ADB sees Asia growth slowing, warns on inflation

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MANILA (Reuters) - Growth in Asia's developing economies will slow in 2008 to the weakest in five years, but the region needs to tackle inflationary pressures before they spiral out of control, the Asian Development Bank said on Wednesday.

By Raju Gopalakrishnan

MANILA (Reuters) - Growth in Asia's developing economies will slow in 2008 to the weakest in five years, but the region needs to tackle inflationary pressures before they spiral out of control, the Asian Development Bank said on Wednesday.

While growth would remain relatively robust in the face of the global credit crisis, inflation will rise to a decade-long high, presenting a major risk.

"If this genie gets out of the bottle and inflation becomes ingrained, it could bring the growth process to a grinding halt," Ifzal Ali, the ADB's chief economist, told Reuters in an interview in Hong Kong.

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"Economically, socially and politically it will become very dangerous. In Asia we have been focusing a lot on growth and we have taken price stability for granted -- this is a reality check."

The region, which includes China, India, the "Tiger" economies of Southeast Asia, South Korea and Central Asia, should register average GDP growth of 7.6 percent in 2008, the ADB said in its annual economic outlook.

But it follows an 8.7 percent surge in 2007 and is the lowest annual growth figure since 7.1 percent in 2003.

The ADB itself has trimmed the 2008 growth forecast from the 8.2 percent it predicted in its last regional outlook six months ago.

"Developing Asia is not immune to global developments, but neither is it hostage to them," the Manila-based multilateral agency said, referring to the credit crisis.

"Although problems will spread from the global economy to developing Asia -- a problem that is already visible in high-frequency trade and financial data -- the region's growth in 2008 is much more likely to moderate than to lurch down."

TOUCH FASTER

The ADB said the region should grow a touch faster in 2009 at an average of 7.8 percent if the credit crisis did not last long.

"This projection assumes modest recovery in the world economy beginning later in 2008 and carrying through 2009, an outcome that is far from guaranteed," it warned.

China, the fastest-expanding major economy in the world, should grow 10.0 percent in 2008 and 9.8 percent next year after an 11.4 percent surge in 2007, the ADB said.

India, which is more insulated from the global economy, should grow 8 percent this year and 8.5 percent in 2009 after 8.7 percent last year, it said.

Ali, the chief economist, said Asia's developing economies continued to be closely linked to the G3 -- the United States, Eurozone and Japan -- economies, all of which were forecast to slow this year.

"There is absolutely no evidence of decoupling when we look at either the trade or financial data -- the evidence is rather to the contrary," he said.

INFLATION A "PALPABLE RISK"

The ADB highlighted inflation, fuelled by spiraling food and oil prices, as a palpable risk for the region.

The World Bank made a similar assessment in a report it released on Tuesday on the economic prospects of East Asia.

It suggested Asian countries needed to continue their move to more flexible exchange rates to make better use of monetary policy to tackle inflation.

The ADB said inflation should average 5.1 percent in developing Asia in 2008, the highest since 6.1 percent during the 1998 Asian financial crisis.

"Indeed, published inflation rates disguise the true extent of underlying inflation pressures due to the presence of subsidies, administrative price controls and cuts in excise taxes," it said.

The subsidies used by many governments in the region to cushion the impact of soaring fuel and food prices were posing a threat to budgets, it said, adding that cash handouts to the poor may be a better and cheaper option.

"If governments do not rethink these expensive and inefficient subsidy programs, fiscal costs could escalate sharply and require painful adjustments (or accelerating inflation, or both) later," the ADB said.

"Carefully targeted direct income support for the poor, within strict budgetary limits, might better alleviate stresses, and at much lower cost."

(Editing by Neil Fullick)