World Bank sees growth in East Asia easing to 6.3% in 2016

Economic growth in developing East Asia is expected to ease from 6.5 per cent in 2015 to 6.3 per cent in 2016 and 6.2 per cent in 2017-18, on the back of a weaker-than-expected recovery in high-income economies and a faster-than-expected slowdown in China, says a new World Bank forecast.

Although the economies of East Asia and the Pacific has remained resilient, growth is expected to ease modestly during 2016-18, because of an elevated external risks and countries should continue to prioritise monetary and fiscal policies that reduce vulnerabilities and strengthen credibility, while deepening structural reforms, the World bank stated in its latest report.

The forecast reflects China's gradual shift to slower, more sustainable growth, expected to be 6.7 per cent in 2016 and 6.5 per cent in 2017, compared with 6.9 per cent in 2015.

''Developing East Asia and Pacific continues to contribute strongly to global growth. The region accounted for almost two-fifths of global growth in 2015, more than twice the combined contribution of all other developing regions,'' said Victoria Kwakwa, incoming World Bank East Asia and Pacific Regional vice president. ''The region has benefited from careful macroeconomic policies, including efforts to boost domestic revenue in some commodity-exporting countries. But sustaining growth amid challenging global conditions will require continued progress on structural reforms.''

The East Asia and Pacific Economic Update examines the region's growth prospects against a challenging backdrop - slow growth in high-income countries, a broad slowdown across emerging markets, weak global trade, persistently low commodity prices, and increasingly volatile global financial markets, the report stated.

Not including China, the region's developing countries grew by 4.7 per cent in 2015, and the pace of growth will pick up slightly - to 4.8 per cent in 2016 and 4.9 per cent in 2017-18 -  driven by growth in the large Southeast Asian economies.

However, the outlook for individual countries varies, depending on their trade and financial relationships with high-income economies and China, as well as their dependence on commodity exports.

Among the large developing Southeast Asian economies, the Philippines and Vietnam have the strongest growth prospects, both expected to grow by more than 6 per cent in 2016. In Indonesia, growth is forecast at 5.1 per cent in 2016 and 5.3 per cent in 2017, contingent on the success of recent reforms and implementation of an ambitious public investment programme.

''Several small economies, including Lao PDR, Mongolia, and Papua New Guinea, will continue to be affected by low commodity prices and weaker external demand,'' says the report.

Cambodia's growth will be slightly below 7 per cent during 2016-18, reflecting weaker prices for agricultural commodities, constrained garment exports, and moderating growth in tourism. In the Pacific Island Countries, growth is likely to remain moderate, it said.

''Developing East Asia and Pacific faces elevated risks, including a weaker-than-expected recovery in high-income economies and a faster-than-expected slowdown in China. At the same time, policy makers have less room to manoeuvre in setting macroeconomic policy,'' said Sudhir Shetty, chief economist of the World Bank's East Asia and Pacific Region. ''Countries should adopt monetary and fiscal policies that reduce their exposure to global and regional risks, and continue with structural reforms to boost productivity and promote inclusive growth.''

Slower-than-expected global growth could weaken demand and reduce growth in developing East Asia and Pacific, especially among commodity exporters.

The report calls for close monitoring of economic vulnerabilities, particularly those associated with high levels of debt, price deflation, and slower growth in China, and high corporate and household debt in some other large economies. In addition, the region should be prepared for natural disasters, which pose a substantial risk for Pacific Island countries.

The report calls for continued macroeconomic prudence and sustained structural reform. In China, it recommends strengthening market discipline in the financial sector, including by allowing credit allocation to be more market-driven; gradually opening up sectors dominated by state-owned enterprises to greater competition; and continuing to reform the household-registration system. It also urges a shift in public spending from infrastructure toward public services, such as education, health, and social assistance, and towards environmental protection.

Across the region more generally, there is a growing need for prudent fiscal policy to guard against future external shocks. This is especially important in those economies where growth has been sustained through increased public or private sector borrowing, or where external demand has been supported by the commodities boom.

Over the longer term, the report calls for governments to boost transparency and strengthen accountability. It urges countries to reduce barriers to regional trade, such as non-tariff measures and regulatory barriers, including to trade in services. And the report stresses that the benefits from the digital revolution will be maximised by developing regulatory regimes that favor competition, and by helping workers adapt their skills to the demands of the new economy.