South Asia's growth to slow down

Growth in South Asia is slowing this year as monetary authorities move to combat still high levels of inflation, according to Asian Development Outlook Update 2011 released today.
The gross domestic product (GDP) is expected to expand by 7.2 per cent, with the inflation forecast marked up to 9.1 per cent. Next year growth should pick up to 7.7 per cent, led by India, after higher interest rates crimped consumer spending and investment in 2011, the report said.
The Asian Development Bank (ADB) has cut its 2011 and 2012 growth forecasts for developing Asia amid ongoing worries about weak external demand from its key trading partners.
It has also trimmed its full year forecast to 7.5 per cent from 7.8 per cent seen in April. The 2012 projection is also lowered slightly to 7.5 per cent from 7.7 per cent previously.
Asian Development Outlook and Asian Development Outlook Update are ADB’s flagship economic reports analysing economic conditions and prospects in Asia and the Pacific, and are issued in April and September, respectively.
The slowdown in demand from the US and Europe continues to cast a cloud over the region, with export growth easing substantially in the second quarter of 2011 in leading economies, including the People’s Republic of China (PRC).
"At the same time, strong domestic consumption and expanding intraregional trade are helping to underpin still solid growth levels,” said Changyong Rhee, ADB’s Chief Economist. "Since the onset of the global recovery, the growth in exports to the PRC from several Asian economies has been stronger than their exports to the rest of the world."
The share of intraregional exports among the largest economies in the region has increased from 42 per cent in 2007 to 47 per cent in the first half of 2011, the report noted.
Accelerating price pressures remain a threat to many economies, with the inflation rate for developing Asia expected to average 5.8 per cent this year, up from an April projection of 5.3 per cent. The rate should cool in 2012 to 4.6 per cent as commodity prices recede but central banks will still need to keep a close watch and may need to take remedial action.
Capital continues to flow into the region, although the pace has eased in recent months, and remains at manageable levels. However policy makers should be prepared to act in the event of any upsurge in capital volatility once the US and European debt markets settle and advanced economies pick up again.
The report notes that many economies in the region are well placed to cope with soft global economic conditions for a while, provided the major industrial economies do not fall back into recession.
"Ample fiscal space, even after the recent spate of fiscal stimulus measures, and large foreign reserves provide a buffer against further downside risks,” Rhee said.In the longer term, the region must press forward with structural reforms that encourage domestic-led, inclusive growth, as demand from advanced countries is likely to remain subdued.
East Asia remains the key economic driver for developing Asia with expected growth of 8.1 per cent this year, although more moderate activity in the PRC has seen the forecast trimmed from the April estimate of 8.4 per cent.
Next year, a further easing of growth in the PRC will see overall growth for the five economies dip further to eight per cent.