The World Bank yesterday lowered its growth forecast for East Asian developing countries to 7.1 percent this year and warned that a prolonged US fiscal crisis could be damaging to the region.
The estimate for this year’s GDP growth is down from a forecast of 7.8 percent in April, and lower than the 7.5 percent growth recorded last year and 8.3 percent in 2011.
Regional GDP growth for next year and 2015 was forecast at 7.2 percent for both years with middle-income economies like Indonesia also softening.
Excluding China, the region is expected to grow 5.2 percent this year and 5.3 percent next year.
World Bank East Asia and Pacific chief economist Bert Hofman told journalists that the bank was expecting a “smooth resolution” of the budgetary impasse that has forced parts of the US government to shut down.
“If there were to be a sustained deadlock, it could actually be quite damaging also for the East Asian economies. For every percentage point growth lost in the United States, we would see about half a percentage point growth lost in East Asia,” he added.
The US impasse has raised fears US lawmakers will not increase the country’s borrowing limit before an Oct. 17 deadline, which could lead the government to default on its debts.
“Any refusal on the increase in the debt ceiling is so unprecedented that it is very hard to predict what would happen. So we don’t have that in the simulation,” Hofman said.
The bank said East Asia is still the fastest growing in the world despite a slowdown in powerhouse China and a softening in places such as Indonesia and Thailand this year.
“East Asia-Pacific continues to be the engine driving the global economy, contributing 40 percent of the world’s GDP growth — more than any other region,” said Axel van Trotsenburg, the World Bank’s East Asia and Pacific regional vice president.
“With overall global growth accelerating, now is the time for developing economies to make structural and policy reforms to sustain growth, reduce poverty and improve the lives of the poor and vulnerable,” he added in a statement.
The bank said that in recent months speculation about the withdrawal of the US Federal Reserve’s stimulus program led to stock market sell-offs and currency depreciation in East Asia, hurting countries with large foreign participation in their financial markets.
“The US Federal Reserve’s decision to delay [a wind down of the stimulus] stabilized markets for now, giving countries a second opportunity to take measures to lower risks from future volatility,” Hofman said. “Reducing reliance on short-term and foreign currency denominated debt, accepting a weaker exchange rate when growth is below potential, and building policy buffers to respond to changing global liquidity conditions are some of the ways that can help countries be prepared.”
The impact of any US tapering on capital inflows in the region may also be offset by Japan’s new strategy to revive growth, which could increase Japanese investment in the region, the bank said.
“Structural reforms that will give people the opportunity to share in the gains of progress hold the key to future growth,” Hofman said.