The Asian Development Bank has cut its 2009 growth forecast for the region’s developing economies to 7.6 per cent, citing tighter credit and soaring food and energy costs. It maintained the 2008 growth forecast for the region at 7.6 per cent, with China set to dip below five years of double-digit growth to 9.9 per cent in 2008 and 9.7 per cent next year. However, it sharply raised its 2008 inflation forecast for East Asia to 6.3 per cent this year, from 5.1 per cent in its April outlook. Inflation averaged 3.9 per cent in East Asia last year.

Vietnam would be the worst off with 19.4 per cent inflation in 2008 and 10.2 per cent next year. The Bank says that the countries in the region need a more decisive tightening of monetary policies to fight the scourge of inflation and prevent it eating away the fruits of speedy economic growth. It has warned that the inflation problem was deepening, while the risk of inaction is rising, and the region’s monetary authorities need to formulate more forceful and preemptive policy responses.

The economic growth in developing Asia in the first three months of the year was stronger than expected, it eased in the second quarter as slower growth in industrialised nations began to bite. Growth in the industrialised economies of Hong Kong, South Korea, Singapore and Taiwan would slow to 4.7 per cent this year amid weaker demand for their exports, before recovering to 4.9 per cent next year. Aggregate economic growth in the other large economies of the Association of Southeast Asian Nations should ease to 5.5 per cent this year, with prospects in Indonesia, Malaysia and the Philippines moderating.

The ADB is of the view that the region’s developing nations should weather the storm “relatively well, while the central bankers were faced with a dilemma in trying to keep inflation in check without depressing the economy. Rapidly rising inflation threatens to dampen consumer spending and risks a wage-price spiral that could derail the region’s recent solid growth. Asian nations should allow their currencies to appreciate faster to help contain price pressures.

Asia’s emerging economies have largely surpassed expectations in recent years, with aggregate GDP growth reaching a peak of 8.7 per cent in 2007. This fast paced economic growth along with surging domestic demand, particularly consumer demand, keeps these economies well anchored even in this uncertain external environment. While growth in emerging Asia will slow somewhat this year, we are still expecting a healthy aggregate growth rate. Even with measures to cool its economy and the impact of the expected global slowdown, China may still grow around 10 and India eight per cent. The large ASEAN economies will expand by about 5.6 per cent.

The Asian newly industrialized economies will experience lower growth of slightly below five per cent, as they are more susceptible to downturns in the US, Europe, and other industrialised economies. High energy and food prices are getting in the way, particularly for those governments that use subsidies to try to control domestic prices. This is an issue that will be confronting for years to come. Signs of stress are emerging, including rising inflation and fiscal strains in the countries where fuel subsidies or energy price controls are still used.

With the global economy slowing and oil subsidies phasing out, high oil prices could have a more visible impact on domestic consumption and growth in the region this year and in 2009. For decades, real food prices had been declining. Over the past five years, however, they have not merely caught up, but by the end of last year they were roughly double the 2002 level. Since then, they have skyrocketed, stoking fears of a “food crisis.” The World Bank’s food price index climbed 57 per cent in the first quarter of 2008 alone.

The explosion in food prices also increases the fiscal cost of food subsidies and current account deficits in food importing countries. This can become a very sensitive economic and social issue, as about one billion people in Asia spend at least 60 per cent of their income on food. Should food become too expensive or scarce, the most vulnerable could begin to suffer malnutrition. To tackle this problem, the governments, in the short term, should create safety nets for the poor. Agriculture sector reforms and measures to increase productivity must be put in place soon to avert a structural crisis. Countries should also make efforts to free up trade and avoid protectionist policies.

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