East Asian economies face eurozone headwinds: ADB

The Manila-based bank cut its gross domestic product growth forecast to 7.2 per cent for the 10-country Association of Southeast Asian Nations (ASEAN) plus China, Hong Kong, South Korea and Taiwan, from 7.5 per cent in September.

It also mapped out an "extreme scenario" of European and US meltdown, which could shave 1.2 per cent off growth next year in East Asia including Japan, from a forecast 5.4 per cent to 4.2 per cent, bank officials said on Tuesday.

"The worst-case scenario is for both the US and eurozone to fall back into recession, pushing the global economy into a deep slump," the ADB's Emerging East Asia regional economic update said.

With headwinds blowing out of Europe, the bank said its "cautiously optimistic" outlook for the Emerging East Asia region excluding Japan was under a thickening black cloud compared to its September forecasts.

"The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago," it said.

"The global economic recovery could flounder if the eurozone and the US fall back into recession, causing another global financial crisis."

It said "major downside risks" included a deep recession in Europe and the United States, higher protectionism and persistent inflation.

If the eurozone's troubles turned into a full-blown crisis for the global economy, the impact on East Asia would be "serious yet manageable" as long as governments responded decisively and collectively.

"Emerging East Asia must prepare for a prolonged crisis and weak post-crisis recovery by implementing appropriate short-term macroeconomic responses and pursuing necessary long-term structural reform," the report said.

Government spending could help maintain the growth momentum while central banks would have to deftly manage the monetary levers to keep inflation "anchored".

"With the eurozone?s sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent," it said.