The Asian Development Bank cut its growth forecasts for Asia because of slowing momentum in China and India and instability in regional financial markets caused by volatile capital flows.
Growth in developing Asia will slow to 6.0% in 2013 from 6.1% last year before picking up slightly to 6.2% in 2014, the ADB said Wednesday. Just six months ago it saw the region growing 6.6% this year and 6.7% next.
It cut expectations for growth in the region's two largest economies. It now sees China expanding 7.6% this year, down from a previous forecast of 8.2%, and 7.4% next year, down from 8.0%, as the country shifts its economy away from investment- and export-driven growth.
Industrial activity and investment in India will be constrained by poor infrastructure and delays in structural reform along with the country's fiscal and current-account deficits, the ADB said. Growth will be 4.7% in 2013—much lower than the 6.0% predicted previously—and 5.7% next year versus an earlier forecast of 6.5%, it said.
"While economic activity (in developing Asia) will edge back up in 2014 current conditions highlight the need for the region to exercise vigilance to safeguard financial stability in the short term while accelerating structural reforms to sustain economic growth in the longer term," ADB Chief Economist Changyong Rhee said in a statement.
Reforms to encourage foreign direct investment, diversify the industrial base, close infrastructure and skills gaps, cut inefficient subsidies and strengthen social protection plans are important, the bank said.
The region is in a much stronger position than it was in the Asian financial crisis, it said. Most economies now have healthy current-account surpluses and much higher foreign reserves.
But widening current-account deficits make India and Indonesia's economies vulnerable, it added. Their assets were hit especially hard by expectations of a rollback in stimulus efforts by the U.S. Federal Reserve.
Still, their foreign-exchange reserves at the end of August were sufficient to cover imports for seven months in India and five in Indonesia, it said.
Write to Natasha Brereton-Fukui at natasha.brereton@dowjones.com
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