Bubble in Optimism Imperils Asia's 2012: The Ticker

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By William Pesek

Give the Asian Development Bank high marks for optimism about the fastest-growing region.

The Manila-based lender predicted yesterday that Asia's economies (excluding Japan) will grow 7.5 percent in 2012, a rate unchanged from this year. While there are many reasons to think the ADB is being overly optimistic, here are the two most obvious: the darkening state of the global economy and accelerating inflation pressures from Seoul to Jakarta.

As the U.S. slows, Europe unravels and Japan walks in place, Asian governments will find it increasingly difficult to support domestic growth. It was one thing to ride out the global chaos of 2008, when ample fiscal and monetary options existed. This time around, it will be harder to stabilize things.

Such stimulus tends to lose its oomph the second time around. Credit rating agencies, meanwhile, are becoming more activist. If Standard & Poor's had the gumption to yank away America's AAA rating, it will have few qualms about downgrades in Asia.

Inflation is the bigger problem. The ADB raised the region's forecast to 5.8 percent this year, from an earlier estimate of 5.3 percent, and that too may prove optimistic. Bad economic news in the West promoted central banks like South Korea, Indonesia, Malaysia and the Philippines to halt their interest-rate-hike cycles.

It's a tough balancing act. With the Federal Reserve, Bank of Japan and European Central Bank holding rates at, or close to, zero, excess liquidity is building up. As the most vibrant region and China's backyard, Asia is attracting the lion's share of that cash. It will increasingly lead to bubble troubles if central banks don't act prudently.

The fragile state of the global economy may leave policy makers gun shy. No one wants to be blamed for driving his or her economy into recession. And, let's face it, central bank independence has become a quaint concept following Wall Street's crash three years ago. So, expect monetary spigots in Asia to stay open.

Slowing growth and rising inflation aren't a recipe for long-term success or optimism. And yet that's what Asia may be facing in the year ahead.

(William Pesek is a Bloomberg View columnist.)

-0- Sep/14/2011 14:57 GMT