Growth in Asia's developing economies, the fastest-expanding in the world, will slow in 2008 to the weakest pace in five years because of the global credit crisis, the Asian Development Bank (ADB) said on Wednesday.
But the biggest risk for the region is inflation, the ADB said. As growth slows in 2008, inflation is expected to reach its highest level in a decade, presenting policy makers with a major headache.
"In the near term, the major risk lies not so much in softer growth but in rising commodity prices and accelerating inflation," Haruhiko Kuroda, the president of the ADB, said in a foreword to its annual economic outlook.
Warning against the use of subsidies by governments, he said: "If inflation expectations are allowed to become ingrained, this could create distortions that damage productivity growth over a protracted period."
The region, which includes China, India, the "Tiger" economies of Southeast Asia, South Korea and Central Asia, should register robust average GDP growth of 7.6 percent in 2008, the Manila-based multilateral agency said.
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 ADB said. "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."
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.
Although the ADB didn't expect a major slowdown in growth, it said inflation was a palpable risk. The World Bank highlighted the inflation risk on a report it released on Tuesday on the economic prospects of East Asia.
The ADB said inflation should average 5.1 percent in the region 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 region's surging growth had created a voracious appetite for commodities, which, along with other factors, was contributing to price rises, 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."