In a new report, the Asian Development Bank says Asia's economic growth will slow down next year as interest rates rise, inflation sets in and China's economy cools down.
The Asian Development Outlook report released Thursday forecasts economic growth in developing Asia to slow to 7 percent next year from this year's estimated 7.2 percent.
Ifzal Ali, the A.D.B.'s chief economist, says the decline is partly a result of persistently high oil prices and an expected cooling down of China's economy, which accounts for a third of developing Asia's total gross domestic product.
"This will be brought about mainly because export growth is expected to moderate, particularly in East Asia," he explained. "Monetary policy will be less accommodative - some of the pass-through of oil prices that has not occurred in countries like India and China will have to occur, adding to inflationary pressure. And finally the re-orientation of the P.R.C. [Peoples Republic of China] with greater emphasis of quality with life, being traded up against higher growth rates … will affect overall growth in Asia."
Asia's developing nations grew 7.4 percent last year, driven largely by China and India.
The A.D.B. estimates China's economy will grow by 8.8 percent next year, down from this year's expected 9.5 percent. The decline will be due to a fall in industrial production, a slight decline in exports and generally higher prices.
Another driver of the region's growth - India - is expected to continue its rapid economic development, despite possible interest rate hikes and oil price adjustments. India's economy is expected to grow by 7.6 percent this year, further expanding to 7.8 percent next year.
Laos, Cambodia and Vietnam grew fastest last year in Southeast Asia. The A.D.B. says the Lao economy will continue to expand this year, driven by large investments in power projects - with growth expected to top 7 percent.
However, Cambodia and Vietnam's growth will moderate. Last year growth was above 8 percent for both, but this year and next Cambodia is expected to turn in growth of just over 6 percent and Vietnam's growth will be nearly 8 percent. Cambodia's primary export - clothing - is facing increasing competition while commodity prices for Vietnam's key agricultural exports are expected to fall.
Indonesia's economy is also expected to slow this year as consumption falls because of higher interest rates. Growth should be about 5.4 percent this year, down from 5.6 percent last year.
In South Asia, the A.D.B expects Pakistan to grow between 6.5 percent and 7.3 percent over the next two years. That is down from more than 8 percent in 2005, in part because of higher oil prices and weaker farm output.
Bangladesh will see growth rise above 6 percent this year and next, after 5.6 percent growth last year.
Afghanistan will show the highest growth rate in South Asia, after nearly hitting 14 percent last year. Vast amounts of foreign aid have poured into the war-torn country and many refugees have returned to open businesses and take up farming. As a result, the A.D.B. expects the country's economy to expand by well more than 10 percent over the next two years.
Despite a generally healthy economic outlook for Asia, Ali says the situation could unravel. The biggest risk would be from sharp adjustments in exchange and interest rates because of widening international trade imbalances, even higher oil prices, a human bird flu pandemic and growing protectionism in the developed world.
Moreover, Ali warns that Asia needs to address a looming employment problem. The A.D.B. estimates Asia needs around 750 million new jobs in the next decade. Last year, at least 500 million people were either unemployed or underemployed.
"The sustainability of growth is contingent on more equitable sharing of the fruits of growth and for this to happen productive and decent employment opportunities on a massive scale would need to be created."
The A.D.B. adds that Asian economies must step up economic reforms and trade liberalization to remain competitive.