WORLD BANK FORECASTS: Slower Growth In Asia This Year

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The World Bank has updated its global economic forecasts, downgrading slightly expectations for Australia’s major trading partner, China, and for the rest of Asia.

Developing countries in Asia will see slower economic growth this year but the pace of growth in the region, excluding China, will pick up next year.

The gradual recovery in high-income economies will start to boost demand for exports from the region, according to the East Asia Pacific Economic Update released today by the World Bank.

The region remains the fastest-growing region in the world with GDP (Gross Domestic Product) more than three times that of the 1.8% rate for high income developed countries.

Developing East Asia will grow by 6.9% this year and next, down from 7.2% in 2013, the report says.

In China, growth will ease slightly to 7.4% this year and 7.2% in 2015 as the government seeks to put the economy on a more sustainable path with policies addressing financial vulnerabilities and structural constraints.

The latest manufacturing statistics show a pause in growth in China’s factories, still a positive for Australian exporters.

Excluding China, the World Bank says growth in developing countries in the region is expected to bottom out at 4.8% this year before rising to 5.3% in 2015, as exports rise and domestic economic reforms advance in the large Southeast Asian economies.

While the region as a whole will benefit more than any other region from the recovery of the
global economy, the impact will vary across countries, depending on their investment and export

China, Malaysia, Vietnam and Cambodia are well positioned to increase exports, reflecting deepening integration into the global and regional value chains which have driven global trade in the last 20 years.

The report revised the World Bank’s 2014 forecast for Malaysia to 5.7%, up from 4.9% in April, because of robust exports in the first half of the year.

Cambodia is expected to grow at 7.2% in 2014, boosted by rising garment exports.

Thailand is also expected to benefit from the global recovery, given its strong integration into global value chains – if the respite in political unrest is sustained.

But in Indonesia, which still relies on exporting commodities, growth will drop to 5.2% this
year from 5.8% in 2013, constrained by falling commodity prices, lower-than-expected
government consumption and slower credit expansion.

Significant uncertainties remain which could affect the region’s growth.

High-income economies, especially in the euro zone and Japan, could face downside risks in the near term.

Global financial conditions could tighten sharply, and international and regional geopolitical tensions could affect prospects.

The region also remains vulnerable to a sharp slowdown in China which would hurt commodity producers hit hard at commodity producers such as metal exporters in Mongolia and coal exporters in Indonesia.

The World Bank, however, rates this as unlikely.

Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region, says the best way for countries in the region to deal with these risks is to address vulnerabilities caused by past financial and fiscal policies, and complement these measures with structural reforms to enhance export competitiveness.

The report identifies policy recommendations for different countries to deal with risk and embark on a path of sustainable growth.

Mongolia and Lao PDR need to reduce the fiscal deficit and tighten monetary policy.

In Indonesia, Malaysia, the Philippines, and Thailand, measures to bolster revenues and reduce poorly targeted subsidies will help create space for productivity-enhancing investments and poverty-reducing spending, while gradually rebuilding fiscal buffers.

In China, as the government seeks to strike a balance between containing growing risks and meeting growth targets, the report indicates that structural reforms in sectors previously reserved for state enterprises and services could help offset the impact of measures to contain local government debt and curb shadow banking.

The report also discusses long-term structural reforms to help countries maximize the benefits from the global recovery.

Key reforms include investing more in infrastructure, improving trade logistics, and liberalizing services and foreign direct investment.

And, as many education systems in the region aren’t producing skills demanded in the labour market, the report recommends a comprehensive strategy to address issues ranging from early childhood development to higher education and lifelong learning.

Here are the World Bank GDP forecasts by country across Asia:

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