Asia’s ability to stimulate strained by inflation

SINGAPORE (AP) — Asia batted away the global recession sparked by the 2008 financial crisis. Fending off the latest wave of market turmoil may prove tougher.

World stocks were pummeled this week by the first-ever downgrade of the U.S. credit rating and evidence of stalling recoveries in the U.S. and Europe that could weaken demand for Asia’s exports of cars, gadgets, clothing and other goods.

Normally that would have Asian governments turning to interest rate cuts and extra spending but their options are constrained by inflation that has remained stubbornly high despite efforts to tame it.

The dilemma: Give economies too much of a boost and the high inflation that is undermining gains in living standards will become even more troublesome. Press ahead with the yearlong campaign to bring inflation down and risk a sharp decline in economic growth just as the U.S., the world’s biggest economy, teeters on the edge of another recession.

Singapore, heavily reliant on the spending power of U.S. consumers, was Wednesday among the first to acknowledge the increased risks, lowering its economic growth forecast for this year.

“It’s a tough balance, but inflation in Asia is going to keep the pressure on policymakers,” said Neeraj Seth, an executive at BlackRock, which manages $3.7 trillion of assets.

China, Asia’s largest economy, may have to sacrifice some of the breakneck growth it’s enjoyed over the last decade to get inflation under control. Consumer prices jumped 6.5 percent in July, a three-year high, while the economy expanded a roaring 9.5 percent in the second quarter.

China has raised interest rates five times since October and curbed lending and investment, but the government admits it probably won’t be enough to slow inflation to its 2011 target of 4 percent.

“The problem is still that growth is too fast and inflation is too high and going up,” said David Carbon, head of Asia research at DBS, Southeast Asia’s largest bank.

Quickening inflation threatens to swell the ranks of people in countries such as China, India and Vietnam already living below the poverty line. Vietnam has the region’s highest annual inflation rate at 21 percent while India’s is 8.6 percent. Rapid rises in prices, especially for food, are a threat to social stability, which in the past decade has been underpinned by the rising living standards that Asia’s robust economic growth has delivered.

The Asian Development Bank estimates that a 10 percent increase in food prices drags another 64 million people below the $1.25 a day poverty line. A 20 percent increase in prices pushes up the number in poverty by 129 million.

“Everything is getting much more expensive, but I’m not getting an increase in my salary. I have to dig into my savings,” said high school teacher Nguyen Bich Lien, 53, as she bought vegetables at a market in Vietnam’s capital Hanoi.

“It costs me 400,000 dong to 500,000 dong ($19 to $24) for one day of shopping, I feel like my money was stolen.”

“When my savings are all spent, then I will have to eat less meat and more vegetables,” she said, adding she earns 8 million dong a month as the breadwinner of her family because her husband is too sick to work.

“I can imagine how much harder low-income workers and farmers have to struggle to make ends meet,” she said.