The risks are tilted more to the downside than before on expectations of a sharper slowdown in the US economy, further tightening of global credit, an abrupt adjustment in exchange rates and continued rise in oil and commodity prices, says the December issue of the ADB's Asia Economic Monitor (AEM). Economic growth in China, the region's growth engine, will slow to 10.5 per cent next year from 11.4 per cent this year, if government measures to cool the economy begin to take hold.
The 2008 economic growth in the Association of South East Asian Nations (ASEAN) is expected to slightly moderate to 6.1 per cent from 6.3 per cent this year.
The report says even as growth slows in emerging East Asia, inflation is rearing its head in many economies and that price pressures are likely to remain for next year.
''Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region's policymakers,'' said Jong-Wha Lee, Head of ADB's Office of Regional Economic Integration.
The report warns that a hard landing of the US economy could have a significant impact on the region's growth as trade linkages with the major industrialised economies remain strong despite rising intraregional trade.
''If we take into account the total share of intra-regional trade that is ultimately destined for the G3 markets--Japan, Europe and the US, the share of G3 markets in the region's total exports is still over 60 per cent,'' the report says.
So far, the turmoil in the US subprime market has not spilled over to the emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited.
However, the region remains vulnerable as its banking sector expands into new lines of businesses and exposes itself to unknown risks, the report adds.
The changing structure of capital inflows, with volatile short-term capital accounting for more than 60 per cent of total inflows, remains a cause for worry, the report says.
This also puts pressure on central banks when pursuing autonomous monetary policies, it adds.
''Despite the resurgent capital inflows after the August market turmoil, a sharp reversal in investor risk appetite remains a possibility in this climate of heightened uncertainty. This could lead to a broader re-pricing of risk and unwinding of so-called carry trade,'' Mr Lee said.
The report recommends policymakers should continue to enhance risk management systems, strengthen information disclosure policy and upgrade supervisory framework to better assess potential vulnerabilities.