Mixed news for Australia and Australian exporters, such as miners, from the World Bank’s latest survey of the East Asian region, which contains some of our major export markets, led by China.
The World Bank surprised by downgrading its economic growth forecasts for some of our biggest export markets, especially China.
For Australia there’s good news in that the bank sees growth strengthening in the short term, but also a warning that China’s move to boost consumption over investment could impact countries supplying capital goods and raw materials to China (which would include Australia).
The downgrades are contained in the latest forecasts issued by the bank ahead of its annual meeting in Washington later this week.
The International Monetary Fund issues an updated version of its World Economic Outlook tonight, our time which is expected to match the Bank’s cuts for Asia, but an upgrade of its outlook for the eurozone and the UK. A new forecast for Australia will also be included in the update.
According to the report, the growth forecast for developing countries in East Asia is 7.1% for 2013 and 7.2% for 2014. Both are down on the forecasts issued in April of this year of 7.8% for this year and 7.6% for next year.
Excluding China, the region is expected to grow at 5.2% in 2013 and 5.3% in 2014. "While domestic demand continues to drive growth, investment growth is moderating in the larger economies of ASEAN, including Indonesia, Thailand and Malaysia. Consumption and resilient remittances helped boost the Philippine economy," the bank said.
Weaker growth in China, Indonesia and Thailand is blamed for the downgrades. But economies such as The Philippines are now forecast to be stronger this year and next.
Despite the cuts, the East Asia region will still be the fastest growth region in the global economy this year and next, according to the World Bank.
And in the short term, the bank sees an improvement in China. "The short term outlook is improving as industrial production data suggests further strengthening of output in the third quarter of 2013," the World Bank said.
Growth next year is forecast to rise a touch, but the bank cautioned that the restructuring of the Chinese economy to reduce the dependence on investment might have "an adverse impact" on the East Asia region (and Australia) "especially on suppliers of capital goods and industrial raw materials to China".
The Bank’s forecasts do not attempt to factor in any impact from the shutdown of the US government or the impending brawl over the US debt ceiling that could have a dramatic impact on global growth for the rest of the year and into 2014 if it results in the US defaulting.
But there was a warning that its latest regional forecasts faced greater likelihood of being revised downwards than upwards, citing potential headwinds such as a less orderly tapering of the US Federal Reserve’s stimulus program and a prolonged fiscal deadlock in Washington.
The abrupt changes triggered by the unresolved question of ending the Fed’s $US85 billion a month of spending, has already had a dramatic impact on emerging economies such as Thailand and Indonesia in the region (and the likes of India, Brazil and Turkey elsewhere).
The tapering question has seen emerging market currencies drop sharply (especially in India and Indonesia) and forced interest rates to be lifted to help protect the currency and mitigate the rapid depreciation.
The increased volatility has helped force down the prices of key commodities, such as gold and copper and the prices of a number of agricultural commodities, which in turn has placed further pressure on economies like Indonesia. Therefore, given the rise in volatility and market instability since May, when the question of an end to the Fed’s spending first emerged, it’s no wonder that the major economies in east Asia have been affected.
But for China, the release of September quarter data from late this week could further underline the strengthening in activity. Certainly for the Australian economy, exports of iron ore to China (our key export and our key market) haven’t really been impacted by the slowdown.
The World Bank now expects the Chinese economy to expand by 7.5% this year, down from its April forecast of 8.3% (which was a bit too optimistic even then) and below the International Monetary Fund’s most recent forecast of 7.75%.
China’s 2014 growth is estimated at 7.7%, down 0.3 percentage point from the previous prediction in April and a sign that the bank sees the economy still battling some headwinds in the next 15 months.
The World Bank said the Chinese government’s investment-heavy stimulus program supported by credit expansion had run its course, and policymakers must focus on containing the rapid growth of credit and tighten financial supervision.
It pointed out that local government debt was a concern, given the complexity and opacity of municipal finances, and said they should be reformed.
"The rapid expansion of shadow banking poses serious challenges, since shadow banking is closely linked to the banking system, is less regulated, and operates with implicit guarantees from banks and local governments," the World Bank said.
But it added local governments in China had significant assets to meet liabilities as they held land reserves worth 10% GDP (around $US800 billion or more) as well as shares in state-owned enterprises worth a similar amount.
The World Bank did point to some small positives, saying China had shown some progress in rebalancing its economy, with consumption contributing more to quarterly growth than investment in the two years up to the first quarter of 2013 and services accounting for a larger share of GDP.
"Still, the economy has yet to make the decisive turn toward consumer-based growth," the World Bank added.
Elsewhere, the bank said, "Developing East Asia is expanding at a slower pace as China shifts from an export-oriented and focuses on domestic demand.
"Growth in larger middle-income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports."
Looking at Indonesia (which seems to be the new flavour of the month for the Abbott Government), the World Bank said investment growth reached a three-year low in the second quarter and is likely to face headwinds from interest rate hikes in response to rising inflation and capital outflows as well as from a slowdown in foreign direct investment and regulatory uncertainties.
The World Bank cut its growth forecast for Indonesia to 5.6% for 2013 and 5.3% next year, down from its previous estimates of 6.2% and 6.5%, respectively.
For the Philippines, the World Bank says investments slowed in the second quarter after a strong first three months of the year. But remittances from Filipinos working abroad have boosted consumption, which contributed three-fourths to growth in April-June.
The World Bank expects the Philippines to grow by an impressive 7% this year, up sharply from the April forecast of 6.2%. For next year, the economy would probably expand by 6.7%, better than the previous estimate of 6.4%.
World Bank East Asia and Pacific Chief Economist Bert Hofman added, however, that the reversal of capital flows in developing East Asia may be offset by Japan’s new strategy to exit deflation and revive growth.
Japan’s efforts to reflate its economy could spill over to emerging Asian economies through expanded bank lending, portfolio rebalancing, and increased outward foreign direct investment, he said.
