The FINANCIAL — 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% in 2015, moderating slightly from 6.8% 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 released today 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% 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% 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% in 2015 and 6.3% 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% this year. In Myanmar, severe flooding in July will likely drive down the pace of growth to 6.5 percent, from 8.5% 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 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.
Myanmar economic development
Meanwhile, Myanmar’s economy grew at 8.5% in real terms in 2014/15 but growth is projected to moderate to 6.5% in 2015/16 due to floods and slowing investments. Economic reforms have supported consumer and investor confidence despite ongoing business environment and socio-political challenges. Rapidly rising demand for investment-related imports has widened the current account deficit. This together with the general strengthening of the US Dollar has put pressure on Myanmar’s exchange rate. Rapid growth in credit to the private sector has fueled monetary expansion. Inflation is estimated to have reached around 10% in the year to July. Medium-term economic growth prospects remain strong assuming continued progress on reforms.