Softer growth prospects for the People's Republic of China (PRC) and India, and a slow recovery in the major industrial economies, will combine to push growth in developing Asia for 2015 and 2016 below previous projections, says a Asian Development Bank (ADB) report.
In an update of its flagship annual economic publication, Asian Development Outlook 2015 (ADO 2015), ADB now sees gross domestic product (GDP) growth for the region coming in at 5.8 per cent in 2015 and 6.0 per cent in 2016—below the March forecasts of 6.3 per cent for both years.
"Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows," said ADB Chief Economist Shang-Jin Wei. "In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macro prudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing."
Growth in the industrial economies is seen easing to 1.9 per cent in 2015, down from 2.2 per cent forecast in March, as consumption and investment remains soft, although there are some positive signs with improved prospects for the euro area and continued growth in the United States, the report said.
The PRC—the world's second largest economy—has seen growth moderate due to a slowdown in investment and weak exports in the first 8 months of 2015. Growth is now seen at 6.8% in 2015, down from 7.2 per cent projected earlier, and below the 7.3 per cent posted in 2014.
External demand weakness and a slower-than-expected pace of enacting key reforms are holding back India's growth acceleration, with the pace in 2015 now seen at 7.4 per cent, down from 7.8 per cent forecast earlier.
Southeast Asia meanwhile is bearing the brunt of the slowdown in the PRC—one of its key markets—as well as subdued demand from industrial countries, with growth in 2015 now seen at 4.4 per cent, before bouncing back to 4.9 per cent in 2016.
To counter the impacts of a US rate rise, monetary policy authorities in developing Asia will need to find a balance between stabilizing the financial sector and stimulating domestic demand, the report said. Continuing steps to build liquid, well-developed domestic financial markets can help reduce the corporate sector's reliance on foreign currency borrowings.