Anthony Rowley In Tokyo
ASIA faces an 'inflation spiral' brought on by multiple upward pressures on prices compounded by supply constraints, the Asian Development Bank (ADB) warned yesterday.
And the social and economic implications of the inflation threat overshadow even the dangers of a global slowdown sparked by the sub-prime crisis, ADB suggests in a new report.'For a number of years this region has been growing economically at breakneck speed and now it is coming up against speed limits,' ADB chief economist Ifzal Ali told The Business Times from Hong Kong, where he launched the bank's annual Asian Development Outlook (ADO).
While food and fuel prices are strong factors behind the surge in inflation, structural factors are also at work, he said.
Infrastructure bottlenecks and skill shortages arising from rapid growth are forcing up prices and wages.
At the same time, money supply is expanding beyond central bank targets in some countries because of burgeoning current account surpluses and the accumulation of foreign reserves.
The ADO urges Asian policy-makers to keep a close watch on inflation. Despite administrative measures and subsidies introduced by some countries to rein in prices, inflation is expected to spike in 2008 and could hit a decade-long regional high, the report says.
It urges policy-makers to tackle inflation at its root. For some economies, this could mean a more flexible exchange rate. In others, fiscal spending and priorities could be scrutinised, or measures taken to ease supply bottlenecks that are adding to cost pressures.
Regional inflation is expected to rise to 5.1 per cent on average in 2008 and subside to 4.6 per cent in 2009. Price increases will be highest in Central Asia, where they will remain in double digits, the ADO suggests.
Inflation is running at an 11-year high in China and is also a threat to other countries, such as Vietnam.
Similar warnings on inflation were sounded on Tuesday by the World Bank in its latest East Asia Economic Update. Headline inflation is now running at more than 15 per cent a year in Vietnam and has reached 9 per cent in China and 11 per cent in Cambodia, the World Bank said.
The ADO says developing Asian economies as a whole will achieve solid growth this year despite a slowdown in major industrial economies, surging food and fuel prices and an ongoing credit crisis in the US.
The ADB expects developing Asian economies as a whole to expand 7.6 per cent in 2008 and 7.8 per cent in 2009. The region posted its highest growth in almost two decades last year, averaging 8.7 per cent.
'Asia will not be immune to the global slowdown, neither will it be hostage to it,' Mr Ali said. 'It remains tied to global activity through traditional trade channels, and increasingly, through its closer integration in international financial markets.
'Favourable policy conditions and impressive productivity growth associated with Asia's economic modernisation and structural transformation will continue to keep the region on a strong growth path.'
Growth in East Asia is expected to slow to 8.1 per cent this year from 9.3 per cent in 2007. South-east Asia will slow to 5.7 per cent this year from 6.5 per cent in 2007 because its export prospects are likely to be hit by a slowdown in the global economy.
In South-east Asia, only Thailand is expected to post higher growth after a return to normalcy in politics.
Vietnam's economic expansion will moderate as the country seeks to curb inflation.
China is expected to grow a strong 10 per cent this year and India is forecast to expand 8 per cent.
An economic slowdown in the US, European Union and Japan will have a bigger impact on China, which is more open to trade than India, the ADB suggests.
South Asia is also expected to lose some steam in 2008, mainly through a moderation of growth in India. Pakistan, Bangladesh and Sri Lanka will also be affected by economic deceleration in major markets because garment exports are likely to suffer.
Growth in Central Asia is expected to slow sharply to 7.5 per cent this year, from double-digit levels in recent years on the back of weaker expansion in the region's largest economy, Kazakhstan.
Economic expansion in the Pacific Islands is expected to pick up in 2008, with the region's biggest economy, Papua New Guinea, benefiting from high commodity prices and the Fiji Islands forecast to grow after contracting in 2007.
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