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Bright outlook clouded by strife

"The forecast anticipates average regional growth of more than 6 percent over the next two years with China increasingly the dominant player."

World Bank report on East Asian economies

The menaces of terror, deflation and a war-related rise in oil prices cloud an otherwise bright outlook for East Asian economies, the World Bank said on Wednesday.

East Asia and Pacific economies are expected to grow 6.4 percent this year, slightly down from 6.7 percent last year, said the Bank's Global Development Finance 2003 report.

"The forecast anticipates average regional growth of more than 6 percent over the next two years with China increasingly the dominant player," it said.

Exports would be key, helped by China's integration into the World Trade Organization.

Exceptions to the rosy outlook were Hong Kong and Singapore, where growth had faltered, and Indonesia, still reeling from the Oct.12 bombing of a Bali nightclub last year in which 202 people were killed.

Four key tensions overshadowed a horizon of rapid growth, low inflation and strong external accounts:

-- Oil. Every US$10-a-barrel rise in the price of oil during the Iraq war costs the region's net energy imports about 0.6 percent of gross domestic product.

-- Instability. "The unpredictability of developments on the Korean Peninsula has become a new regional concern and the memory of the bombing tragedy in Bali is a recent reminder of the problem of terrorism in the region," the report said.

-- Exchange rates. With fierce competition for western markets, "the question of appropriate exchange rates is likely to emerge as a larger issue," it said.

-- Deflation. "The corrosive effects of deflation, already painfully evident in Japan, could become more pervasive across the region if measures to promote corporate restructuring are slow."

South Asian economies, meanwhile, were tipped to grow 5.3 percent this year, up from 4.9 percent last year.

Poor weather, political insecurity and a subdued global economy had put a damper on the region's growth last year, although India-Pakistan tensions eased and a ceasefire was reached in Sri Lanka's civil war.

"Improving exports and a recovery in agriculture, which accounts for a quarter of the region's output, are together expected to boost GDP growth to 5.3 percent over the next years," the Bank said.

But higher export revenue would likely be channeled into higher imports, leading to little overall change in the trade balance, it said.

Domestic demand should gather momentum, it forecast, particularly in India as agricultural incomes recover.

"The outlook for India dominates South Asia's economic prospects," the report said.

"Manufacturing performance in India is showing signs of an incipient upturn, and the burgeoning Bangalore-based international services sector has experienced much less disruption in demand than high-tech sectors elsewhere."
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