East Asia heading for economic slowdown, warns ADB

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East Asia will post slower growth next year due to a wobbly US recovery, the Asian Development Bank (ADB) warned Tuesday, adding that greater exchange rate cooperation could help safeguard the region.

The fragile US economy and phasing out of economic stimulus has weakened the outlook for East Asia, with growth expected to shrink to 7.3 percent in 2011, down from 8.8 percent this year, the Manila-based bank said in its twice-annual Asia Economic Monitor.

Despite bouncing back from the global financial crisis, East Asia's economic picture remains "highly uncertain," the ADB said, warning that "severe economic damage caused by the Great Recession will take a long time to heal."

"High unemployment could become entrenched and last for many years," it added.

"Growth in productivity could also suffer as capital investment plummeted during the crisis and has not returned to pre-crisis trend growth."

Emerging East Asia may need to erect "temporary" capital controls to battle a surge of hot money flowing into the region that risks increasing "economic distortions and lowering long-term growth prospects," the report said.

Critics have warned that the US Federal Reserve's US$600-billion fiscal stimulus package could unleash a flood of speculative funds into the region.

With the exception of Vietnam, East Asia's currencies have been surging in 2010, a situation that "will not help" efforts to focus on intra-regional trade in response to sagging demand in the West, said Iwan Azis, head of the ADB's office of regional economic integration.

"The worst case scenario is there will be a currency war and a trade war, but I don't assign a high probability to that," Azis told a press briefing in Hong Kong.

But without currency cooperation "intraregional trade will not be as good as it could be," he added.

Azis said greater currency cooperation could also lower the temperature of simmering currency spats with the United States and other critics, who have accused China of artificially undervaluing the yuan to boost exports.

China's willingness to let the yuan rise in value "will be critical," Azis added.

"There is room for every single country (in the region), not just China, to appreciate more," he said. He stopped short of calling for a euro-style currency union, saying that any regional cooperation "is not going to be like Europe".

Regional inflation remained moderate, but "policymakers need to be alert to the dangers of higher inflation," the bank said in a note Tuesday.

The main ADB report said East Asia's emerging economies saw a "robust recovery" in 2010, with many of the region's stock markets bouncing back sharply.

"The V-shaped recovery has certainly set its course -- it's already there," Azis said, adding that "for 2011, we expect that (growth) will continue to be strong but it's moderating."

The bank's forecast for 2010 remained below the region's 10.4 percent economic expansion in 2007.

"After slowing sharply in 2008 and 2009, the East Asian economies recovered strongly in 2010 which has led GDP growth back closer to 2007 levels," the report said.

Hong Kong, China, Thailand, the Philippines, Korea and Singapore are among the 14 economies analysed in the report.

East Asia continued to lead the global recovery, with many of its economies posting "strong growth in the third quarter of 2010, driven by domestic demand," the report said.

China's economy expanded by 9.6 percent in the third quarter, but there were signs that growth was starting to ease, the bank said.

Singapore, the region's fastest growing economy, moderated to 10.6 percent in the third quarter after two consecutive quarters of "rapid growth".

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