Asian growth forecasts raised despite global turmoil

The Asian Development Bank (ADB) has upgraded its forecasts for economic growth in developing Asia despite the global credit crunch. However, it is also arguing against the view that the Asian economy is decoupling from America.

GDP growth in Asia and the Pacific will reach 8.3% this year according to the ADB’s Asian Development Outlook 2007 Update.* This compares with a forecast of 7.6% back in March. Growth of 8.2% is forecast for 2008 as long as the global economy remains stable.

China’s growth is expected to be 11.2% this year while India is predicted to reach 8.5%. Next year China and India are expected to grow by 10.8% and 8.5% respectively. If the two demographic giants are removed from the projections the region is still expected to grow fast. The other economies should grow by 5.7% this year and 5.6% next.

However, the global credit crunch and the related possibility of an American downturn have increased the probability of less favourable outcomes. “The likelihood of growth slowing more abruptly than this update’s central projections suggest is rising,” says the report.

But the report judges that even if there is an American slowdown, its impact on Asian growth is likely to be limited: “Together the evidence from past slowdowns, available statistical findings and the results of modelling simulation exercises suggests that that developing Asia would feel the tremors from a US recession, though these are likely to be modest and short-lived. Even if the worst experiences of the past 35 years were replayed, the attrition of growth is unlikely to be severe.” Nevertheless the report argues against the thesis that Asia is “decoupling” from America. It gives reasons, apart from America’s size, why the two regions remain integrated.

First, closer regional trade links within Asia are complementary to trade with America. “In East and Southeast Asia, closer trade integration emerges as a result of back and forth trade in intermediate goods and parts, much of which is assembled in final goods for export to the US and other industrial countries.”

Second, financial markets are becoming increasingly integrated across borders. Finally, there are more traditional linkages between regions. These include links related to commodity prices, exchange rates and interest rates.
* Available at www.adb.org