East Asia Pacific Growth To Moderate Says World Bank

East Asia remains one of the main growth drivers of the world economy, accounting for nearly two-fifths of global economic growth, according to a new World Bank report. Overall, the region is expected to grow 6.5 percent in 2015, moderating slightly from 6.8 percent last year.

“Growth in developing East Asia Pacific continues to be solid, but the moderating trend suggests policy makers in the region must remain focused on structural reforms that lay the foundation for sustainable, long-term and inclusive growth.

These reforms include regulatory improvements in finance, labor and product markets, as well as measures that enhance transparency and accountability. These policies will reassure investors and markets, and help sustain growth that can help lift people out of poverty,” said Axel van Trotsenburg, World Bank East Asia and Pacific Regional Vice President.

The East Asia Pacific Economic Update report looks at the challenging global environment facing the region. The recovery in high-income economies remains gradual, global trade is growing at its slowest pace since 2009, and the widespread slowdown in developing countries has intensified, particularly in commodity producers affected by lower commodity prices.

The performance trends across East Asia are diverse. China’s economy is expected to grow at about 7 percent this year and gradually moderate thereafter, as its economy continues to shift toward a model more dominated by domestic consumption and services, which implies a gradual reduction of growth.

The rest of developing East Asia is expected to grow 4.6 percent in 2015, similar to the rate last year. Commodity exporters such as Indonesia, Malaysia and Mongolia will see slower growth and lower public revenues this year, reflecting weaker global commodity prices. Commodity importers will maintain a stable — even robust — pace of growth. Vietnam, for example, is expected to grow 6.2 percent in 2015 and 6.3 percent in 2016. Growth will ease, however, in many of the smaller economies. In Cambodia, lower agricultural output is hurting the economy, although growth will still be 6.9 percent this year. In Myanmar, severe flooding in July will likely drive down the pace of growth to 6.5 percent, from 8.5 percent in 2014. Pacific Island countries, meanwhile, will see moderate growth.

“Developing East Asia’s growth is expected to slow because of China’s economic rebalancing and the pace of the expected normalization of U.S. policy interest rates,” said Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region. “These factors could generate financial volatility in the short term, but are necessary adjustments for sustainable growth in the long term.”

The Philippines is among the strongest performers in the region, bucking the trend, because of strong fundamentals. Economic growth is projected to improve from 5.8 percent in 2015 to 6.4 percent in 2016.

Lower 2015 growth takes into account the relatively weak first half growth brought about by slow government spending, weak exports, and the initial impact of the El Niño phenomenon. In contrast, second half growth is projected to improve as government ramps up spending. Accelerated implementation of public-private partnership projects and the continuing effect of lower food inflation and declining oil prices are expected to support growth.

The report assumes a gradual slowdown in the Chinese economy in 2016-17. This scenario is likely because China has sufficient policy buffers and tools to address the risk of a more pronounced slowdown, including relatively low public debt levels, regulations restricting savings outside of the banking system, and the state’s dominant role in the financial system. If China’s growth were to slow further, the effects would be felt in the rest of the region, especially in countries linked to China through trade, investment and tourism.

The report also assumes that a gradual increase in U.S. interest rates will begin in the coming months. While this increase has been anticipated and is likely to be orderly, there is still a risk that markets could react sharply to such tightening, causing currencies to depreciate, bond spreads to rise, capital inflows to fall, and liquidity to tighten.

In the face of these possible headwinds, the report emphasizes two key priorities across the region: prudent macroeconomic management, aimed at shoring up external and fiscal vulnerabilities; and deeper structural reform, focused on encouraging private investment.

“The Philippines can ensure a more inclusive growth path by accelerating reforms to secure property rights, promote more competition, and simplify regulations to trigger more private investments by firms of all sizes, while sustainably ramping up public investments in infrastructure, education, health, and social protection,” said World Bank Country Director Motoo Konishi.

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