Asia's Growth Seen Imperiled by Prices
By ALEX FRANGOS
HONG KONG—Unchecked increases in oil and food prices could shave growth across Asia over the next two years, according to a report by the Asian Development Bank, imperiling economic gains among the poor in the globe's fastest expanding region.
The ADB report warned Tuesday that if fuel and food prices continue to rise at their current pace, inflation could shave between 0.4 and 1.5 percentage points off gross domestic product in each of Asia's largest developing economies this year and next, including in China and India. Barring such price rises, the intergovernmental bank expects growth in the region overall to be 7.8% this year. Inflation has become the dominant economic challenge in the region, prompting widespread monetary tightening and other measures, such as price caps, fuel subsidies and tariff reductions. Several countries, including China, Indonesia and South Korea have allowed their currencies to strengthen recently, making imported goods, especially commodities, more affordable.
Inflation continues to accelerate despite these measures. This week, Vietnam announced its April inflation rate hit 17.5% compared with a year earlier, the fastest rate in over two years, as increased supplies and attempts by the government to cool lending failed to halt the rise in food and fuel prices.
Food prices, which account for 40% of Vietnam's inflation measure, rose 4.5% in April alone.
Consumers have managed the rising costs without resorting to widespread protests, unlike in many Asian countries and elsewhere when food prices last spiked in 2008. Unlike the Middle East, where wheat prices played a role in recent protests, many of the biggest food-price increases in Asia have been for popular but non-essential food products such as sugar, chilies and garlic. The price of rice, by far the region's most important staple, has fallen in recent months and is only up 2.4% over the past year. It remains roughly 50% lower the peaks of 2008.
But as prices more broadly continue to rise, bucking analyst expectations of a cooling period, the pressure builds on governments to ameliorate the effects on average families.
"Left unchecked, the food crisis will badly undermine recent gains in poverty reduction," said ADB Chief Economist Changyong Rhee.
The ADB estimates that if food and fuel prices continue to rise at the 30% year-to-year rate they have so far this year, governments will be forced to tighten monetary policy further, which along with the price rises likely will cause consumers and businesses to curtail spending.
Such a rise in prices for food would expand Asia's poor by nearly 200 million people, to 1.1 billion. Food makes up more than half of costs for most low-income families. The ADB defines poor as someone living on less than $1.25 a day.
Even assuming that prices grow more slowly in 2012, the damping effect on growth would persist.
Separately, former Singapore Prime Minister Lee Kuan Yew said in a recent interview with The Wall Street Journal that a stronger local currency could help ease elevated inflation in the wealthy Asian city-state.
"World inflation is not a problem Singapore can control, except by increasing the value of our currency to keep the price of imports down," Mr. Lee said in the interview. But the authorities mustn't let the local currency get too strong because "we must keep the price of our goods and services competitive."
Across Asia, families are making adjustments. One fear among economists is that further inflation, especially for food and energy, could eventually curb growth in consumer spending, which has been resilient across the region on the back of high employment and rising incomes.
In the northern Thai city of Chiang Mai, 58-year-old garage owner Boonsong Kodkum says car owners are now coming in only when they have serious problems, unlike before, when they used to come in for minor issues like touching up scratches. "They have to save money like I do," he says.
Even though he has several cars at home, he now rides a motorbike with a sidecar to save on fuel costs.
In Vietnam's Vinh Phuc province, 65 kilometers northwest of Hanoi, Nguyen Nhu Trang, a 22-year-old housewife, says she has started feeding her 6-month-old son with Vietnam-made milk formula, because the price for imported formula has increased too much lately.
In the Philippines, 52-year-old Purificacion Roque, who works part-time as an auditor in Manila, says the price of cooking oil has more than doubled, so she now steams most of her food rather than frying it.
For breakfast, she used to have a hot dog in a sandwich but now uses Cheez Wiz processed cheese instead.
"We are expecting our situation to get worse," she says. She has a solution, though: She says she'll encourage some of her four children to go overseas to earn more.
— Wilawan Watcharasakwet, Josephine Cuneta
and Nguyen Anh Thu
contributed to this article.
Write to Alex Frangos at alex.frangos@wsj.com
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