Inflation will reach its highest level in a decade across most of Asia this year, threatening to reverse recent productivity gains and create fiscal strains for governments that provide big food and fuel subsidies, according to the Asian Development Bank.
While inflation in Asia has been fuelled by high world food and energy prices, the Manila-based lender said on Wednesday, the problem was compounded by domestic factors such as skills shortages in an economic boom.
Ifzal Ali, ADB’s chief economist, warned that the inflationary threat was much greater than official figures suggested in countries such as India that damp the price impact via subsidies.
“South Asia is going to be very vulnerable to high commodity prices,” Mr Ali said. “What is happening because of [price] controls is that the inflationary pressures are grossly under the table. But the pressures are there and building.”
In China, where inflation has accelerated to its fastest pace in 11 years, “the challenge is now to bring down inflation and at the same time avoid a hard landing”, according to Mr Ali.
In the case of countries such as Vietnam, where the inflation rate is expected to double this year to about 18 per cent, the ADB said the government needed urgently to introduce a blend of monetary and fiscal tightening. It also needed to allow some currency appreciation, in order to prevent its stellar recent economic progress from grinding to a halt.
Several Asian governments are likely to be forced into monetary tightening soon, says the ADB, including India where inflation could turn into a serious political issue in the run-up to elections next year.
In its latest economic report, the ADB predicted that Asia excluding Japan would grow 7.6 per cent this year, down from 8.2 per cent forecast in September.
The report stressed that despite stronger domestic consumption and a more diversified set of trading partners, the region would not be sheltered from a US-led slowdown in leading advanced economies.
It noted that Asian suppliers still had only limited access to China’s final goods markets and that the potential for rerouting exports would be damped by the fact that US woes coincided with a slowdown in Japan and Europe. Still, echoing a World Bank assessment this week, Mr Ali praised Asian exporters for strengthening links with oil-rich nations.
Stronger domestic demand and a relatively solid banking sector will also help cushion the impact in Asia of a US-led credit squeeze. In the past Asia would have required antibiotics to cope with the knock-on effect of a US recession, he said, but “an aspirin or two” should be sufficient this time.
Mr Ali said the return of inflation as a substantial threat was the most significant change this year in the Asian economic landscape. If governments let stronger inflation become entrenched, it would eventually translate into lower consumer demand for durable goods, he said.
In the case of countries such as Vietnam, where the inflation rate is expected to double this year to about 18 per cent, the ADB said the government needed to introduce urgently a blend of monetary and fiscal tightening as well as allow some appreciation of the local currency to avoid stalling its recent stellar economic progress.
In the case of China, where inflation accelerated to its fastest pace in 11 years, ”the challenge is now to bring down inflation and at the same time avoid a hard landing,” according to Ifzal Ali, the ADB’s chief economist.
While inflation has been fuelled by soaring world food and energy prices, the ADB also stressed on Wednesday that the problem was in equal part generated by domestic factors, such as skills shortages amid an economic boom. Mr Ali warned that the inflationary threat was much greater than official figures suggest in countries such as India because of fuel and food subsidies.
”South Asia is going to be very vulnerable to high commodity prices,” he said. ”What is happening because of [price] controls is that the inflationary pressures are grossly under the table. But the pressures are there and building.”
As a result, according to the ADB, several governments are likely to opt for monetary tightening soon, including India where inflation could prove a major political issue in the run-up to elections next year.
In its latest economic report, the ADB forecast that Asia excluding Japan would grow 7.6 per cent this year, down from 8.2 per cent forecast in September. The report stressed that despite stronger domestic consumption and a more diversified set of trading partners, developing Asia would not be immune to a US-led slowdown in developed economies.
”Although developing Asia is now exporting more to other emerging economies, this is unlikely to compensate fully for losses in the much larger, more established markets,’’ the ADB said. ”Market penetration of Asian suppliers in China’s final goods markets is limited, and strong growth in China will provide only a limited cushion against the downturn’’ in the US, Europe and Japan.
Still, following in the footsteps of a World Bank assessment earlier this week, Mr Ali recognised that the impact on Asia would be much more subdued than in 2001, when the US last suffered a major economic downturn. While in the past Asia would have required antibiotics to cope with the knock-on effect, ”an aspirin or two” should be sufficient, Mr Ali said.
He said the return of inflation as a substantial threat was the most significant change in the Asian economic landscape in 2008.
