Inflation impacts on Asian outlook

As the international community continues focusing on China's emergency response to this week's devastating earthquake, analysts try to evaluate the potential economic impact of the catastrophe.

Only 3 months before the Olympic Games are due to start, the worst natural disaster to hit the country in 30 years, has been used by the Chinese government to show the world the new face of China by deploying thousands of troops to the affected areas.

Although in the short term the quake is likely to affect prices, the economic impact is expected to be relatively limited, as the affected Province of Sichuan and neighbouring city of Chongqing contributed less than 5% to the country's 2007 GDP growth.

However, the main concern for the Chinese economy, and the economy of the Asia-Pacific region as a whole, continues to be inflation.

"Asian markets have to contend with Chinese inflation reaching an 11 year high," said Peter Dalgliesh, manager of the Pacific Assets Trust. "Inflationary pressures are impacting the outlook for the region as previous expectations of monetary policy easing are going into reverse."

Dalgliesh commented that current top line growth expectation are likely to remain firm but margin pressures are building up as input costs continue to rise.

"Exchange rates could offer a steer to differentiate between winners and losers as those markets with relative currency stability should experience less inflationary pressure and therefore greater policy flexibility to offset any further slow down in global economic growth."