Capital inflows feeding asset bubbles could undermine Asian growth

The Manila-based Asian Development Bank expects strong expansion in Asia this year of 6.6 per cent, with growth of 6.7 per cent pencilled in for next year, but said there was a risk to recovery in developing economies from asset bubbles from rising capital inflows.

In its Asian Development Outlook 2013 , the lender said consumer prices will rise 4 per cent this year and 4.2 per cent next year.

The recovery in China’s economy and “robust growth” in southeast Asia would lead expansion in the developing Asian region, which covers 45 nations, and it would also be boosted by strong domestic consumption.

“Developing Asia’s recovery phase remains vulnerable to shocks,” the bank said. “Strong capital inflows could feed asset bubbles. Political discord surrounding fiscal debates in the United States, austerity fatigue in the euro area, and border disputes in Asia could jeopardise macroeconomic stability.”

Stringent standards
The report said China would probably grow 8.2 per cent this year and 8 per cent in 2014 as more stringent environmental standards and policies to make growth inclusive may slow the pace of investment, the report said.

“Consumption outpaced investment to contribute the most to expansion. In line with the emphasis on domestic demand, the current account surplus continued to decline relative to GDP in a trend expected to continue in 2013 and 2014,” the report’s authors said.

India’s economy may expand 6 per cent this year and 6.5 per cent next year, it said.

Southeast Asia is forecast to grow 5.4 per cent this year and 5.7 per cent next year, with strong domestic demand and wage pressures likely to cause inflation to accelerate to 4.2 per cent this year, the report said.