East Asia's rapid economic growth in gross domestic product (GDP) is expected to soften in 2007 to a still robust 4.4% from 4.9% this year, says a report released today by ADB.

An expected slowdown in growth in the US and euro area will only reduce demand for East Asia's exports slightly. Coupled with resilient domestic consumption, this will sustain economic expansion across the region. Measures taken by the People's Republic of China (PRC) to curb over-investment will continue to bring its economic growth back to a more manageable level, while inflation across the region is expected to moderate further as growth eases.

Excluding Japan, regional gross domestic product (GDP) is projected to drop to 7.0% in 2007 from 7.7% this year, according to the semiannual Asia Economic Monitor (AEM), which covers the 10 members of ASEAN; plus the PRC; Japan; Republic of Korea; Hong Kong, China; and Taipei,China.

"On balance, in 2007 East Asia faces an external economic environment that is expected to be somewhat less supportive of exports and growth, but more conducive to containing inflationary pressures," says Masahiro Kawai, Head of ADB's Office of Regional Economic Integration (OREI) and Special Advisor to the ADB President.

In Japan, GDP growth is likely to be 2.8% in 2006 and is expected to slow modestly to 2.4% in 2007.

The report forecast the PRC economy to make a relatively smooth transition from projected 10.4% growth in 2006 to 9.5% in 2007. Economic expansion in the newly industrialized economies - Hong Kong, China; Republic of Korea; Singapore; and Taipei,China - is expected to slide to 4.6% in 2007 from 5.3% this year, as they react to slower growth in exports to the PRC and the US.

According to AEM, there are six major risks to the regional growth outlook:

- a sharper-than-expected slowdown in the US economy

- a disorderly adjustment of global payments imbalances

- global financial market turbulence

- a sudden oil supply shock

- an insufficient slowdown of the PRC economy

- disruptions from non-economic events like avian flu pandemic or rising

- geopolitical tension on the Korean peninsula

While the threat of high inflation in the US has not faded completely, the near-term risk of a sharper-than-expected slowdown, even the possibility of a recession, is higher now than in early part of this year, the report says.

AEM notes that despite the recent slower expansion in investment, medium-term risks persist that economic expansion in the PRC will not moderate to a sustainable pace, and it remains to be seen whether measures to rein in overinvestment are effective.

"To tackle structural vulnerabilities, governments in the region should focus on alleviating constraints on domestic investment," Mr. Kawai adds. "In some cases, such as in the PRC the focus should be on enhancing the quality rather than the volume of investment."