World Bank Cuts East Asia Economic Growth Forecasts

By Shamim Adam

Dec. 10 (Bloomberg) -- East Asian economies will probably expand at the slowest pace in eight years in 2009 as easing export demand and declining investment and consumer spending portend “hard times” for the region, the World Bank said.

East Asia, which excludes Japan and the Indian subcontinent, will expand 5.3 percent next year, slower than the 7.4 percent rate the World Bank predicted in April. Growth will probably be 7 percent this year, the Washington-based lender said its semi- annual report today.

Fiscal stimulus and coordinated interest-rate cuts by governments and central banks around the world have failed to reverse a worldwide economic slump and the worst credit crunch in seven decades. The World Bank yesterday lowered its global growth projections, and predicted international trade will shrink in 2009 for the first time in more than 25 years.

“The contraction of output in the developed economies may well last longer and run deeper, delaying a recovery in growth in East Asia,” the bank said. “In the near term, downside risks are substantial.”

The World Bank in April said inflation will pose a greater threat to the East Asia region than the global slowdown this year. As crude oil and commodity prices fall from record levels, and consumer price gains peaked, it is now pointing to a worsening economic outlook.

Weaker Exports

“Prospects for weaker exports, together with a projected decline in capital inflows, will constrain investment spending,” it said. “Private consumption is likely to be hit by more sluggish earnings, higher levels of unemployment, the reduction in household and corporate wealth, and an increased desire to save in uncertain times.”

Asian governments and their counterparts around the world are spending hundreds of billions of dollars to protect their economies from the global financial crisis. Slowing inflation will allow the governments to boost growth through expansionary fiscal measures, the World Bank said.

China last month announced a $582 billion economic stimulus plan, while South Korea unveiled a 14 trillion won ($9.7 billion) package of extra spending and corporate tax breaks, adding to almost $20 billion in income-tax reductions announced in September.

“A number of countries in East Asia have some room to loosen policy, as fiscal positions have generally improved in recent years,” it said. “To ensure fiscal stimulus packages achieve their objective of generating demand and jobs in the domestic economy, such packages will need to be well-targeted and temporary in duration.”

‘Do Better’

The World Bank said developing East Asian economies will be more resilient during the slowdown compared with other emerging- market regions such as Latin America, which it projects will grow 2.1 percent next year.

“East Asia is expected to do better than the other developing regions in the world” by growing 4 percent to 5 percent in the next year, Vikram Nehru, the World Bank’s chief economist for East Asia, said in an interview with Bloomberg Television on Dec. 8. “That’s not spectacular, but still reasonably good.”

East Asia probably contributed to a quarter of global growth this year, and that may rise to a third next year, the World Bank said.

“The countries in the region will be better positioned to deal with the crisis to the extent that they are able to maintain macroeconomic stability, shift exports to faster growing regions in the world, substitute external with domestic demand, and continue with their structural reforms to strengthen competitiveness,” the report said.

The following table contains the World Bank’s revised growth estimates for 2008 and 2009:

=========================================================
                          November            April
                         Estimates           Estimates
                       2008     2009       2008     2009
=========================================================
East Asia                7.0      5.3        7.3     7.4
China                    9.4      7.5        9.4     9.2
Southeast Asia           5.2      3.8        5.6     6.0
Indonesia               6.0      4.4        6.0     6.4
Malaysia                5.5      3.7        5.5     5.9
Philippines             4.0      3.0        5.9     6.1
Thailand                3.9      2.0        5.0     5.4
Newly Industrialized
Economies                4.0      2.4        4.6     5.0
Hong Kong (SAR)         3.6      1.4        4.8     5.1
Singapore               2.5      1.2        5.2     5.9
South Korea             3.9      2.0        4.6     5.0
Taiwan (China)          3.7      2.5        4.3     4.6
Small Economies          6.3      4.7        6.4     6.1
Vietnam                  6.5      6.5        8.0     8.5
======================================================

To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net