Strong demand from within Asia, particularly China, is likely to offset some drag from a likely US slowdown. The PECC also cited high energy prices, water pollution and global warming as the top three risks to economic growth in the region. China’s booming growth will slow slightly to 10.5pc next year from an estimated 11.4pc this year if government measures to cool the economy begin to take hold. Economic expansion in the 10-member Association of Southeast Asian Nations will likely slightly moderate to 6.1pc in 2008, from 6.3pc this year.

As growth slows a bit in emerging East Asia, inflation is rearing its head in many economies. Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region’s policy makers. However, greater flexibility in exchange rates, a better investment climate and management of capital inflows will help the region support growth. Economic growth in Emerging East Asia accelerated to 8.4pc in the first half of 2007, up from 7.8pc in the latter part of 2006, exceeding earlier expectations by a wide margin.

This strong performance reflected a more rapid increase in domestic investment and consumption spending, which offset moderating export growth in a number of economies. The acceleration in the first half of 2007 was especially sharp in China, with growth averaging 11.5pc, up from around 10.5pc in the latter part of 2007, and continuing to run at 11.5pc in the third quarter. While net exports continued to contribute between three and four percentage points to overall growth, much of the acceleration in China was due to faster domestic demand growth, in particular investment spending.

Growth also continued to run at solid 7-10pc rates in several low income economies of the region such as Cambodia, Lao PDR, Mongolia and Vietnam, powered by across-the-board strength in exports and domestic demand. Growth is also running at above historical trend rates in some of the smaller island economies, due to high commodity prices and, in some cases, improved economic management. But political instability and social tensions continue to undermine performance in some of these economies, for example Fiji, where output is expected to contract this year.

The stronger growth dynamic was also apparent in some of the middle income economies in South East Asia, notably Indonesia and the Philippines, where first half growth picked up to 6.1pc and 7.3pc respectively, while continuing to run in a 5 ½-6pc range in Malaysia. Growth in Indonesia, Philippines and Malaysia was underpinned by a marked acceleration in personal consumption and domestic investment spending. The investment upturn is especially notable given the long period of weakness in this sector in the aftermath of the 1997-98 financial crises.

Thailand remained an outlier in this respect, with domestic demand remaining weak, principally because of continued political uncertainties. More robust domestic demand also helped buoy first half growth of around 5.1pc in the high income newly industrialized economies (NIEs), offsetting somewhat weaker export growth in some economies. Singapore was emblematic, with growth accelerating to 7-8pc in the first half, and to 9.4pc in the third quarter, despite a slowdown in net export growth to virtually zero

The East Asian economy as a whole in 2008 is forecast to continue posting a brisk growth rate of 8.2pc, though at a slower rate than the 8.7pc registered in 2007. The combined inflation rate of the East Asian economy as a whole in 2008 is forecast to remain stable at 3.2pc. Among the Asean, the economies of Thailand and Malaysia are forecast to develop steady domestic demand. The Indonesian economy is forecast to enjoy thriving expansions of both domestic and external demand. The Philippine economy will see slowing growth of domestic and external demand.

Korea

The World Bank forecasts that Korea’s economy will grow 5.1pc next year on increased domestic demand and strong exports to Europe and China, exceeding a 4.6pc forecast by the IMF last month. The Fund expected the Korean economy to grow 4.8pc this year, but said the figure for 2008 would only reach 4.6pc, down 0.2 percentage point from the July outlook, citing projected slower exports overall in Asia and the possibility of further global financial market turbulence. Robust exports and a steady rise in domestic demands are expected to sustain the momentum of growth in the latter part of 2007 and in 2008, resulting in GDP growth of 4.8pc in 2007 and 5.1pc in 2008.

The country’s financial sector remains in good overall health but one of the potential risks being closely monitored is mortgage lending in the housing market. The pace of house price inflation has slowed sharply, although bank exposure is not high and non-performing loans are low, the report pointed out. Lending to small- and medium-sized enterprises has also been growing quickly, but the pace is expected to moderate as tighter lending standards and stronger monitoring by regulators take effect.

Exports are projected to rise 11.4pc from this year to $413 billion in 2008 on strong performances by shipbuilders and automakers. Next year’s imports are expected to rise 13.1pc to $399 billion, resulting in a trade surplus of $14 billion. For this year, Korean exports are estimated to climb 13.9pc annually to $370.8 billion, with imports likely to increase 14.1pc to $352.9 billion. Exports are expected to increase at a double-digit rate in 2008 for six years running, boosted by brisk overseas shipments of autos and ships and strong demand from emerging markets.

Exports have maintained a double-digit real growth thanks to solid demand from the Euro zone and China, in the face of strong won appreciation against the dollar. Next year’s strong export growth will be possible, despite high-flying oil prices and volatile foreign exchange rates that are expected to weigh on the Korean economy. Korea, the world’s fourth-largest crude buyer, depends entirely on imports for its oil needs. Korea’s currency has been rising against the US dollar this year, making its exports more expensive.

Headline consumer price inflation has been stable, running at 2.3pc in the third quarter of 2007. It was below the central bank’s medium term target range of 2.5-3.5pc. Although consumer prices remain subdued, the overnight call rate target had been held at 4.5pc for the previous 10 months. The BOK expects that inflation pressures may increase from the second half of this year into the first half of 2008 due to economic recovery, higher asset prices, the growth of liquidity and higher international oil prices.Given the sluggishness of the economy in late 2006 and early 2007, the government had frontloaded fiscal expenditure in the first half of this year. The fiscal balance excluding social security funds is expected to remain in a very modest deficit of around 1pc in 2007 and 2008. The current account remains broadly in balance while net capital inflows continue at moderate rates. Double-digit export growth has been offset by high oil prices and a widening services account deficit. The services account deficit continued to expand as the demand for travel and education abroad increases.

For the first eight months of 2007, the current account totalled a surplus of $0.5 billion, with a surplus of $19.0 billion on goods and a deficit of $14.7 billion on services. The current account is likely to continue in broad balance this and next year. The capital account recorded a surplus of $11.7 billion for the first eight months of this year. Short-term external borrowing, surged by $37.9 billion during this period, and was a main factor in the overall net capital surplus, given net outflows of direct investment and portfolio investment.

Net capital inflows are anticipated to moderate as demand for hedging by shipbuilders slows and capital outflows by domestic investors increase, thanks in part to easier regulations and expanding tax incentives for overseas investment. Meanwhile, foreign exchange reserves reached US$257.2 billion in September 2007, up US$18.3 billion over the end of 2006.