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In a revised supplement issued recently, Asian Development Bank (ADB) has downgraded Asia’s growth outlook to 4.6% from 5.2% for 2022 and to 5.1% from 5.3% for 2023 from its forecast in the Asian Development Outlook 2022 in April. The latest report hints at worsening economic prospects as a fall-out of the war in Ukraine, Covid-19 lockdowns in various Chinese manufacturing hubs and aggressive fiscal tightening in developed economies in the coming months.
ADB has raised the inflation forecast for developing Asia to 4.2% from 3.7% for 2022 and to 3.5% from 3.1% for 2023 owing to higher fuel and food prices. Inflation pressures in the region are, however, less than elsewhere, it noted. Indonesia and the Philippines were the only two economies to see the growth forecasts revised upwards. ADB revised the Philippines’ growth forecast to 6.5% growth for 2022 from 6%, while the growth for Indonesia was raised to 5.2% from 5%.
Based on the worse-than-expected performance during the first quarter, the ADB supplement trimmed the growth forecast for Hong Kong, China to 1.0% for 2022. The growth projection for 2023 has been raised to 3.9%. Albert Park, the chief economist at ADB, said, “The economic impact of the pandemic has declined across Asia, but we are far from a full and sustainable recovery. Apart from the slowdown in China, the fallout from the war in Ukraine has added to inflationary pressure that is causing central banks around the globe to hike interest rates, acting as a brake on growth.”
Double-digit inflation and Asia growth
Inflation is at double-digit levels in East Asia, Pakistan and Sri Lanka in South Asia, and in Southeast Asia. Inflation in India, at 7%, is above the 2%–6% target range of the Reserve Bank of India. But the headline and core inflation in the rest of developing Asia’s large economies remain manageable, says ADB.
An earlier report by the International Monetary Fund (IMF) on the Asia-Pacific regional economic outlook said economic growth in Asia and the Pacific is poised to slow more than previously estimated in 2022.
ADB has revised East Asia’s growth forecast to 3.8% from 4.7% in April for 2022 because of downgraded 4.0% growth in China and softening global demand. For South Asia, the growth forecast has been lowered to 6.5% from 7.0% for 2022 and to 7.1% from 7.4% for 2023 primarily owing to the economic crisis in Sri Lanka, high inflation and related monetary tightening in India.
On the other hand, ADB has marginally upgraded its development forecast for Southeast Asia to 5.0% from 4.9% for 2022 as domestic demand benefits from the continued lifting of Covid-19 mobility restrictions and the reopening of borders in some economies in the region.
Covid-19 and Ukraine war
According to the ADB revised supplement, though the impact of Covid-19 has declined across most of developing Asia, the economic fallout from Russia’s invasion of Ukraine on the region has increased. War-induced supply disruptions and escalating sanctions imposed on the Russian Federation have led to global commodity prices spiking and remaining higher than 2021’s already elevated levels. As a result, inflationary pressures have increased in many regional economies.
According to the report, financial conditions have declined in developing Asia following the Fed Reserve tightening its monetary policy. The strengthening US dollar has been reflected in currency depreciations and portfolio outflows in the region. Equity markets weakened further after the Fed raised its benchmark policy rate in March and May, and risk premiums for many economies in the region have widened this year.
Asia growth and slumping demand
With financial conditions tightening, growth in advanced economies is softening and with activity in China hampered by supply chain disruptions, domestic demand and exports in developing Asia are set to face significant challenges.
According to Duncan Robertson, Portfolio Manager, TT Asia Equity Strategy, “A key risk to our market view would be a recession, either globally or just in the US. With PMIs falling, that cannot be ruled out. Indeed, most economists seem to be revising up their probability of a recession occurring either this year or next.”
Earlier, the IMF forecast that the regional gross domestic product will expand by 4.9%, 0.5% points less than we forecast in January and slower than last year’s 6.5% growth rate. IMF also estimated that inflation will rise faster in many countries, though from relatively low levels.
