A United Nations economic report on the Asia-Pacific region says the region's outlook into 2006 is positive, with only a modest slowing in China's growth. But U.N. officials warn there are clouds on the horizon.

The report by the U.N. Economic Commission for Asia and Pacific is cautiously upbeat but warns that inflation is a risk for next year, if oil prices remain high. In addition, the report says a rise in interest rates and the threat of avian flu could undermine growth.

ESCAP economists forecast oil prices will remain close to $50 a barrel, which could lead to inflation in oil-importing countries. At the same time, if avian flu spreads among humans, it could damage Asia's crucial tourism industry.

Barring those problems, however, the U.N. report released Wednesday says the region's strong growth this year generally will continue in 2006. Although China may see a modest slowing, it and India probably will see growth top seven percent.

Japan, the world's second largest economy, also is expected to continue its expansion, with two percent growth.

Kim Hak-Su

Kim Hak-Su, ESCAP executive secretary, says the biggest concern for economic growth is higher interest rates. Many economies have relied on low interest rates to spur growth.

"My concern is Asian countries now grow on the basis of domestic consumption and the high economic growth based on domestic consumption was possible thanks to the low interest rate," said Kim Hak-Su. "Any interest rate increase will kill the capital market. The low-cost based consumption will be in trouble. People may not pay back their debt. Those countries relied too much on cheap money will [need to] be careful [in] 2006."

Ravi Ratnayake, an ESCAP senior economist, says the outcome of the World Trade Organization ministerial talks this week in Hong Kong also could affect the economy next year.

"Maybe this is very important given the fact that the countries in the Asia Pacific region are heavily dependent on trade and the growth in trade," said Ravi Ratnayake. "If there is a complete failure it will have some negative impact on the region; especially the countries expecting market access on agriculture - as well as services."

The report warns that if the WTO talks on liberalizing world trade fail, it could mark the beginning of the end of the multilateral trading system, which has fueled much of Asia's growth for decades.