October 7, 2013 6:16 am

World Bank cuts East Asia growth forecast

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The World Bank has cut its 2013 growth forecast for developing East Asia, citing weak commodity prices, slowing consumer demand, and China’s efforts to restructure its economy away from exports.

The Washington-based organisation said in its semi-annual economic report that East Asia will continue to be the biggest driver of global growth, but now expects the region to expand by 7.1 per cent this year, down from its April projection of 7.8 per cent.

The bank also cut its China growth estimate from 8.3 per cent to 7.5 per cent, which it said was “primarily because the most recent expansion in credit has been less effective in generating growth”.

Asia has been a global bright spot throughout much of the past five years, in part due to China’s stimulus package launched in the wake of the financial crisis in 2008. The region has also attracted billions of dollars of capital inflows amid loose monetary policy in the developed world.

However, rising debt levels, slowing growth and the prospect of a reversal of capital flows once the US Federal Reserve begins its reduction – or “tapering” – of asset purchases have prompted doubts among economists and investors about the outlook for the region.

“Any scaling back of quantitative easing in the US will result in higher borrowing costs, lower capital inflows, and a decline in asset prices in East Asia,” the World Bank said in its report. “This will affect investment and potential output, and raises concerns about potentially over extended domestic financial sectors.”

Indonesia and India, two countries with large and persistent current account deficits, were the initial focal points of investor worries about the onset of tapering, but currency weakness and equity market sell-offs have affected most countries in the region since late May.

Although recent data have suggested an improvement in economic activity in China, Japan, the US and Europe, the bank urged the Asian policy makers to carry out urgent structural reforms to be better prepared for the “lingering downside risks”.

“The Federal Reserve’s decision to delay tapering [has] stabilised markets for now, giving countries a second opportunity to take measures to lower risks from future volatility,” said Bert Hofman, World Bank chief economist for East Asia.

“Reducing reliance on short-term and foreign currency-denominated debt, accepting a weaker exchange rate when growth is below potential, and building policy buffers to respond to changing global liquidity conditions are some of the ways that can help countries be prepared.”

The World Bank’s revised growth forecasts echo those made by the Asian Development Bank last week. The ADB cut its estimate for emerging Asia – which includes India – from 6.6 per cent to 6 per cent.

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