World Bank Sees Asian Recovery as Worst Over for China: Economy

The World Bank said growth in East Asia’s emerging nations will accelerate next year as China’s economy recovers, reducing the need for policy makers to cut interest rates.

Developing East Asia will probably expand 7.5 percent in 2012 and 7.9 percent in 2013, the Washington-based lender said in a report today, raising the forecast for this year from an October prediction of 7.2 percent. The region is expected to account for about 40 percent of global growth in 2012, it said.

“We see a bit of an uptick next year in part because of China’s recovery that is going on already,” Bert Hofman, World Bank chief economist for East Asia and the Pacific, said in a Bloomberg Television interview today. “We see most of the economies to be almost at full capacity, so further stimulus at this point wouldn’t make much sense, it would just result in higher inflation.”

The region still faces risks from Europe and the U.S., where spending cuts and tax increases are due to take effect in January if lawmakers don’t resolve a fiscal policy dispute, the World Bank said, even as recent reports showed a global recovery may be gathering momentum. Asian nations have loosened fiscal or monetary policies this year to protect growth, with rate cuts in China and Thailand and higher spending by Philippine President Benigno Aquino and Malaysian Prime Minister Najib Razak.

“We are pretty much already at the bottom of the rate-cutting cycle for most of the region,” said Enrico Tanuwidjaja, an economist at Royal Bank of Scotland Group Plc in Singapore. “The dynamics of inflation and growth for East Asia don’t warrant further easing.”

China Effect

The World Bank raised its growth prediction for emerging East Asia after third-quarter data showed government measures to support expansion in China gave “quite a boost” to the economy, and may continue to do so next year, Hofman told reporters in Singapore today. World trade has also improved since August, and the risks from Europe “are now considerably less than six months ago,” he said.

“We expect quarter four also to be good and that then feeds into a very strong next year and that lifts the region up as a whole,” he said in the interview. “Even outside China, domestic demand is driving growth in Indonesia, Malaysia, the Philippines, so there also growth is quite strong.”

China’s economy may grow 7.9 percent in 2012, compared with 9.3 percent in 2011, the World Bank said. Asia’s largest economy may expand 8.4 percent next year, and the country’s slowdown “appears to now have bottomed out,” it said. Growth in 2013 will be a result of a “combination of lagging effects of earlier monetary expansions, local government fiscal stimuli, accelerated approval of central investment projects, and an upswing in the business cycle,” according to the report.

Japan Recession

China has set its initial target for economic growth at 7.5 percent for a second year and tightened its inflation goal to the lowest level since 2010, two bank executives and a regulatory official said this month, asking not to be named as they weren’t authorized to disclose the details.

While Asia’s developing economies are expanding, Japan is in a technical recession. Its exports fell for a sixth month in November and the trade deficit swelled, data released today showed, underscoring the challenge that incoming Prime Minister Shinzo Abe faces in reviving growth.

Asian stocks advanced today and the yen weakened amid bets U.S. lawmakers will reach a budget deal and the Bank of Japan will add to economic stimulus. The MSCI Asia Pacific Index added 1.1 percent as of 6:14 p.m. in Tokyo, headed for its highest close since August 2011.

Elsewhere in Asia, Taiwan kept its benchmark rate unchanged for a sixth straight meeting, while Malaysian inflation held at the lowest in more than two years in November.

Receding Inflation

“Monetary policy stances in the region are largely appropriate in the current environment, in which negative shocks remain a dominant concern,” the World Bank said. “Receding inflation in most countries suggests that there is no need for immediate monetary tightening in the region in the absence of major shocks.”

In Europe, a report showed German business confidence rose more than economists estimated this month. The Bank of England will publish minutes of its December meeting where officials left their bond-buying program on hold as they assessed the need for more stimulus.

A report in the U.S. today may show housing starts fell to an 872,000 annual rate in November, while building permits, a proxy for future construction, probably rose to an 875,000 annual pace, according to Bloomberg surveys.

China has refrained from loosening monetary policy further since July even as Japan joined peers in the U.S. and Europe in expanding easing.

Taylor Rule

“Given China’s still significant fiscal space and the already accommodative monetary stance, the burden of any countercyclical response should fall on fiscal policy,” the World Bank said today.

The Taylor rule suggests that monetary policy is already “relatively relaxed” in Indonesia, the Philippines and Thailand, the World Bank said today. John Taylor, an economist at Stanford University, published in 1993 an interest-rate formula, which measures where a central bank should set its policy rate based on inflation and growth.

“Consequently, further easing may be constrained in these countries unless conditions change dramatically,” the World Bank said.

Policy makers should monitor short-term capital flows into their financial systems if liquidity in the global economy increases further amid renewed stimulus by the European Central Bank and the Bank of Japan, the lender said.

While a resurgence in capital inflows into the region hasn’t led to strong currency appreciation, such pressures may accumulate if the fund influx continues, it said.

“The bulk of the capital flowing into the region consists of foreign direct investments, which creates jobs and growth in production capacity,” Hofman said. “Nevertheless, monetary authorities should closely monitor developments in their capital accounts. Appropriate exchange-rate arrangements and capital-market development could provide a cushion against undesirable effects of capital inflows, while macro-prudential measures could guard against excessive credit growth.”

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