Growth to Slow in E Asia and Pacific in 2012, but Domestic Demand Will Play Key Role in Rebound Next Year

Economic growth in the East Asia and Pacific region may slow down by a full percentage point from 8.2 percent in 2011 to 7.2 percent this year, before recovering to 7.6 percent in 2013. Growth in developed countries will remain modest, with recovery in the region to be driven mainly by strong domestic demand in developing countries, said the World Bank in its East Asia and Pacific Economic Data Monitor, released today.

The new report says that weak exports and lower investment growth will cut down China’s GDP growth from 9.3 percent in 2011 to 7.7 percent this year. In 2013, however, China’s growth is expected to rebound to 8.1 percent as the impact of stimulus measures kicks in, supported further by an uptick in global trade.

“The East Asia and Pacific region’s share in the global economy has tripled in the last two decades, from 6 percent to almost 18 percent today, which underscores the critical importance of this region’s continued growth for the rest of the world,” said World Bank Group President Jim Yong Kim.

“Even under difficult global circumstances, poverty in the region will continue to decline, with the share of people living on US$2 a day expected to reach 24.5 percent by the end of 2013, down from 28.8 percent in 2010,” said Pamela Cox, World Bank East Asia and Pacific Regional Vice President. “Weaker demand for East Asia’s exports is slowing the regional economy, but compared to other parts of the world, it’s still growing strongly, and thriving domestic demand will enable the region’s economy to bounce back to 7.6 percent next year.”

The report cites reconstruction spending in Thailand after last year’s floods as among the factors buttressing domestic demand in the region. In addition, countries like Indonesia – together with Thailand and Malaysia – are currently enjoying a boom in spending by their governments and the private sector on capital goods.

In China, the growth of domestic demand in real terms has come down from last year, and GDP growth in the second quarter grew only by 7.6 percent compared to a year ago. Investment growth has slowed in particular, driven by last year’s measures to rein in investments in real estate, the report says. However, relaxation in monetary policy earlier this year and local and central government stimulus measures could again reverse this trend in months to come.

The report notes that tensions in the Eurozone have eased following the European Central Bank’s announcement to defend the euro in July and the launch of its bond-buying program that significantly calmed the markets. Also, the recent announcements by the United States Federal Reserve regarding a new round of quantitative easing to help stimulate the American economy, has helped revive the global equity markets.

However, the report says that considerable downside risks remain. Should conditions in Europe deteriorate sharply, the risks are high that developing economies might be affected. A crisis in the Eurozone will adversely affect the economies in the East Asia and Pacific mainly through trade and links to the financial sector. The report considers food price increases less of a risk for East Asia at this stage, as rice markets remain well supplied.

Policy makers in the East Asia and Pacific Region will have to continue managing growth and reducing poverty in an environment that will remain volatile, the report says. Countries that have experienced rapid expansion of credit need to be cautious, while exporters of commodities should continue to take measures and build institutions that help manage volatile commodity revenues.

“Over the medium-term, increases in productivity in the East Asia and the Pacific, which is increasingly becoming a middle income region, will drive growth. Continued structural reforms, improvements in the business climate and investments in infrastructure and education systems will become more important, said Bert Hofman, World Bank Chief Economist for East Asia and the Pacific.