India’s growth is projected by the Asian Development Bank to accelerate to 7.4% in 2017-18

The U.S. Federal Reserve’s ongoing policy normalisation could potentially pose a risk to the economies in Asia and the Pacific region, especially if the trajectory of interest-rate increases were to be sharper than expected, says Yasuyuki Sawada, Chief Economist and Director General, Economic Research and Cooperation Department, Asian Development Bank (ADB).

“If it is sharper than expected, the normalisation of U.S. interest rates, then there could be some heterogenous impact on the Asian economies,” Mr. Sawada said, observing that the ADB’s baseline scenario in its GDP growth projection of 5.7% for the region in 2017 and 2018 was based on the U.S. central bank raising the policy rates thrice this year and four times in 2018. “Some countries may react to a sharper than anticipated increase with policy responses of their own and this could have an impact on the growth momentum,” he noted.

The Fed raised benchmark rates by one quarter of a percentage point in March and signalled at the time that the strengthening economy would warrant “gradual increases” — an expression that economists understood to mean two more increases this year.

The ADB, in its annual Asian Development Outlook 2017 released last month, flagged the possibility that a recent uptick in U.S. inflation could “accelerate the tightening cycle” but added that such an acceleration would likely be accompanied by a quickening in growth momentum in the world’s largest economy.

Policy changes, particularly with respect to trade, in the U.S. and Europe also posed a risk to the outlook for the Asian economies, Mr. Sawada said adding that he, however, didn’t anticipate the global trade environment ever realistically returning to the interwar conditions of the 1920s and 1930s. Asia’s economies had also increased their intra-regional trade in recent decades and to that extent were therefore less reliant on the developed economies, he observed.

The third key risk to the Asian growth forecast for 2017 was from a possible strong increase in U.S. oil and gas output that could potentially depress global commodity and energy prices. While this would benefit net oil importer economies, energy exporters like the Central Asian countries of Azerbaijan and Kazakhstan would likely be impacted adversely.

The ADB has projected the Central Asian economies to expand 3.1% this year, rebounding from 2016’s slowdown to 2.1%.

India’s growth is projected by the ADB to accelerate to 7.4% in 2017-18. This, Mr. Sawada elaborated, would be mainly on account of improved terms of trade, a cyclical recovery and indications that the impact of demonetisation on cash reliant sectors was relatively short term. The new bankruptcy and insolvency code and Goods and Services Tax were also business enabling developments, he added.