MANILA -- Asia will not grow as fast this year due to policy uncertainty in advanced economies and an outflow of capital, the Asian Development Bank said on Thursday.
In its 2017 Asian Development Outlook, the Manila-based lender projects growth for the region to slow by 0.1 percentage point to 5.7% in 2017 and 2018, the slowest pace since 2001.
Developing Asia accounts for 45 of the ADB's 67 member economies, which also include countries in Europe and North America.
Growth in China which accounts for roughly 60% of the regional economy will decelerate by 0.2 point to 6.5% in 2017 and slow further to 6.2% in 2018 as Beijing takes further steps to shift the country to a consumption-driven economy. The push by the world's second-largest economy to achieve greater financial stability such as lowering high corporate debt and addressing shadow banking, among others, is coming at the cost of slower growth.
The ADB sees China's slowdown weighing on East Asia's growth, though public spending is expected to boost the economic prospects of the subregion's smaller economies. South Korean growth is seen slowing by 0.2 point to 2.5% in 2017, while Taiwanese growth is expected to improve to 1.8%, up 0.3 point thanks to government spending that will lift growth for the local economy.
"The controlled moderation of growth in the People's Republic of China is balanced by expected healthy growth elsewhere," the ADB said. Thirty countries in the region are expected to grow at a faster pace this year, buoyed by higher external demand and recovering global commodity prices.
The bank sees India, the region's second largest economy which account for a tenth of its output, growing to 7.4% this year and to 7.6% the next, driven by improving business and investment prospects as a result of government deregulation and tax reforms. Although the country's demonetization of high-value notes squeezed consumption, the impact is expected to be only temporary.
Philippines loses out
Most Southeast Asian countries will log faster growth this year. "With normal weather supporting agriculture and a steady recovery in the major industrial economies boosting exports, growth will pick up in nearly all of the economies in the subregion," the ADB report said. Vietnam's growth will increase from 6.2% in 2016 to 6.5% in 2017. Among its beneficiaries are commodity producers such as Indonesia, Malaysia and Vietnam.
Only the Philippines is seen slowing, from 6.8% in 2016 -- an election year -- to 6.4% this year. Thailand will pick up from 3.2% in 2016 to 3.5% in 2017.
The recovery in global oil prices sets the stage for a modest recovery in Central Asia, with growth of 3.1% seen for 2017 and 3.5% for 2018, after slowing to 2.1% in 2016. Pacific economies are also expected to rebound in 2017, with Papua New Guinea seen recovering from the contraction that hit the oil and gas sector in 2016.
The possibility of sharper-than-expected interest rate hikes by the U.S. Federal Reserve cloud the outlook for Asia. Last month, the U.S. central bank raised the overnight rate for the third time since the global financial crisis. The ADB warned that the recent surge in inflation in the U.S. could prompt the Fed to accelerate the pace of its monetary tightening, and that Asian economies with high corporate and household debt are vulnerable to any resulting financial shocks.
"Possible shifts and trade tax policies, especially policy changes being discussed in the U.S., could create uncertainty for business investment and export growth in developing Asia," the ADB said.
U.S. monetary tightening could send Asian currencies falling against the greenback, but economies with more open capital accounts are bound to experience the biggest currency slides.
Further improvements in the U.S. economy will trigger capital outflows from Asia, the ADB said.
The risk posed by mounting household debt in some Asian economies, particularly South Korea, Malaysia and Thailand, may still be contained for the time being, though the ADB has urged authorities to bolster efforts to mitigate systemic risk.
"Policymakers may also have to stress-test their banking sectors regularly to track bank exposure and identify needs for special reserves," the bank said.
Despite the expected moderation in growth the looming risks, Asia will continue to drive global growth, accounting for 60% of global output.
"As the global economy starts to pick up, uncertainty will become a key theme for investors in 2017," the ADB said.