Despite a less favorable external environment, the growth outlook for developing East Asia and Pacific (EAP) remains positive at 6.3% in 2018, according to the latest World Bank economic report on the region.
The growth outlook is lower than the 6.6% recorded in 2017 due to the continued moderation in China’s growth as its economy continues to rebalance, said Navigating Uncertainty, the October 2018 edition of the World Bank East Asia and Pacific Economic Update released October 4.
Growth among developing countries in the EAP region was resilient during the first half of 2018, and the regional economy grew by 6.4% in the second quarter. While the pace of growth was marginally lower than that observed in both the second half of 2017 and in Q1 2018, it was broadly in line with expectations, said World Bank.
The region remains a key driver of the global economy, accounting for about 29% of global growth.
The report underscores, however, that in recent months a combination of trade tensions, higher U.S. interest rates, a stronger U.S. dollar, and financial market volatility in many emerging economies has increased the uncertainty around the region’s growth outlook. At the same time, inflation has begun to rise across the region, particularly in Myanmar, the Philippines, and Vietnam.
“Robust growth has been and will continue to be the key to reducing poverty and vulnerability in the region,” said Victoria Kwakwa, World Bank vice president for East Asia and the Pacific.
“Protectionism and turbulence in financial markets can hurt the prospects for medium-term growth, with the most adverse consequences for the poorest and most vulnerable. This is a time for policy makers across the region to remain vigilant and proactively enhance their countries’ preparedness and resilience.”
China is expected to slow down moderately to 6.5% in 2018, after growing faster than anticipated in 2017. Growth in developing EAP, excluding China, is expected to remain stable at 5.3% from 2018 to 2020, driven primarily by domestic demand.
In Thailand and Vietnam, growth is expected to be robust in 2018 before slowing in 2019 and 2020 as stronger domestic demand only partially offsets the moderation in net export growth. Indonesia’s growth should be stable, thanks to improved prospects for investment and private consumption.
Growth in 2018 in the Philippines will likely slow, but the expected expansion of public investment will boost growth over the medium term. In Malaysia growth is expected to ease, as export growth slows, and public investment is lower following the cancelation of two major infrastructure projects.
In EAP’s smaller economies, growth prospects remain robust, averaging over 6% annually in Cambodia, Laos, Mongolia, and Myanmar between 2018 and 2020. Growth is expected to resume in Timor-Leste following the resolution of a political impasse, while in Papua New Guinea it is expected to rebound in 2019, following the large earthquake earlier this year. Growth in the Pacific Island countries is expected to remain relatively stable, although highly vulnerable to natural disaster shocks.
Heightened uncertainty has intensified the risks to the region, said the report, adding that an escalation in protectionism could have more severe impacts on the region’s growth prospects. If higher U.S. tariffs on Chinese exports weaken economic growth in China, there would likely be additional negative consequences for developing EAP exports to China, and global commodity prices.
“In an extreme scenario, a spillover of protectionist sentiment to investment would have more severe implications for regional—and global—growth,” said the paper.
Moreover, while rising protectionism and heightened financial market turbulence represent important risks in themselves, their combined impact would be much greater. Domestic vulnerabilities—such as elevated domestic debt and large external financing needs which persist for some countries in EAP—would amplify the impact of external shocks, especially where policy buffers are limited, prompting further capital outflows and dampening growth.
“The regional and global integration of most economies in the region intensifies their vulnerability to external shocks. The main risks to continued robust growth include an escalation in protectionism, heightened financial market turbulence, and their interaction with domestic fiscal and financial vulnerabilities,” said Sudhir Shetty, World Bank chief economist for the East Asia and Pacific region.
“In this context of rising risks, developing EAP economies need to utilize the full range of available macroeconomic, prudential, and structural policies to smooth external shocks and raise potential growth rates,” he added.