Asian Development Bank cuts Asia growth forecast to 7.5%

Asian economic growth will be slightly lower than forecast because of weak demand from key trading partners , while higher commodity prices will push inflation up, the Asian Development Bank said on Wednesday.

ADB said it is trimming its growth forecast slightly to 7.5 per cent for both this year and next for 45 developing or newly industrializing Asian countries, excluding Japan. In April, the bank had predicted that the region would expand 7.8 per cent in 2011 and 7.7 per cent in 2012.

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Inflation also remains a "threat," the Manila-based lender said, with consumer price inflation predicted to average 5.8 per cent this year, up from 5.3 per cent forecast previously, before cooling off to 4.6 per cent in 2012.

The Manila-based lender said in an update to its annual Asian Development Outlook report that the slowdown in demand from the United States and Europe "continues to cast a cloud over the region," with export growth easing substantially in the second quarter in China and other leading economies.

"The main headwinds to the region's growth come from faltering prospects in the major industrial economies," the report said.

Economic growth in the US and Japan did not live up to earlier ADB forecasts, the report said. In the US, persistent high unemployment is dragging down private consumption while in Japan, the economy was showing signs of a slowdown even before the devastating earthquake and tsunami struck in March. Meanwhile in Europe, the sovereign debt crisis is putting pressure on an economic recovery.

While the ADB's revised forecast is "not a huge drop," it does not take into account a possible Greek debt default, Chief Economist Changyong Rhee told reporters.

Global financial markets have been slammed in recent days on renewed fears over Greece's financial situation. Investors are worried that if Greece doesn't meet debt-reduction commitments, its bailout creditors can refuse to pay out the next batch of money.

"Our scenario assumes this won't happen. I hope this won't happen because if this happens ... Asia will be partly affected," said Rhee.

A Greek default "would cause huge turmoil in global financial markets," he added.

However, growing domestic consumption, infrastructure investment and trade within Asia is supporting the region's economies.

Falling commodity prices and weak economies in major industrial countries will help lower inflation pressures but unless global economic activity falls sharply, inflation will remain a problem, the ADB said.

The report also warned that Asia is undergoing a rapid demographic shift because of the expanding proportion of elderly people in many countries, which will drag on economic growth over the next two decades. China's aging population, for example, will cut growth by 0.3 percentage point a year from 2011 to 2030.

ADB urged governments to beef up pension, social security and health care systems and open up labor markets to allow in young workers from other countries.