April 7 (Bloomberg) -- Developing East Asian economies will grow slower than forecast this year as China’s expansion moderates and political upheaval weighs on Thailand’s outlook, the World Bank said.
China will expand 7.6 percent this year, down from 7.7 percent projected in October, while Thailand will grow 3 percent, 1.5 percentage points lower than seen six months ago, the World Bank said in its East Asia and Pacific Economic Update released today. Developing East Asia is forecast to grow 7.1 percent in 2014, down from 7.2 percent seen in October, it showed.
Even so, the region’s expansion will be underpinned by a recovery in high-income economies and the market’s modest response to the Federal Reserve’s tapering of its quantitative easing program to date, the report showed. It said “structural reforms” are key to reducing vulnerabilities and enhancing the sustainability of long-term growth in the region.
“China has already begun a series of reforms in finance, market access, labor mobility and fiscal policy to increase the efficiency of growth and boost domestic demand,” the World Bank said in a statement. “Over time, these measures will put the economy on a more stable, inclusive and sustainable footing. Some initiatives that the government has already announced, such as tax reform and lowering barriers to private investment, may also spur growth in the short term.”
Risks to Forecast
Bert Hofman, chief economist of the World Bank’s East Asia and Pacific region, said risks include a slower-than-expected recovery in advanced economies, a rise in global interest rates and increased volatility in commodity prices because of recent geopolitical tensions in eastern Europe.
On China, successful reforms could bring considerable benefits to trade partners supplying it with agricultural products, consumption goods and modern services, the World Bank said. “Conversely, spillovers from a disorderly rebalancing in China could hurt regional and global growth, especially in countries relying on natural resource exports,” it said.
China is Australia’s biggest trading partner and the island-nation’s economy is transitioning from a mining investment boom to higher resource exports as increased supply comes online.
In past quarters, domestic demand, particularly investment, has weakened in Indonesia and Malaysia, reflecting tighter credit, higher debt servicing costs, ongoing fiscal consolidation, reduced profits from commodities and higher import costs due to weaker currencies, the World Bank said.
“In Thailand, implementation delays and political uncertainties have been the major contributors” to its slowdown, the Washington-based organization said.
Hundreds of thousands of protesters in Thailand began street rallies in late October, calling for Prime Minister Yingluck Shinawatra to quit and allow electoral rules to be rewritten to erase the political dominance of her family.
The World Bank said the global economic recovery “remains on track.” The report assumes 3 percent growth in the world economy this year and 3.3 percent in 2015. Growth in high-income economies is assumed to accelerate to 2.1 percent this year and 2.4 percent next year, it said.
Forecasts were updated from a January report following new data, “which show a weaker first quarter for the U.S., and weaker second-half 2013 for Japan,” Hofman said by e-mail.
“With the global policy cycle shifting, maintaining macroeconomic stability will remain high on the agenda,” the World Bank said. “Recent developments have reinforced the importance of having a flexible exchange rate regime to defend against external shocks, including capital flow reversals. While credit growth has started to decelerate, the legacy of past credit booms remains a concern, especially among the region’s larger economies, including China.”
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