Growth in developing East Asia will decline by around one to two percentage points to around 8.5% in 2008 as a result of the unfolding financial turmoil in the US and the resulting global slowdown, says the World Bank’s latest six-monthly review of the East Asia and Pacific region’s economies.
April 1, 2008 -- But despite the likely drop from recent double-digit levels, overall growth remains healthy across the region and most countries are well positioned to navigate the global slowdown because of the investments they’ve made in the last 10 years in structural reforms and putting sound macroeconomic policies in place, the report says.
In fact, according to the latest East Asia & Pacific Update, East Asia and especially China have increasingly become a “growth pole” in the world economy – acting as a counterweight to the slowing industrial economies.
EXECUTIVE SUMMARY AND INTRODUCTION
Last year, developing East Asia recorded its highest growth rate in over a decade, capping a decade of improvements following its home‐grown financial crisis in1998. Yet this is hardly a time for celebration, but rather one for concern. The global economy is once again facing a testing time, with soaring fuel and food prices, on the one hand, and, on the other, an unfolding sub‐prime crisis emanating in the United States and spreading to other countries and asset classes. Although East Asia will undoubtedly be affected, it is reasonably well positioned to navigate this crisis without incurring significant damage to its prospects. Yet the challenges ahead should not be underestimated.
The turmoil in the US sub‐prime mortgage market that began last August has continued to broaden and intensify, leading to a tightening in global credit markets and failing financial institutions – most dramatically with the collapse of the Bear Stearns investment bank in mid March 2008. How this will play out and its potential effects on world economic growth, trade and financial flows is one of the two or three major uncertainties facing economic policy makers in East Asia at present.
EAST ASIAN DEVELOPMENTS: A CASE FOR GUARDED OPTIMISM?
Strong growth momentum under clouded skies
Financial linkages - U.S. turmoil affects East Asian securities markets, not so much banks.
Trade linkages - Weakening U.S. demand offset by other markets --so far.
Volatile commodity prices not at the forefront of policy makers' attention - Since 2003, oil and non‐oil commodity prices have respectively more than tripled and doubled. However, of greater immediate concern for policy makers is the surge in commodity prices over the last 6–9 months––especially for food––that has pushed headline inflation higher and sparked concerns about the adverse effect on the poor.
East Asian economies will face testing times in 2008. Most analysts now expect the US economy to see either near zero or negative growth in the first half of the year, followed by a mild recovery in the second half of the year, accompanied by slower growth in Japan and Europe. Substantially higher world oil and food prices will further erode incomes in the bulk of the East Asian region, the latter particularly hurting the poor.
Developing East Asian economic growth in this global slowdown scenario is expected to fall to 8.6 percent in 2008, the lowest since 2002, down from 10.2 percent in 2007. China’s growth is expected to finally dip below 10 percent, after five years at 10 percent plus rates, mainly due to lower export growth. Elsewhere, growth is expected to ease more modestly to the 5‐6 percent range for middle income economies like Indonesia, Malaysia and Philippines.
World Bank Chief Economist for the East Asia & Pacific region, Vikram Nehru, discussed with you the findings of the report in a live online discussion.
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