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Asian Growth to Slow, But Not as Much as Feared

Asia-Pacific economies are likely to slow this year but should perform much better than was anticipated just a few months ago thanks to a pick-up in consumer spending, a Reuters poll shows.

The survey of 12 regional economies, excluding Japan, shows that most are expected to slow a little from 2006 as exports cool, but they are forecast to rebound next year.

The slowdown this year means inflation forecasts have been lowered in just over half of the countries polled.

Thailand is the only economy where the 2007 growth forecast has been slashed as political uncertainty following a military coup last September plus subsequent policy flip-flops have knocked consumer confidence and investment.

For the rest of Asia the outlook is brighter than estimated, with lower interest rates, buoyant housing and job markets and higher government spending likely to bolster domestic demand.

Domestic consumption accounts for around 60% of Taiwan's gross domestic product and makes up about 70% of GDP in the Philippines. "In 2007, domestic demand is the buzz word," said Dong Tao, chief regional economist at Credit Suisse in Hong Kong.

He said the main risk to Asia's economic outlook now were worries about a U.S. recession and volatility in global financial markets. "We have been on the optimistic side for a long time," Tao said, referring to domestic demand. "But this is not a one-way street. The biggest risk is from the other side of the world," he said. "Fear of a U.S. recession and volatility in the capital
markets."

China Cools, Still Booming

Rising consumption is also the reason why economists say a slowdown in China's booming economy is unlikely to be as great as they had estimated in the last poll in November.

China's GDP growth is forecast to ease to 10.0% this year from 10.7% in 2006, against a previous forecast of 9.5%.

The world's fourth-largest economy is set for a fifth straight year of double-digit growth, reinforcing the view that further monetary tightening will be needed to curb inflation. "Domestic demand in China is strong and could actually surprise people when investment accelerates," said Tao.

"There is some indication that perhaps investment growth is rebounding and that could make China grow even stronger and means there is a risk of another round of monetary tightening." China's central bank has raised benchmark lending rates twice and increased the amount that commercial lenders have to hold in reserve five times since last April.

In Southeast Asia, economists have cut Thailand's 2007 GDP growth estimate to 4.0%, which would be a six-year low, from 4.5% in November. "Basically, political uncertainty is seen weighing on both consumption and investment. Right now, only the external sector is seen supporting the economy," economist Vishnu Varathan at Forecast in Singapore said.

In contrast, optimism on the Indonesian economy has been growing as lower borrowing costs and steady commodity exports have helped the country recover from a 2005 currency and budgetary crisis. Economists expect the economy to grow 6% in 2007 -- the same forecast
as in November -- after 5.5% last year.

Inflation Tame

Inflation in much of Asia is expected to be tame in coming months as global growth is cooling and oil prices have declined.

The Reuters poll forecast average inflation in the Philippines would ease to 4% this year from 6.2% in 2006. Malaysian inflation is seen slipping to 2.7% from 3.6% last year.

China was the only country polled where 2007 inflation forecasts were raised. The consumer price index there is expected to rise 2.2% this year versus a previous forecast of 1.7% and above a five-year average of 1.5%.

As for currencies, the New Zealand and Taiwan dollars were expected to see some of the sharpest moves.

The Taiwan dollar, one of Asia's weakest currencies this year, is tipped to rise just over 1% to 32.6 against the U.S. dollar by the end of June, benefiting from speculation about U.S. rate cuts.

But the New Zealand dollar is forecast to weaken to 68 New Zealand cents against the U.S. dollar by the end of June and to NZ$0.64 by year-end as it faces the heavy redemption of kiwi-denominated eurobonds.

It hit a 14-month high in late February above NZ$0.71 but has weakened since then due to an unwinding of so-called carry trades -- switches into high-yielding currencies like the kiwi from low-yielders -- and rising risk aversion.

"We look for one more spike higher in the kiwi dollar as the central bank hikes rates. The market is pricing in too little a chance of a rate hike," said Barclays Capital currency strategist David Forrester. "What's going to drive the kiwi dollar lower is the kind of risk aversion that we have seen in the last couple of days, but at the moment we see that as overblown."