Its flagship economic publication Asian Development Outlook (ADO) 2019 Update forecasts economic growth in the 45 countries of developing Asia at 5.4 per cent this year before nudging up to 5.5 per cent in 2020.
The newly lowered forecasts reflect gloomier prospects for international trade due in part to escalating trade tensions between China and the United States as well as slowing economic growth in advanced economies and the large economies of developing Asia, including China, India, South Korea and Thailand.
Excluding the newly industrialised economies of Hong Kong, South Korea, Singapore and Taiwan, developing Asia is forecast to expand by 6 per cent this year and next year.
"The China-US trade conflict could well persist into 2020 while major global economies may struggle even more than we currently anticipate. In Asia, weakening trade momentum and declining investment are the major concerns," said ADB Chief Economist Yasuyuki Sawada. "These are all issues that policymakers must monitor closely."
The prospects for growth vary across the sub-regions of developing Asia. The slowdown in global trade coupled with a sharp downswing in the electronics cycle has pulled down forecasts for China and the more open economies in east and southeast Asia.
ADO 2019 Update forecasts the China economy to expand 6.2 per cent this year and 6 per cent next year. East Asia as a whole is expected to grow 5.5 per cent in 2019 and 5.4 per cent in 2020, while southeast Asia is seen expanding 4.5 per cent and 4.7 per cent respectively.
Weaker investment prior to the April-May general elections as well as tighter credit is weighing on India's growth outlook this year, with gross domestic product (GDP) now expected to expand 6.5 per cent in 2019 before ticking up to 7.2 per cent growth in 2020. South Asia as a whole is seen growing 6.2 per cent and 6.7 per cent in 2019 and 2020 respectively.
With public spending stimulating the economies of Kazakhstan and Uzbekistan, Central Asia's economic growth is forecast at 4.4 per cent this year and 4.3 per cent next year. Meanwhile, Papua New Guinea's recovery from an earthquake is helping to boost growth in the Pacific subregion to 4.2 per cent this year before moderating to 2.6 per cent next year.
The report notes that an escalation and broadening of the China-US trade conflict may reshape supply chains in the region. There is already evidence of trade redirection from China toward other economies in developing Asia such as Vietnam and Bangladesh. Foreign direct investment is following a similar pattern.
Public and private debt has risen in developing Asia since the 2008-09 global financial crisis with debt-to-GDP expanding around two-thirds over the last two decades. The report notes that rapid debt buildup can be a danger to financial stability and urges policymakers to remain vigilant.
Inflation has ticked up largely due to rising food prices in the region, including in China as African swine flu has pushed up meat prices. The report predicts headline regional inflation of 2.7 per cent in both 2019 and 2020.