ADB trims GDP forecast: Developing Asia to grow at slowest pace since 2001

     In cutting its forecasts, the Manila-based development lender cited worsened prospects for the region’s two largest economies, China and India, and slow recoveries in advanced economies including the U.S. and eurozone.

     Other headwinds in play include weakening currencies, falling commodity prices and fears over capital outflows. “Risks have increased but it is still manageable if countries can implement macroprudential policies to increase their resilience against financial shocks,” said Shang-Jin Wei, the bank’s chief economist, at a press briefing in Hong Kong.

     Growth in China will slacken to 6.8% in 2015, down from the 7.2% forecast earlier this year and below the 7.3% posted in 2014, the bank predicted. This compares with China’s official growth target of 7% for this year.

     The bank tied its lowered forecast to slowing Chinese exports and investment. An aging population and rising wages will further translate into lower gross domestic product growth, reiterating the need for a different growth model for China, Wei said. “Higher wages mean the scope for low-wage-based growth becomes narrower and the need for innovation- and consumption-based growth rises,” he added.

     Consumption contributed 4.2 percentage points to China’s GDP growth of 7% in the first half this year, the ADB said. The labor market remained resilient, with 7.2 million new jobs created in urban areas in the same period.

     Wei said that robust retail sales, energy and consumer confidence data for the last two months “suggest that the talk about the collapse of China’s growth rate is likely to be overblown.”

     China’s recent stock market turmoil is not an accurate reflection of the health of the world’s second-largest economy. “Our judgment is that it will be unlikely to have a major long-lasting effect on China’s growth in the medium term,” Wei said. “Like in many countries, the stock market in China is not a good market forecast.”

     The ADB trimmed its forecast for India for growth this year and next by 0.4 percentage points, too, as delays in key structural reforms and the weak global economy are holding back momentum.

     Vietnam is one of the few economies whose prospects are improving, in the ADB’s view. It raised its growth forecast for this year and next by 0.4 percentage points. The bank cut its forecast for growth in Indonesia, Southeast Asia’s largest economy, by 0.6 percentage points amid slowing investment and declining private spending.

     Despite a dimmer economic outlook, Asia remains the largest contributor to the global economy, accounting for about 60% of global growth, the ADB said. However, capital outflows from the region are expected to accelerate when the U.S. Federal Reserve raises rates, which could hurt growth. ADB data shows that capital outflows from developing Asian markets reached $160 billion in the first quarter this year.

     A stronger U.S. dollar particularly poses a threat to Asian companies with large debts in the U.S. currency. For instance, more than 70% of borrowings by companies in Vietnam, Sri Lanka and Indonesia are denominated in foreign currencies. By contrast, in Laos, companies hold more foreign currency assets than liabilities.

     To mitigate financial shocks arising from a U.S. rate hike, the ADB has urged policymakers in emerging economies to establish liquid domestic financial markets and implement macroprudential regulations.

     “This may entail some capital flow management such as limiting reliance on foreign currency borrowing,” Wei said.