Despite tougher external conditions, Credit Suisse predicts that Asia’s growth in 2006 and 2007 will remain robust.

Strong domestic demand in almost every country in the region will underpin GDP growth, and Credit Suisse has revised upwards its forecast for Asia, excluding Japan, to 7.8% from 7.7% for 2006, and to 7.5% from 7.4% for 2007. The revision reflects stronger-than-expected domestic spending in Indonesia, Singapore and Hong Kong, while China and India continue to be the dominant drivers of growth in the region.

Credit Suisse has adopted a slightly more negative view on the external environment – caused by a continued slowdown in US consumption – and sees some risks related to monetary policy, but it still sees fundamentals in Asia remaining healthy. Overall, the growth momentum for Asia ex-Japan will remain strong in the second half of 2006, inflationary pressure will remain surprisingly benign, and current account surpluses will be larger than previously thought, it predicts.

In China, monetary tightening will continue Credit Suisse notes, but it adds that government measures to cool the economy will not likely be sufficient to alter ample liquidity conditions in the near future. Beijing’s preference to keep the RMB exchange rate steady is a major constraint on monetary policy, effectively capping any upside to local interest rates and presenting a fundamental obstacle to draining liquidity, it says.

“In China, we are sticking to our 10.1% GDP growth forecast for 2006, with 9.8%-10.0% growth projected for the second half of the year,” said Dong Tao, Credit Suisse’s chief regional economist for Asia ex-Japan. “Exports are likely to soften amid weakened US consumption, which should keep Beijing away from drastic tightening, but robust consumption and large investments in infrastructure should offer a cushion for sustained growth.”

Credit Suisse also maintains a bullish forecast for India, where it expects GDP growth of 8.5% this year versus consensus of 7.3%. The main risks to that forecast are rising interest rates and inflation but Credit Suisse remains positive on investment growth, and industrial production data continues to show strong growth across the basic, consumer and intermediate goods sectors.

In Southeast Asia, Credit Suisse has upgraded the 2006 growth forecast for Singapore to 8.5% from 7%, well above the consensus estimate of 6.6%. The revision is mainly due to a sharp rise in forecast investment spending to 8.9% from 6%. Forecast growth for Indonesia this year has also been upgraded to 5.6% from 5%, due mainly to a strong recovery in consumer spending amid easing inflation, falling interest rates and strong growth prospects in Eastern Indonesia.

In Hong Kong, growth in the first quarter of the year hit a surprisingly buoyant 8.2% year-on-year, it said, driven by robust domestic consumption and strong exports, but it expects the expansion in the second half will be curtailed by a property market slowdown. Full year growth is expected to reach 5.9%, down from 7.3% in 2005. Credit Suisse anticipates a 10%-20% price fall in the residential property market in the second half of 2006, which will drag down economic growth and consumer sentiment.