The Asian Development Bank cut most of its 2012 and 2013 growth estimates for developing Asia on Wednesday as a slump in global demand weighs on the region's powerhouses China and India and on its other export-dependent economies.
The ADB cut its GDP growth estimate for China by nearly 1 percentage point to 7.7 percent from the previous 8.5 percent, warning that risks to the world's second-largest economy were likely to intensify in the short run given bleak global demand and the uncertain outlook for its largest trading partners.
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But it believed China would still be able to avoid a hard economic landing, given that policymakers in Beijing have considerable scope for further stimulus measures.
"The global slump in demand, especially from Europe, will remain a serious drag on growth in the near term," ADB Chief Economist Changyong Rhee said in a news release as the Manila-based bank released an update of its regional outlook.
"The government has the means to cushion the economy from global turmoil, however. Its strong fiscal position, receding inflation and expansionary policy measures should ensure a soft economic landing, but it needs to expedite its effort to diversify the source of growth and strengthen structural reforms for inclusive growth."
Highlighting the extent of China's slowdown, an official survey also released on Wednesday indicated its normally robust services sector lost considerable momentum in September, with a key activity index falling to near two-year lows, as slow growth in manufacturing began to feed through to the rest of the economy.
The euro zone's unresolved sovereign debt crisis and the United States' looming fiscal cliff were the biggest risks to the growth outlook, with Asia's most open economies particularly vulnerable to spillover effects, the ADB warned.
The risk of rapid reversals in capital flows to developing Asia also remained a concern, although the region's capital markets have not shown excessive volatility, it added.
Still, most countries in the region have enough room to use monetary and fiscal policy tools if necessary to protect domestic growth, with inflation expected to be slower than earlier anticipated this year and the next, the ADB said.
The region must brace itself for a prolonged period of moderate expansion after years of rapid growth, the bank said.
Developing Asia - comprised of 45 countries in Central, East, South, and Southeast Asia and the Pacific - is now forecast to grow 6.1 percent this year and 6.7 percent in 2013.
The figures are substantially slower than April estimates of 6.9 percent and 7.3 percent respectively, and last year's 7.2 percent expansion.
CHINA, INDIA SLOWDOWNS
As China struggles with slower investment and weaker demand at home and abroad, the ADB also cut its 2013 growth forecast for the country to 8.1 percent from the previous 8.7 percent.
Growth in India is expected to hit 5.6 percent and 6.7 percent in 2012 and 2013, weaker than previous forecasts of 7.0 percent and 7.5 percent, respectively, as it battles persistently high inflation, a large fiscal deficit and weaker consumption.
East Asia will remain the region's fastest-growing area, although it will not be immune to the overall deceleration in the region, the ADB said.
The bank kept its 2012 growth forecast of 5.2 percent for Southeast Asia, lifted in part by recovery efforts in Thailand from last year's flooding, and higher state spending in Malaysia and the Philippines.
But cracks are beginning to show in Southeast Asia as the global slowdown wears on. Indonesia, the region's largest economy, reported on Monday that exports and imports fell the most in three years in August.
The ADB urged Asian economies to diversify their growth drivers and capitalise on its booming service industries, as seen in India and the Philippines, to sustain domestic growth during times of prolonged weakness in external demand.
The development lender said policies such as education reform, improved infrastructure and easier regulation geared towards boosting the services sector - now contributing nearly half of the region's GDP and employing 34 percent of developing Asia's workers in 2009 - would help lift productivity and promote inclusive growth.