A slowing Chinese economy will cool growth in East Asia this year, but China has significant fiscal resources to help engineer a “soft landing” and could cut taxes and raise s welfare spending, according to the World Bank. In its twice-yearly report on the region, the Bank said Chinese gross domestic product (GDP) would grow by 8.2% in 2012 compared with its previous forecast of 8.4% – – before recovering to 8.6% in 2013.
For 2012, the report projects that annual growth will moderate further to 7.6% with slower expansion in China pulling down the regional aggregate. Excluding China, growth will increase to 5.2% as Thailand returns to normal levels of production.
Commodity exporters, which experienced a boom in 2011, may be vulnerable in the event of a faster than anticipated slowdown in China, which could trigger an unexpected drop in commodity prices. “Most East Asian economies are well positioned to weather renewed volatility.
Domestic demand has proved resilient to shocks. Many countries run current account surpluses and hold high levels of international reserves.
Banking systems are generally well-capitalized,” said Bert Hofman, World Bank chief economist for the East Asia and Pacific Region. “Still, risks emanating from Europe have the potential to affect the region through links in trade and finance.” The EU, along with the US and Japan, accounts for more than 40% of the region’s exports, and European banks provide one-third of trade and project finance in Asia.
As external demand is likely to remain weak, countries in developing East Asia and Pacific need to rely less on exports and more on domestic demand to maintain high growth.
Already, many countries are moving in this direction, but there is further scope for rebalancing. “Some countries will need to stimulate household consumption. In others, enhanced investment, particularly in infrastructure, offers the potential to sustain growth provided this does not exacerbate domestic demand pressures,” said Bryce Quillin, World Bank Economist and lead author of the report.
“With a changing financial sector in the aftermath of the financial crisis, new ways to finance higher levels of infrastructure investment need to be developed. Governments would need to focus on accelerating the preparation of infrastructure projects.
” In the medium-term, investment will enhance productivity and drive growth through higher value-added activities and innovation. Although large gains have been made in labor productivity across the region since the Asian financial crisis of 1997-98, there is still large room for further gains.
Policies to support the movement of labour among countries can also be improved, suggests the report. Improved regional migration policies could enhance the gains from regional economic integration and allow countries with declining working age populations to meet labor demand.