World Bank raises East Asia outlook

SINGAPORE Tue Dec 18, 2012 9:04pm EST

SINGAPORE (Reuters) - The World Bank raised its 2013 economic growth forecasts for China and developing East Asia on Wednesday, and said the region remained resilient despite the lackluster performance of the global economy.

"For 2013, we expect the region to benefit from continued strong domestic demand and a mild global recovery that would nudge the contribution of net exports to growth back into positive territory, a trend projected to continue into 2014," the World Bank said in its latest East Asia and Pacific Economic Update.

"Most countries in the region have retained their strong macroeconomic fundamentals and should be able to withstand external shocks," it added, although it warned of risks such as a sharp drop in investment growth in China that could shake global confidence and a U.S. failure to reach an agreement on tax increases and spending cuts before the end of the year.

The World Bank said China was expected to expand by 8.4 percent next year, fuelled by fiscal stimulus and the faster implementation of large investment projects. The latest forecast is higher than the 8.1 percent figure cited in an October report.

"The slowdown in the Chinese economy appears to now have bottomed out. While third quarter growth, at 7.4 percent year-on-year, is still low compared to last year, quarter-on-quarter growth has picked up notably, reaching 9.1 percent in the third quarter at a seasonally-adjusted, annualized rate," the World Bank said.

Growth in the world's most populous nation is, however, expected to slow to around 8 percent in 2014, with the potential pace of economic expansion gradually declining as productivity and labor force growth tail off.

For developing East Asia as a whole, next year's growth is expected to come in at 7.9 percent, up from an earlier forecast of 7.6 percent, with the Philippines and Malaysia growing by 6.2 percent and 5.0 percent, respectively.

The international lender's previous forecast was for the Philippines to grow by 5.0 percent and Malaysia to expand by 4.6 percent in 2013.

The World Bank said domestic demand, in the form of both consumption and investment, has been critical to sustaining growth in East Asia, in particular Indonesia, Malaysia, Thailand and the Philippines.

"The robust growth in services this year in part reflects strong domestic demand, but is also associated with longer term trends caused by rising incomes," the World Bank said of the four countries and Vietnam.

For Myanmar, the World Bank now expects the country to grow by 6.5 percent next year, up from an earlier forecast of 6.2 percent.

MONETARY POLICY, QE3

While Asian governments in general had room to boost spending in the event of an economic shock, the World Bank warned that further easing of monetary policy could be detrimental to inflation.

"In Indonesia, the Philippines and Thailand, the current policy rates are lower than those implied by the Taylor Rule, suggesting that monetary policy is already relatively relaxed. Consequently, further easing may be constrained in these countries unless conditions change dramatically."

"This is particularly true for Thailand, which has a negative policy interest rate in real terms," it said.

The Taylor Rule calls for raising rates if the inflation rate is above the target, or if the economy is overheating.

The World Bank was, however, sanguine about the problem of hot money arising from further monetary easing by developed countries, saying quantitative easing did not necessarily lead to more capital inflows into emerging Asia.

"QE1 did but QE2 did not. Moreover, the bulk of capital flows into East Asia and the Pacific consists of FDI (foreign direct investments), which create jobs and growth in production capacity," the World Bank said.

(Reporting by Kevin Lim; Editing by Jacqueline Wong)