The Asian Development Bank, or ADB, on Wednesday slashed its growth forecast for developing Asia, citing gloomier global prospects and weak domestic demand in the region's largest economies. At the same time, the lender stressed the need to unlock the potential of the service sector to boost economic growth.

In the Asian Development Outlook 2012 Update, the bank cut the region's growth forecast for this year sharply to 6.1 percent from the 6.9 percent estimated in April. The bank's forecast for 2013 is at 6.7 percent, down from the 7.3 percent predicted in April.

"The possibility of a shock emanating from the unresolved euro area sovereign debt crisis or a sharp fiscal contraction in the U.S. pose the biggest downside risks to the economy," ADB said. However, it noted that most of the developing Asia economies have room to counteract such shocks, though there is no widespread, urgent need at the moment for countercyclical policy intervention.

Economies in the region must diversify their growth drivers in the medium term, given the weakness in external demand and moderating growth in China and India.

The report found that booming service industries can be a powerful engine of economic growth and job creation for developing Asia. The bank feels that authorities must reduce restrictions and red tape to unlock the sector's true potential.

Services now account for almost half of developing Asia's output. The sector contributed about two-thirds of the growth recorded in India between 2000 and 2010, and more than 40 percent in China.

ADB cut its 2012 gross domestic product, or GDP, growth estimate for China, warning that downside risks to the economy are likely to intensify in the short run given bleak global demand and the uncertain outlook for the country's largest trading partners.

China's 2012 GDP is now forecast to grow 7.7 percent, down from the 8.5 percent projected in April. The 2013 forecast is also ratcheted down to 8.1 percent from 8.7 percent. Export and import growth is expected to remain subdued, according to the report.

"The global slump in demand, especially from Europe, will remain a serious drag on growth in the near term," ADB's Chief Economist Changyong Rhee said.

However, China's strong fiscal position, receding inflation and expansionary policy measures should ensure a soft economic landing, ADB said. It projects inflation of 3.2 percent for 2012, with the rate ticking up to 3.5 percent in 2013.

India's GDP is now expected to grow 5.6 percent in fiscal 2012 and 6.7 percent in fiscal 2013, a significant drop from ADB's earlier projections of 7 percent and 7.5 percent, respectively. ADB said falling global demand and a delayed monsoon curtailing agricultural growth have exacerbated India's recent economic slowdown.

The report pointed out that the slowdown in new infrastructure projects and the shelving of some approved projects indicated continued weakness in investment. ADB raised its inflation estimate for 2012 to 8.2 percent from 7 percent on the back of higher domestic food and fuel prices. Inflation is then expected to trend downwards to 7 percent in fiscal 2013.

Meanwhile, inflation in developing Asia is expected to fall to 4.2 percent in both 2012 and 2013 from 5.9 percent in 2011 due to weakening growth momentum.

RTTNews