(Xinhua)
Updated: 2008-04-02 19:23

HONG KONG - The Asian Development Bank on Wednesday revised its forecasts for economic growth of developing Asia in 2008 down to 7.6 percent, saying inflationary pressures would mount across the region to pose a major challenge.

"Rising food and energy prices will test the resilience of developing Asia in many years to come," the bank's chief economist Ifzal Ali told a press conference in Hong Kong, where the bank released its flagship Asian Development Outlook 2008 (ADO).

He said developing Asia will return to trend growth in the next two years, projecting a growth of 7.6 percent for the region in 2008, followed by slight improvement in 2009 to 7.8 percent.

The regional growth will remain solid thanks to generally favorable conditions in the region and productivity growth arising from continued economic modernization and structural transformation, according to the report.

Growth is expected to slow down to 10 percent this year for the Chinese mainland, and, for India, to 8 percent, the bank said, pointing to recent tightening in monetary policies in both economies, recognized as the engines of regional growth.

Arguing against developing Asia's de-coupling from the United States economy and calling it a "myth", Ifzal said the region remained closely tied to global activity through trade and finance and the fallout from the US slowdown would be felt.

"A global slowdown is now under way," he said, "one of the fundamental changes is that, instead of a slowdown only in the United States, we are seeing coincidental declines across the United States, the eurozone and Japan."

"The ADO baseline forecasts have been revised down significantly over the last few months and, as new data are released, analysts continue to cut their growth forecasts."

The U.S. slowdown has led to declines in exports of garments, footwear, toys, games, and sports equipment from developing Asia. Sixty-one percent east and southeast Asian exports directly meet final demand in the United States, Europe and Japan, he said.

The slowdown in the United States, European Union and Japan will have a more pronounced impact on China, which is more open to trade than India.

It will also lead to asset market adjustments in Asia, he added.

"Asia will not be immune to the global slowdown, neither will it be hostage to it."

The Asian developing economies averaged a growth of 8.7 percent in 2007, the fastest in nearly two decades, and the growth of many economies tested speed limits, the Manila-based bank said in the ADO report, its flagship annual publication.

"We saw signs of overheating emerge everywhere (in 2007). There was skilled labor shortage. There were infrastructural bottlenecks, " Ifzal said.

Inflation rose to an 11-year high in the Chinese mainland by November, and reached double digits in Vietnam and Central Asia by the end of 2007, he said.

Inflation in developing Asia, expected to "spike", could hit a decade high with an average of 5.1 percent in 2008, followed by 4.6 percent in 2009, the report said.

Rising food and energy prices were a major challenge, Ifzal said, adding that spending on the two accounts for nearly 60 percent of household budgets in the region.

The bank listed many "structural constraints" facing the economies of developing Asia, such as macroeconomic stability, integrating into the global economy, getting prices to send the right signals, creating a conducive business and investment climate and above all, ensuring that the benefits of growth are shared by all.

It urged policy-makers to tackle inflation at its root.

"For some economies, this may mean a more flexible exchange rate," said Ifzal, naming the example of Vietnam.

"I think it is time for Vietnam to allow some flexibility in its currency value. Otherwise the inflationary pressures will continue to mount," he said.

"While in others it may need a scrutiny of fiscal spending and priorities and, in some cases, targeted measures may be warranted to ease supply pressures that are piling on to cost pressures," said the report.