Asia rolls on despite headwinds

Asia will continue to grow strongly over the next couple of years despite weak global demand, the Asian Development Bank says.

Launching the bank's flagship annual publication, the Asian Development Outlook, in Wellington yesterday, ADB principal economist Donghyun Park said economic growth across developing (non-Japan) Asia was expected to be 6.9 per cent this year and 7.3 per cent next year.

Though that would be lower than last year's 7.2 per cent and 2010's 9.1 per cent, it is a stark contrast to the "uninspiring" 1.1 per cent forecast for the United States, euro area and Japan collectively this year, with 2013 not much better at 1.5 per cent.

The eurozone crisis remained the single biggest threat to Asia's robust prospects, Park said, though the possibility of another oil shock was also a risk, not least to the improved outlook for inflation across the region. He said the risk from the eurozone to Asia was manageable.

Trade was the main channel through which European woes might affect the region. "The region's direct exposure to eurozone banks is relatively small, and reserves are sufficient to cover short-term external debt repayments, helping shield the region from financial contagion."

With the need to rely more on demand from within the region, China's moves to rebalance its economy are welcome. Its growth has tended to be top-heavy in investment spending and light on private consumption.

"The Chinese Government is very much aware of the need to rebalance the economy and has been since well before the global financial crisis," Park said. "Such sky-high investment rates for such an extended period are not sustainable. Significant progress is being made."

Beijing is making an effort to strengthen social safety nets, with a view to reducing the need for precautionary saving by households and enabling people to spend more.

"But contrary to conventional wisdom, a large part of China's savings is not household but corporate savings."

As state-owed enterprises tended to retain their profits, moves to reduce the role of the state in the economy would also have a real impact on boosting consumption.

"In addition to government action there is the mega-trend of the rise of a huge urban middle class,." Park said. "They are really hungry to spend."

A focus of the ADB's report is increasing inequality, not just in China but across the region. While Asia had made massive progress over the past 20 years, lifting something like 700 million people above the poverty line, in recent years income inequality had been growing, Park said.