lender said in an update to its 2008 Development Outlook report.
The report was written before a weekend of financial market turmoil in the United States that has already had global repercussions, after Lehman Brothers filed for bankruptcy and Merrill Lynch was only saved with a takeover by Bank of America. In its report the ADB said the past eight months of turmoil in the markets had "exploded the myth of uncoupling" and showed economies in Asia were still heavily reliant on industrial countries, notably the United States, for their exports.
Around 85 per cent of footware imported by the United States and a third of its clothing comes from developing Asia, the bank said.
The ADB sharply increased its inflation forecast for Asia for 2008 from the 5.1 per cent predicted in April to 7.8 per cent, and to 6.0 per cent in 2009.
Economic growth in 2008 is expected to drop from the 7.6 per cent that was forecast in April to 7.5 per cent, and slow further to 7.2 per cent next year.
The ADB said it expected food prices would remain high, and that oil would remain "well above" 100 dollars a barrel-although New York's main contract, light sweet crude for October delivery, was at just below 93 dollars Tuesday.
China's economic growth will remain unchanged at 10 per cent this year, the ADB forecast, but it revised down slightly its 2009 forecast to 9.5 per cent on the expectation of a reduced trade surplus and slower investment growth.
The ADB said that while some central banks had started 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."
"Containing inflation will take time as monetary policy works with a lag," the bank said. The ADB projected double-digit inflation this year for Cambodia, Indonesia, Laos, Philippines, and Vietnam.
"Curbing inflation is the crucial macroeconomic challenge facing most Southeast Asian countries," the bank said.
Meanwhile, the economic slowdown across Asia has shown that the region is still heavily dependent on the financial health of the world's major economies, the ADB said today.
The bank also warned in an update to its annual Asian Development Outlook report that if the slowdown extends beyond 2009, the repercussions for the region could be "severe." "The myth of uncoupling has been exploded," the Manila-based lender said.
"The region clearly remains heavily reliant on industrial countries for its exports and has not uncoupled from their business cycles."
The statement refers to the widely held view that Asian economies are now strong enough to rely on intra-regional trade rather than the so-called G3 (the United States, the Eurozone and Japan).
The ADB said the global downturn was expected to be long and drawn out, meaning exports from Asian countries will be "sluggish."
Developing Asia supplies about two-thirds of US clothing imports and 85 per cent of its footwear both in terms of value and volume.
The bank said exports from the region in these sectors had contracted in the first half of the year.
Asia is also a major supplier of toys, games and sports equipment to the United States.
"As the region almost completely supplies the US import market for these goods, a prolonged weakening of demand could adversely affect developing Asian manufacturers," the ADB said.
And the story is much the same for Japan and the Eurozone.