Growth In East Asia To Moderate On Weaker Demand
fxbom.com
01:05 PM
SINGAPORE — Economic growth in East Asia continues to moderate, mainly due to weakening external demand, underscoring the need for governments to focus on driving local demand and productivity amid uncertainties in Europe and a global growth slowdown, the World Bank said in a report.
The World Bank expects gross domestic product growth in East Asia to be 8.2% in 2011 and 7.8% in 2012, according to its East Asia and Pacific Economic Update released in Singapore on Tuesday. That follows the region’s growth slowing from 9.1% in the last quarter of 2010 to 8.5% in the second quarter of 2011.
Monetary policy normalization has already been on hold in most countries in recent months and some central banks have started to cut official interest rates as sustaining growth becomes the dominant concern of policy makers, the report noted. In countries where the recent financial turbulence resulted in significant pressures on exchange rates, policy makers have also intervened in the currency markets, it said.
Indonesia was the first country in the region to cut interest rates as it moved to protect growth in the face of a weakening external environment. The authorities lowered the benchmark rate both in October and November, by 75 basis points in total, to the current 6%.
However, although inflation appears to have peaked in the region, negative real interest rates mean some countries will likely remain reluctant to use such cuts to pre-empt the impact of a global slowdown, according to the report.
“Lower growth in Europe in the course of fiscal austerity and the banks’ needs to increase capital coverage would affect East Asia. Less credit from European banks can also affect capital flows to East Asia, but high reserves and current-account surpluses protect most countries in the region against the impact of possible renewed financial stress,” said Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific Region.
The World Bank said it’s important for governments to take precautionary steps against financial risks arising from sudden downward movements in asset prices.
“Fiscal positions, while not as strong as before the 2008 crisis, leave sufficient space for fiscal stimulus in most middle-income countries, should this become necessary,” it said.
Reserves held by the region’s economies declined as capital flows started reversing and valuation adjustments took place, the report said. Still, those reserves remain substantial and should be sufficient to help countries withstand further global shocks, the bank added.
According to the report, the region’s growth slowdown has been more pronounced in industrial production. Exports of electronics is declining, though demand for commodities and raw materials remains strong.
East Asia’s growth prospects are constrained by global uncertainties and by natural disasters, the report said.
The effects of flooding in several countries are likely to take a toll on growth this year. While damage estimates are not complete, Thailand, for one, has revised its 2011 GDP growth forecast down to 2.4% due to severe ongoing floods, its worst in decades.
Production losses are being felt in the entire region as the impacts of that disaster spread through industrial supply chains. While Thailand’s reconstruction after the floods is likely to contribute to growth, recovery of production to predisaster levels will depend in part on the strength of global demand for electronics and cars, the World Bank said in the report.
On China, the biggest economy in East Asia, the World Bank said the nation’s share in world imports has grown, making it an increasingly important source of global demand as developed countries buy less. China’s shift to more consumer-goods imports is also benefiting the region’s manufacturing exporters.
The World Bank also said that the expansionary policies that supported strong growth in the aftermath of the financial crisis have fed a real-estate boom in China, and that rapid credit growth may have undermined the portfolio quality of Chinese banks.
But following measures to cool the world’s second-biggest economy–such as higher interest rates and statutory reserve requirements, and curbs on growth in bank lending–growth in China is likely to slow, though not very sharply.
-By Gaurav Raghuvanshi; Dow Jones Newswires; +65 64154 154; gaurav.raghuvanshi@dowjones.com
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