The Asian Development Bank (ADB) said East Asia is expected to undergo a moderate slowdown in economic growth this year with the external environment turning somewhat less favorable and oil prices reaching record levels.

In its report titled the Asia Economic Monitor (AEM) released on Monday, the bank said current forecasts for East Asia - defined as the 10 ASEAN member countries, China and the Republic of Korea (ROK) - see average 2005 gross domestic product (GDP) growth of 6.8 percent, down from 7.6 percent in 2004.

Excluding China, East Asia is expected to post average growth of 4.4 percent, compared with 2004 growth of 5.5 percent, it said.

China recorded GDP growth of 9.4 percent in the first quarter of 2005, and 9.5 percent in the second quarter. A gradual softening of fixed investment, already underway, and somewhat diminished export prospects are expected to slow growth in the coming quarters, according to the report. GDP growth for 2005 is forecast at 8.9 percent, down from 9.5 percent in 2004.

Singapore is likely to be among the economies hardest hit by the deteriorating external environment. Singapore's highly open economy will be adversely affected by weaker export prospects and slower export growth may affect consumer and business sentiments, thus affecting domestic demand, the report says.

The economy is expected to grow 3.7 percent in 2005, down from 8.4 percent in 2004.

These forecasts are subject to risks from further increases in oil prices and a disorderly adjustment of the global payments imbalance, the report says.

Pradumna B. Rana, senior director of ADB's Office of Regional Economic Integration (OREI), said "We now face a backdrop of moderately slowing growth, a gradual buildup of inflationary pressures, and a tightening of US monetary policy."

"The key challenge for East Asia is to calibrate fiscal, monetary, and exchange rate policies while at the same time pursuing structural reforms to strengthen domestic demand."

The report cites the loss of economic momentum in major industrial markets and softness in the information technology cycle as the main reasons for the worsening external economic environment.

Exports grew at a slower rate in the first half of this year in all East Asia's larger economies except China, continuing the trend since the middle of 2004, the report says.

Coupled with higher oil prices and a general bias toward tighter macroeconomic policies, the result has been slower growth in domestic demand in most East Asian economies.

East Asian stock markets in general held up well in the first half, while currencies remained stable or depreciated against the US dollar.

The report welcomes the recent shift by China and Malaysia from a pegged exchange rate against the US dollar to a managed float against a basket of currencies, suggesting the moves marked initial steps toward fostering greater exchange rate flexibility within the region.

In general, progress in financial and corporate reforms continues to improve the health and robustness of financial sectors in the region, says the report.

Source: Xinhua