East Asia's Growth to Slow to 7.6% in 2008, ADB Says

By Shamim Adam

July 22 (Bloomberg) -- Asia's developing economies will expand at the slowest pace in five years in 2008 as easing U.S. growth weighs on exports and accelerating inflation crimps consumer spending, the Asian Development Bank said.

East Asia may expand 7.6 percent in 2008, less than a December estimate of 8 percent, according to a report released today by the lender's Office for Regional Economic Integration in Manila. Next year's growth is also estimated at 7.6 percent.

A U.S. housing recession has roiled financial markets and hurt demand for Asian-made technology and other goods, threatening expansion in a region the ADB says will account for more than a fifth of global growth this year. Record commodity costs have forced central banks from Vietnam to Indonesia to raise interest rates at the risk of stifling expansion further.

``Emerging East Asia is facing stronger headwinds as external demand weakens, global oil and food prices remain elevated, the global IT recovery remains fragile, and the subprime-generated financial turmoil continues to work itself out,'' the ADB division said.

China's growth is likely to cool amid a ``more protracted'' U.S. slowdown and as the government tightens policies to keep inflation contained, according to the report. Asia's second- largest economy will expand 9.9 percent in 2008, compared with a December estimate of 10.5 percent, the ADB unit said. Expansion may slow to 9.7 percent next year.

`Pain, Nervousness'

``It will take a while for things to turn around in Asia, probably not until the second half of 2009,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``The oil and commodity price shock has caused a lot of pain and there is still a lot of nervousness over the financial market turmoil.''

There are few signs that price pressures will subside anytime soon, the ADB unit said, predicting inflation in the region will average 6.3 percent this year, more than double the average in the 10 years to 2006, and ease to 4.6 percent in 2009.

``Inflation will likely continue to plague much of emerging East Asia as record global energy and food prices seep down into overall economic activity,'' it said. ``Rapidly rising inflation threatens to dampen consumer spending and risks a wage-price spiral that could derail the region's recent solid growth.''

Asian central banks need ``decisive tightening of monetary policies'' to combat the rise in prices, said the unit, which makes forecasts separately from the ADB.

`Behind the Curve'

The Philippine central bank has raised interest rates at its last two meetings, while Bank Indonesia has boosted borrowing costs for three consecutive months. In Vietnam, rates were increased to 14 percent, the highest in Asia, and Thailand raised its benchmark for the first time in two years last week.

Still, monetary policy in many East Asian economies is ``behind the curve,'' the ADB unit said. ``There are growing signs that inflation expectations are beginning to drift, with second-round price effects beginning to burrow through the region's economies.''

Stronger currencies can help Asian economies combat price pressures, Jong-Wha Lee, the Manila-based head of the ADB unit, said in a statement today.

``Allowing more exchange rate flexibility can help mitigate imported inflation,'' Lee said. ``Greater currency flexibility will also give more wiggle room to monetary authorities.''

Best Performer

In China, the yuan's 7.1 percent advance this year has made it Asia's best performer and some Chinese officials are pressing for slower currency appreciation to protect jobs as cooling global demand threatens exports.

``With inflation still relatively high, though moderating, more tightening may be expected,'' the ADB unit said. ``A gradually appreciating renminbi, continued monetary tightening, and an expected deceleration in external demand growth should lead to an easing in overall GDP growth.''

Growth in the second quarter was the slowest since 2005, China's government said last week.

Emerging East Asia groups China, the Southeast Asian nations of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand and Vietnam, and the newly industrialized economies of Hong Kong, Singapore, South Korea and Taiwan.

The following is a table of the Asia Development Bank's Office of Regional Economic Integration estimates for annual gross domestic product growth for this year and next.

====================================================
                             2008    2008    2009
                              New    Prior
====================================================
                               Annual GDP Growth
Emerging East Asia            7.6%    8.0%    7.6%
ASEAN                         5.5%    6.1%    5.8%
Cambodia                     7.5%    8.0%    7.0%
Indonesia                    6.0%    6.4%    6.2%
Lao PDR                      7.7%    7.9%    7.8%
Malaysia                     5.4%    5.9%    5.6%
Philippines                  5.5%    6.4%    5.6%
Thailand                     5.0%    4.8%    5.2%
Vietnam                      6.5%    8.5%    6.8%
Newly Industrialized
Economies                     4.7%    5.1%    4.9%
Hong Kong                    4.9%    5.4%    4.9%
South Korea                  4.7%    5.0%    4.9%
Singapore                    4.9%    6.3%    5.8%
Taipei, China                4.5%    4.8%    4.8%
China                         9.9%   10.5%    9.7%
Japan                         1.5%    1.7%    1.5%
U.S.                          1.5%    1.9%    1.6%
Euro Area                     1.8%    2.1%    2.0%
=====================================================

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net