Asia outperformed expectations in the third quarter, with reassuring strength in domestic demand helping to offset a softening in the external environment. However the dramatic rise in oil prices in the last few weeks has introduced new problems. It is a fiscal challenge to those countries, including India and Indonesia, which maintain fuel subsidies – although improvements in government finances mean they should be able to cope. High oil prices are also adding to import bills and have pushed headline inflation in some economies to worrying levels. We expect oil prices to drop back. But if they don’t, many central banks could be forced to tighten policy more than they otherwise would want.
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