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March 28, 2007

ADB lifts growth forecast for Asian economies

It expects pickup in consumer, business sentiment to even out weaker exports

MANILA - THE Asian Development Bank (ADB) raised its growth forecast for Asia excluding Japan on expectations that a pickup in spending by consumers and companies in the region will cushion the impact of weaker exports.

Asia's developing economies will expand 7.6 per cent this year, faster than the 7.1 per cent estimated in September, the Manila-based lender said yesterday. The pace will quicken to 7.7 per cent next year, it said in its Asian Development Outlook 2007 report.

Rising incomes and increased employment across Asia are boosting consumer spending and encouraging companies to lift investment.

That will help sustain the region's economies this year even as slowing growth in the United States and Europe dampens demand for made-in-Asia exports, according to the ADB.

China and India are likely to continue to drive Asia's expansion. The ADB lifted its 2007 forecast for China to 10 per cent from 9.5 per cent estimated six months ago, while India may now expand 8 per cent instead of 7.8 per cent.

Asia's rate of expansion this year is still expected to trail that of last year, when the region grew an 'exceptional' 8.3 per cent, the ADB said. The lender also expects growth in the US, Japan and euro zone to slow, pushing world trade volumes lower this year.

'These projections imply that growth will move on to a more sustainable footing and that overheating pressures that surfaced in 2006 will gradually abate,' the ADB said. In Asia, 'net exports' contribution to growth will soften, but strengthening domestic demand will fill part of the gap'.

Slowing inflation stemming from lower oil and commodity prices and as a result of previous interest rate increases may encourage central banks to cut borrowing costs this year, the lender said. Inflation pressures in South-east Asia may 'subside significantly', the ADB said.

'Most developing countries are very cognizant of overheating,' Mr Ifzal Ali, the bank's chief economist, said in an interview in Tokyo. 'Monetary policy will have a major role in bringing this under control.'

Asian central banks raised rates more than 25 times last year to curb inflation, control lending and limit inflows from overseas that were creating asset bubbles in their markets.

'As the pass-through effects of high oil prices comes to an end, there may be scope for interest rates to come down,' the lender said, citing Indonesia and Thailand which have already begun lowering rates.

The 10 economies in South-east Asia will grow 5.6 per cent this year, and accelerate to 5.9 per cent next year, the ADB said.

Said Mr Bill Belchere, an economist at Macquarie Securities in Hong Kong: 'Domestic demand cycles are stronger in South-east Asia and are being reinforced by policy, whether that is cutting interest rates or adding fiscal stimulus.'

China is taking steps to boost domestic demand and curb a reliance on exports and investment for growth. Premier Wen Jiabao this month said the nation's economic expansion is unstable and environmentally unsustainable.

Risks to the region's growth this year include slowing demand for electronic goods and a resurgence of inflation should oil or commodity prices rise, the ADB said.

Crude oil has dropped about 20 per cent since reaching a record US$78.40 per barrel on July 14 last year. It was US$62.61 yesterday.

'The global electronics cycle could turn in 2007, which would negatively affect export prospects particularly for East and South-east Asia,' the report said. 'The relief that lower prices are currently bringing to budgets, to inflationary pressures and to import bills is welcome, but should not be counted on.'

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