World Bank’s Latest East Asia Pacific Economic Update Available

The World Bank expects that economic growth in developing East Asia will reach 6.9 percent year-on-year (y/y) in both 2014 and 2015, down from 7.2 percent (y/y) in 2013. Gross domestic product (GDP) growth in China, the world’s second-largest economy, will ease slightly to 7.4 percent (y/y) in 2014 and 7.2 (y/y) in 2015 as China’s government seeks to put the economy on a more sustainable path with policies addressing financial vulnerabilities and structural constraints. Excluding China, growth in developing countries in the region is expected to bottom out at 4.8 percent (y/y) in 2014, before rising to 5.3 percent (y/y) in 2015 on rising exports and as domestic economic reforms advance in large Southeast Asian economies.

Axel van Trotsenburg, the World Bank East Asia and Pacific Regional Vice President, said: “East Asia Pacific will continue to have the potential to grow at a higher rate - and faster than other developing regions - if policy makers implement an ambitious domestic reform agenda, which includes removing barriers to domestic investment, improving export competitiveness and rationalizing public spending.”

Although the East Asia Pacific region will as a whole will benefit more than any other region from the global economic recovery, the positive impact will vary across countries, depending on their investment and export environment. China, Malaysia, Vietnam and Cambodia are Southeast Asian countries that are well positioned to increase exports, reflecting their deepening integration into the global and regional value chains that have driven global trade in the last 20 years.

The World Bank’s 2014 forecast for economic growth in Malaysia was revised to 5.7 percent (y/y), up from 4.9 percent (y/y) in its April estimate, due to robust exports in the first half of 2014. Cambodia is expected to grow 7.2 percent (y/y) in 2014, boosted by rising garment exports. Meanwhile, Thailand is also expected to benefit from the global recovery, given its strong integration into global value chains - if political unrest does not ignite.

In Indonesia, however, GDP growth will moderate to 5.2 percent (y/y) in 2014, from 5.8 percent (y/y) in 2013, due to sliding commodity prices (Indonesia’s economy relies on exports of commodities), lower-than-expected government consumption and slower credit expansion.

A positive feature of the region’s economies are robust private consumption, supported by various factors which include election-related spending in Indonesia and a strong labour market in Malaysia. In the Philippines, buoyant remittances pushed up private consumption, which accounts for more than half of the country’s overall growth.

The report also mentions a number of risks that could affect the region’s growth. These risks originate from high-income economies, particularly in the Eurozone and Japan. 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, though unlikely to happen, could hurt commodity producers especially hard, such as coal exporters in Indonesia.

Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region, said: “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 provides policy recommendations for the region’s countries to deal with risk and embark on a path of sustainable growth. 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 that will 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.

Key Findings:

• Developing countries in the East Asia Pacific region will see slightly slower economic growth this year, but the pace of growth will pick up in the region, excluding China, as the gradual recovery in high-income economies will increase demand for exports from the region.

• Developing East Asia Pacific remains the fastest-growing region in the world.

• Overall, developing countries in East Asia Pacific will grow by 6.9% this year and in 2015, down from 7.2% in 2013.

• In China, growth will ease slightly to 7.4% this year and 7.2% in 2015, amid structural reforms to address financial vulnerabilities and structural constraints.

• Excluding China, developing countries will grow at 4.8% this year, before rising to 5.3% in 2015, as exports rise and domestic adjustment in the large Southeast Asian economies is completed.

• How each country benefits from the global recovery will depend on their investment and export environment.

• China, Vietnam, Malaysia and Cambodia are well positioned to increase their exports. Malaysia, for example, will grow by 5.7%, up from 4.9% in April, reflecting robust exports in the first half of the year.

• In Indonesia, which still relies on exporting commodities, growth will drop to 5.2% this year from 5.8% in 2013. That’s because of falling commodity prices, lower-than-expected government consumption and slower credit expansion.

• The region’s economies are supported by robust private consumption, such as election-related spending in Indonesia, a strong labor market in Malaysia, and remittances in the Philippines.

• Significant uncertainties remain.

• If the global recovery falters, global financial conditions tighten sharply, or international and regional geopolitical tensions rise, the region’s economic outlook will become more challenging.

• The region also remains vulnerable to a sharp slowdown in China, which, though unlikely to happen, could hit commodity producers, such as metal exporters in Mongolia and coal exporters in Indonesia, especially hard.

• The best way for countries in the region to deal with these risks is to address vulnerabilities and inefficiencies caused by an extended period of loose monetary policy and fiscal stimulus, and complement these measures with structural reforms to enhance export competitiveness.

• In Mongolia and Lao PDR, for example, the fiscal deficit must be reduced and monetary policy tightened.

• 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, we believe 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.

• In the long run, we encourage countries to carry out structural reforms needed to boost their export competitiveness and maximize the benefits from the global recovery.

• Key reforms include infrastructure investment, logistics, and the liberalization of services and foreign direct investment.

Source: World Bank

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