Strong growth in Asia but overheating a risk

East Asian and Pacific economies will grow 7.8 percent this year on robust domestic demand, the World Bank said on Monday, but it warned countries to guard against overheating in credit and asset prices. The forecast is up from 7.5 percent last year, but the bank said in its latest East Asia and Pacific Update report that expansion would then drop to 7.6 percent next year. Domestic demand will underpin the rise after the region contributed 40 percent of global growth last year. Global risks arising from the eurozone debt crisis and US fiscal showdown have abated and there are signs of an economic turnaround in advanced economies, which bodes well for Asia's exports, the bank added. However, one emerging issue is "the risk of overheating" in some of the region's larger economies, it said. Near-zero interest rates and easy monetary policies in the US, the European Union and Japan have led to a massive exodus of money from these countries into emerging markets, including those in Asia, where they can get higher returns. The inflow has boosted property and stock prices but there are fears of an asset bubble that could collapse once the funds are withdrawn as quickly as they came in. Combined with the funds influx, domestic stimulus measures -- including low interest rates -- implemented by governments to boost demand as exports waned have led to higher levels of debt and inflation. "Continued demand-boosting measures may now be counter-productive as it could add to inflationary pressure," said Bert Hofman, the bank's chief regional economist. "A strong rebound in capital inflows to the region induced by protracted rounds of quantitative easing in the US, EU and Japan, may amplify credit and asset price risks," he added. Gross capital flows into the region amounted to $46.8 billion in the first three months of this year, up 86.3 percent from a year ago, the bank said. It also said that in the same period the amount of cash that found its way into Asian stock markets more than doubled year on year to $13.2 billion from $5.6 billion. "The risk of an asset boom in the markets in which global liquidity spills over is emerging, with asset valuations moving ahead of fundamentals and possibly a correction down the road," the bank said. "Stock market indices have surged by 56 percent in the Philippines and 48 percent in Thailand in the past 14 months alone," it noted. Debt accumulation by governments, companies and households has also increased, the bank said. The bank urged governments in the region to channel the funds to productive activities by investing the money in infrastructure and human capital to sustain high growth. "Beyond raising the level and quality of investment, the region must regain its focus on improving productivity," the bank said. It urged policymakers to be prepared to withdraw the domestic stimulus measures as the global economy recovers.