The World Bank has joined its Asian peer, the Asian Development Bank, in warning that China’s weak growth trajectory will hold back economic growth over the next couple of years. But if you exclude China, growth in the region could pick up a little.
But the World Bank is nowhere near as negative as the Asian Development Bank which last month said China’s lower growth forecast would knock 0.3 percentage points from the Asian region growth rate this year.
The ADB forecast growth of 5.7% for this year and next, down from 5.9% in 2015 for what it calls “Developing Asia” a 45-country grouping used by the ADB that includes central Asia and the Pacific as well as countries in east, south and Southeast Asia.
The ADB said it saw China’s growth at 6.5% this year – the World Bank has it at 6.7%.
The World Bank though is a bit more confident than its Asian peer.
The bank’s latest East Asia Pacific Economic Update, titled “Growing Challenges”, predicts growth for developing countries in East Asia to slow from 6.5% last year to 6.3% this year, and 6.2% in 2017-18 (the forecast excludes Australia, Japan and India).
The bank warns in the new report that “vulnerabilities created by the interplay between high levels of indebtedness, price deflation, and slowing growth in China bear close monitoring, as do corporate and financial sector vulnerabilities across much of the region".
But excluding China, the World Bank expects growth to pick up in East Asia. And the region may grow at a 4.8% rate this year and 4.9% in 2017 and 2018, compared with 4.7% in 2015.
The growth will be led by the large Southeast Asian economies, though the outlook for individual countries varies, depending on their trade and financial relationships with developed economies and China, as well as their dependence on commodity exports, which are forecast to remain in the doldrums.
The Philippines and Vietnam have the strongest growth prospects among Southeast Asian economies, – both are forecast to grow by more than 6% this year. Indonesia, is forecast to have growth of 5.1% in 2016 and 5.3% next year, if the recent reform measures are successful and an ambitious public investment program actually happens.
The bank said that growth in developing East Asia and Pacific had “remained resilient”, and the slowing growth forecast reflects China’s gradual shift to slower, more sustainable growth, expected to be 6.7% this year and 6.5% next year, compared with 6.9% last year.
However, a weaker recovery in the developed world, or a steeper slowdown in China, could hurt growth in the rest of the Asia-Pacific region, the World Bank said. The International Monetary Fund is expected to trim its global forecast from the previous 3.4% to close to 3% when it releases its World Economic Outlook this week.
And if China slows sharply, the region would be affected by “spillover effects” through trade and financial channels, it warned.
As examples of the damage a sharp slowdown in China could cause, the World Bank said that based on historical data a one-percentage-point decline in China’s growth could lower growth in Vietnam and Malaysia by 0.4 percentage point and in Mongolia by 0.8 percentage point.
The World Bank said China has "substantial policy buffers" that may prevent a sharp slowdown in growth. It pointed out that government debt is only 41% of gross domestic product, held primarily locally by a small group of state-owned institutions.
And that buffer reduces exchange-rate and refinancing risks and allows the government fiscal space to take steps to lift economic growth, if needed. In fact the Chinese government has lifted spending in recent months, especially in the stricken real estate sector, and this seems to have pushed prices higher on a more consistent basis.
But China needs to reduce leverage, particularly in industrial sectors where overcapacity is most evident, the World Bank said. These include coal, iron ore mining, iron and steel chemicals, alumimium and other metal processing, cotton and cement among quite a few sectors.
"The region has benefited from careful macroeconomic policies, including efforts to boost revenue in commodity-exporting countries. But sustaining growth amid challenging global conditions will require continued progress on structural reforms," said Victoria Kwakwa, the incoming regional vice president for East Asia and Pacific at the World Bank.
