Growth in the East Asia & the Pacific region slowed to 7.5 percent in 2012, which nevertheless represented 40 percent of global growth. The slowdown was due to slower growth in China, which has started to shift away its economy from excessive reliance on investment and net exports.
Growth in the rest of the region accelerated to 6.2 percent, 1.6 percentage points faster than the average of the preceding decade and comparable to growth during the boom and bounce-back years of 2007 and 2010.
With virtually all countries in the region having recovered from the 2008 crisis—largely thanks to domestic stimulus—rising debt levels and asset bubbles are increasingly a source of concern especially in the context of strong capital flows and weak external demand environment.
GDP growth in the region is projected to slow to 7.3 percent in 2013 reflecting weak global conditions and waning effects of stimulus measures. China is projected to slow to 7.7 percent rate in 2013 but accelerate to about 8 percent in 2014 and 2015 as global conditions improve.
Growth in the rest of the region is expected to slow to 5.7 percent in 2013 due to fiscal tightening, capacity constraints and a negative contribution from net exports reflecting exchange rate movements and weak external demand. Growth is projected to firm up to about 6 percent in 2014 and 2015 as external conditions improve.
Risks and vulnerabilities
The risk of a serious crisis emanating from high-income countries has declined, but the strength and timing of recovery in Europe remains uncertain.
Developments throughout the region will remain sensitive to outturns in China and Japan. The main risk related to China remains the possibility that high investment rates prove unsustainable, provoking a disorderly unwinding and sharp economic slowdown.
The depreciation of the Japanese yen in response to loose monetary policy is likely to affect some developing-country exports and growth in the short-term. The effects are expected to be balanced overall due to potential gains through supplies of inputs, including parts and components as well as imports of competitive technology, machinery and equipment.
Japanese quantitative easing is likely to exacerbate capital inflows, potentially contributing to demand price pressures, asset price inflation and a further rise in domestic debt encouraged by low borrowing costs. Although net capital flows are not expected to generate sustained pressures on regional exchange rates, low Japanese interest rates could increase capital flows and exchange rate volatility.
The recent decline in global commodity prices may reflect a turning point as past investments came on stream. Should this easing accelerate, fiscal and current accounts, and incomes and growth in commodity exporters like Indonesia, Malaysia, Mongolia, Papua New Guinea (PNG), Timor Leste and Solomon Islands could come under pressure, even as lower prices would benefit importers. The negative impact is expected to be muted in Malaysia and Indonesia where the decline in oil prices will contribute to an improvement of budget balances through a reduction in fuel subsidies.
With most of the region having fully recovered from the financial crisis, and many countries growing at historically high rates, policies could become less accommodative. Should capital flows make adjusting monetary policy difficult a larger share of the burden may have to be borne by fiscal tightening, while macro-prudential measures would gain in importance to safeguard financial stability. Fiscal consolidation can perhaps be achieved by rationalizing current spending, which would allow structural reforms and growth enhancing infrastructure investment programs to continue.
Rebuilding buffers to absorb future shocks, remains a priority in Cambodia, Lao PDR, Vietnam, the Pacific islands and Mongolia where gradual global and regional integration has benefitted growth, but also made these economies more vulnerable to global and regional business cycles and commodity price fluctuations.