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Oil: Fuelling Asia's costly growth

Continued fuel subsidies will make it difficult to cope with rising oil prices.

For a region that is a net oil importer, Asia would seem to be in the firing line of the rapid increase in oil prices. However, the region's economies have proved surprisingly resilient. Low real interest rates; China's strong growth, especially its ability to absorb higher input prices; and strong regional economic fundamentals have contributed to Asia's ability to shrug off higher costs.

Analysts, however, are beginning to take account of the oil-price effect. "People seem to be dismissing the issue," says Rob Subbaraman of Lehman Brothers in Tokyo. "When oil went from $30 to $40 per barrel people were worried initially. Since then, though, there's been no apparent effect on Asian economies."

Shaving forecasts

Subbaraman warns that if prices do not fall soon, he will start downgrading economic forecasts for the region significantly. Some analysts are already shaving their own forecasts for Asian economies, but not as much as might be expected. UBS has reduced its real GDP growth forecasts for Asia to 4.5% from 4.6% in 2005 and to 3.4% from 3.6% in 2006. Part of the reason for restraint in making downgrades, says UBS, is the fortuitous coincidence of higher fiscal spending in the US as a result of Hurricane Katrina and higher capital investment in Japan.

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