Asian economies to ride on domestic demand

PETALING JAYA: Asian economies are expected to chug along on the expansion trail this year, driven by domestic demand and investments, said CIMB head of economics Lee Heng Guie. 

In a recent research note, Lee said accommodative monetary policies, favourable financial market conditions, rising disposable incomes and stable oil prices should ensure that global economic growth was sustained. 

He said the expected downturn in global export demand should pose a modest growth risk to some Asian economies, but domestic demand and increased government spending should push economic growth in some countries. 

“Risks to regional growth prospects in 2007 will revolve around the pace of the slowdown in the US and China, the direction of crude oil and other commodity prices, as well as the sustainability of the property markets.  

“There is also the threat of over-tightening by the Federal Reserve in response to inflation expectations in a slowing economy,” said Lee. 

He added, however, that growth should remain “fairly respectable” among emerging markets as economic powerhouses China and India remained on expansion mode. 

The Chinese economy, he said, was expected to expand at a “robust” 10.1% this year compared with an estimated 10.5% for the whole of 2006, while India’s gross domestic product was anticipated to grow 7.8% this year compared with 8.3% in 2006, fuelled mainly by private investment and public projects as well as solid domestic demand. 

Lee also expects regional currencies to continue to appreciate against the US dollar, on weakness in the greenback due to uncertainty over a potential monetary tightening, a widening US current account deficit and loss of investor interest in US assets. 

He sees the yen strengthening further by 5.6% to 108 per dollar by end-2007, and the renminbi firming up by 4.3% to 7.50 by end-2007. Lee sees the ringgit strengthening to 3.45 by the end of the year.  

The risks against regional currency appreciation include a slowdown in the US and Chinese economies, which could result in a sell-off of the currencies of the two countries, as well as their central banks taking proactive action to stem the appreciation in their currencies.  

Lee’s report also suggested that the US could cut rates by 50 basis points to 4.75% in the first half of this year, as a contraction of the housing sector remained a concern, while the tightening was expected to end among Asian countries, aside from Japan, China and India. 

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