The Asian Development Bank said inflation will put pressure on regional policy makers to manage price increases even as a faltering global recovery reduces economic growth.
The Manila-based lender cut its 2011 growth forecast for Asia excluding Japan to 7.5 percent from an April estimate of 7.8 percent, according to the Asian Development Outlook 2011 Update report released today. It raised the region’s inflation forecast to 5.8 percent this year, from an earlier estimate of 5.3 percent.
“Inflation is a continuing concern,” the ADB said in a statement accompanying the report. “If commodity prices resume their climb and the current weakness in the global recovery turns out to be temporary, regional central banks will have to speed up the process of monetary tightening, especially where inflation is already high.”
Europe’s failure to resolve its debt crisis and diminishing U.S. jobs growth have hurt Asian exports and trimmed expansions from China to Singapore, prompting South Korea, Indonesia, Malaysia and the Philippines to avoid raising interest rates in September after boosting them earlier this year. Asian currencies and stocks weakened today as Chinese Premier Wen Jiabao signaled that developed nations shouldn’t rely on China to bail out the world economy.
All of Asia’s 11 most-traded currencies have fallen against the dollar in the past month as slowing expansion damped the appeal of the region’s assets. The MSCI Asia-Pacific Index (MXAP) of regional stocks has lost more than 15 percent this year.
Growth in Asia excluding Japan will be 7.5 percent next year, the ADB forecast, down from an earlier estimate of 7.7 percent. The lender kept its 2012 inflation forecast at 4.6 percent. Crude oil has fallen about 12 percent in the past six months.
“While cooling somewhat, inflation next year is forecast to stay relatively high, at 4.6 percent, with large variations across countries,” the ADB said.
Asia is balancing the need to support the region’s growth while containing price pressures. Wen, facing calls to widen support for indebted European countries, said at the World Economic Forum in Dalian, China today that “countries must first put their own houses in order.”
“Developed countries must take responsible fiscal and monetary policies,” he said. “What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.”
Greek Prime Minister George Papandreou will hold a conference call with German Chancellor Angela Merkel and French President Nicolas Sarkozy today amid increasing speculation that Greece will default.
The ADB forecasts assume that Greece won’t default on its debt, Rhee Chang Yong, the lender’s chief economist, said in Hong Kong today.
“That is the case of doomsday,” Rhee said. “That’s the responsibility of the European and advanced economies’ policy makers not to let this happen, because if this happens, there would be huge turmoil in the global financial market.”
China’s Wen reiterated last month that stabilizing prices remains the nation’s top priority while central banks in Malaysia and the Philippines signaled last week the risks to their economies have increased as they kept rates unchanged.
Job growth in the U.S. unexpectedly stagnated in August, with payrolls data showing the weakest reading since September 2010. Italy’s bond-yields have surged as the region’s sovereign debt crisis spread from Greece, the first to receive a European Union-led bailout. Prime Minister Silvio Berlusconi’s government rushed a 54 billion-euro austerity package to convince the European Central Bank to buy its debt.
Asia’s policy makers need to prepare for more volatile capital flows as the global risks threaten investor appetite for emerging-market assets even as the region’s still “robust” economies may lure funds, the ADB said, suggesting more flexible exchange rates, temporary capital-control measures, and improved financial supervision.
“Imposing selective and carefully designed temporary capital control measures that are conducted in a regionally coordinated manner could be part of the policy mix,” the ADB said. “More flexible exchange-rate regimes could also help to provide an automatic filter to fend off speculative short-term capital inflows.”
East Asia, which includes China, South Korea, Hong Kong, Taiwan and Mongolia, will be the fastest growth region of Asia, the ADB said.
China will expand 9.3 percent this year, less than the previous forecast of 9.6 percent, after growth moderated due to monetary tightening to curb inflation and weaker external demand, the lender said. India’s economy will grow 7.9 percent in the year ending March 31, compared with the earlier estimate of 8.2 percent, it said.
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