Global Uncertainties, PRC Slowdown Weigh on Asia's Growth

India will remain one of the fastest growing major economies in the period ahead-ADB

Growth is slowing across much of developing Asia as a result of the continued weak recovery in major industrial economies and softer growth prospects for the People's Republic of China (PRC). This will combine to push growth in developing Asia for 2015 and 2016 below previous projections, says a new Asian Development Bank (ADB) report.

In its new Asian Development Outlook (ADO) 2016, ADB forecasts gross domestic product (GDP) growth of 5.7% in 2016 and 2017 for the region. In 2015, GDP growth was 5.9%. ADO is ADB's flagship annual economic publication.

PRC's growth moderation and uneven global recovery are weighing down overall growth in Asia, said Shang-Jin Wei, ADB's Chief Economist. Despite these pressures, the region will continue to contribute over 60% of total global growth. Countries across the region should continue to implement productivity-enhancing reforms, investment in under-supplied ?infrastructure, and sound macroeconomic management to help increase their growth potential and insulate themselves from global instability.

Industrial economies' growth will stay at 1.8% in 2016, before inching up to 1.9% in 2017. Stronger consumption and investment in the US will be tempered by soft external demand. Both the eurozone and Japan will see slightly improved prospects, the report said.

Growth continues to moderate in the PRCthe world's second largest economyas exports slow, labor supply falls, and supply-side reforms reshape the economy toward more domestic consumption and a further reduction in excess industrial capacity. Output will increase 6.5% in 2016, down from the 6.9% increase in 2015, but within the government's growth target. In 2017, growth will slow to 6.3%. Due to its outsized linkages, estimates suggest the drag from the growth moderation in the PRC may be as much as 0.3 percentage points across the region.

India will remain one of the fastest growing major economies in the period ahead. Growth will reach 7.4% in 2016 before picking up to 7.8% in 2017. India's economy expanded by 7.6% in 2015 as strong public investment boosted growth, despite weak exports. Reforms geared to attract more foreign direct investment and stronger corporate and bank balance sheets will help maintain growth momentum.

Southeast Asia meanwhile is set for stronger growth as output accelerates steadily from 4.4% in 2015 to 4.5% in 2016 and 4.8% in 2017. Regional growth will be led by Indonesia as it ramps up investment in infrastructure and implements policy reforms that spur private investment.

Soft global commodity prices, including oil and food, are keeping price pressures low with regional inflation projected to increase slightly to 2.5% in 2016, from 2.2% in 2015, as domestic demand strengthens. Inflation will reach 2.7% in 2017 as global commodity prices recover. Subdued demand for exports of manufacturers and continued low commodity prices will trim developing Asia's current account surplus from the equivalent of 2.9% of regional GDP in 2015 to 2.6% in 2016, and further to 2.4% in 2017.

Potential interest rate hikes by the US Federal Reserve combined with broader weakness of emerging markets mean that risks to the regional growth forecast remain tilted to the downside. Heightened investor risk aversion, intensified global financial market volatility, and a sharper-than-forecast growth slowdown in the PRC would further weaken the global outlook and directly hurt regional exports and growth.

Tepid oil and commodity prices will continue to dampen the prospects of Asia's commodity-dependent economies. The lingering effects of the El Ni weather cycle remain a major climate risk for economies that rely on agriculture. While consumer price inflation is generally low but positive, producer price deflation has emerged as a new risk in the PRC and other Asian economies.

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