Predicted to beat all Asian economies except China:

Record year ahead for Sri Lankan economy

Sri Lanka will have the fastest growing economy in 2012 after China, predicts Capital Economics, a leading independent macroeconomic research consultancy in a note distributed to investors yesterday.

“Capital Economics expects the Sri Lankan economy to grow eight percent in 2012, making it the fastest growing economy in emerging Asia after China,” the note prepared by Gareth Leather, Asia economist at Capital Economics, said. Capital Economics has offices and research centres in Singapore, Toronto and London.

The Sri Lankan economy expanded at a faster pace of 8.4 percent annually in the third quarter of 2011 than the second quarter’s 8.1 percent as both services and industrial sectors recorded strong growth, and the agricultural sector continued to recover from the impact of the floods, the Capital Economics researcher said.

Sri Lanka’s strong GDP growth in the third quarter, in contrast to the general trend in the rest of emerging Asia, reduces immediate pressure on the Central Bank to reduce interest rates, he said. The economy is set to expand further next year as the island nation continues to recover from the end of the conflict, the economist said.

“The economy is set to benefit from the growth in the tourism and construction industries and the improvement in investor confidence since the conflict ended.” Leather, however, pointed out that subdued inflationary pressures and growing external risks are likely to call for monetary loosening, and the Central Bank may enact two 25 basis point cuts in rates next year.

While inflation is expected to remain moderate in 2012, an acceleration due to rapid growth in credit and money supply cannot be ruled out, the economist added.

He warned that in the event of a sharp slowdown in the United States and the European Union, Sri Lanka’s growth will stall, as more than half of the country’s exports go to these markets.

However, given the comparatively lower share of exports in GDP, the impact of a prospective global slowdown on the economy will be minimal, he added.

Latest figures released by the Department of Census and Statistics show that the Sri Lankan economy expanded 8.4 percent annually in the third quarter. In the third quarter of 2010, the gross domestic product (GDP) increased eight percent year-on-year.

The agricultural sector expanded 6.2 percent in the three-month period, while the industrial sector grew 10.8 percent. There was a 7.8 percent annual growth in the services sector during the quarter. At the same time, the gross national product (GNP) rose 5.7 percent on an annual basis in the third quarter.