Asia to Expand at Slowest Pace Since 1998, ADB Says

By Shamim Adam

March 31 (Bloomberg) -- Asian economic growth will slow to the weakest since the 1998 financial crisis as the global recession hurts exports, the Asian Development Bank said, cutting its forecast for the second time in four months.

Asia excluding Japan will grow 3.4 percent this year, less than a 5.8 percent estimate in early December and a 7.2 percent forecast in September, the Manila-based institution said in a report today. The economies may recover next year with a 6 percent expansion, it said.

Global trade may contract for the first time since World War II this year, the World Trade Organization predicts, as U.S. and European demand slumps. Asia’s expansion in the next two years will be “well below” recent growth rates, hindering efforts to reduce poverty in a region where more than half the population live on less than $2 a day, the ADB said.

“The short-term outlook for the region is bleak as the full impact of the severe recession in industrialized economies is transmitted to emerging markets,” ADB’s acting chief economist Lee Jong-Wha said in a statement. “The concern for the region is that it is not yet clear that the U.S., European Union and Japan will recover as soon as next year.”

Asia needs to reduce its dependence on exports, and implement more policies to boost domestic consumption, the lender said. Overseas shipments account for about 32 percent of Asia’s gross domestic product, according to the World Bank.

Stimulus Limited

Central banks across Asia have lowered interest rates to stimulate demand, and governments are pumping more than $700 billion in spending, tax cuts and cash handouts into their economies to kick-start local consumer and business spending.

“It is uncertain these conventional monetary policies and discretionary fiscal policies can continue to support demand until external demand recovers,” the ADB said. “If the planned fiscal packages turn out to be ineffective or insufficient, many Asian economies will not have room to resort to additional fiscal packages.”

Economic reports continue to signal deteriorating conditions in the world’s largest markets. Japan’s exports plunged an unprecedented 49.4 percent in February from a year earlier, European confidence fell to the lowest on record in March, and U.S. jobless benefits data show more Americans are spending longer periods out of work.

In Asia, Chinese industrial companies’ profits dropped for the first time on record in the first two months of the year, while South Korea’s industrial production fell 10.3 percent in February from a year earlier.

Job Losses

Exports by developing Asian economies may shrink 10.3 percent this year, after growing 14.7 percent in 2008, the ADB said. Imports will probably contract 11.9 percent.

The MSCI Asia Pacific excluding Japan Index has dropped 46 percent in the past year, while nine of 10 Asian currencies tracked by Bloomberg have dropped against the dollar in 2009.

“Across the region, factory closures and job losses are rising, weighing on consumer sentiment and forcing households to cut back on spending,” the ADB said. “Slowing demand and the uncertain economic environment are discouraging investment. As business sentiment continues to degenerate, capital spending will be restrained.”

Inflation, which averaged 6.9 percent in developing Asia last year, may ease to 2.4 percent in 2009 and 2010 as demand shrinks and commodity prices tumble, the ADB predicts.

China will expand 7 percent this year, from 9 percent in 2008, the ADB predicts. The World Bank expects Asia’s second- largest economy to grow 6.5 percent this year, while the government says 8 percent is possible.

Southeast Asia

India’s economy will grow 5 percent this year, the ADB said. Prime Minister Manmohan Singh’s government expects growth in the year starting April 1 to be slower than the 7.1 percent it projected for the current year, while the International Monetary Fund forecasts an expansion of 5.3 percent.

In Southeast Asia, the ADB expects the economies of Thailand, Malaysia and Singapore will shrink this year, dragging growth in the region to 0.7 percent in 2009. The East Asian economies of South Korea, Taiwan and Hong Kong will also contract, it said.

Some of the world’s biggest financial companies including Lehman Brothers Holdings Inc. have collapsed as banks and other financial institutions reported about $1.3 trillion of writedowns and losses since the start of 2007. Asian financial systems have weathered the crisis “quite well” and bank lending is flowing “normally,” the ADB said.

“Nevertheless, the global financial crisis is far from over, and the speed and scale of its resolution remain subject to a great deal of uncertainty,” the ADB said. “The biggest risk to the region’s continuing financial stability is the specter of a deep and protracted downturn.”

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