World Bank Keeps Favorable Growth Outlook for East Asia and Pacific

[vc_row][vc_column][vc_row_inner][vc_column_inner][mk_fancy_title size=”35″ font_family=”none”]World Bank Keeps Favorable Growth Outlook for East Asia and Pacific [/mk_fancy_title][vc_column_text]

In the April 2018 edition of its East Asia and Pacific Economic Update, the World Bank is cautiously optimistic about economic growth outlook for East Asia and Pacific (EAP). After a better-than-expected global economy in 2017, growth in developing EAP is expected to remain stable in 2018, reflected by solid prospects in Thailand and several commodity exporters, notably Indonesia. Domestic demand is estimated to remain robust in most of the region’s economies and continue to underpin growth in 2018 and beyond. However, with economies operating close to their potential, price pressures are expected to rise.

Global economic growth was faster-than-expected in 2017, with a broad-based upturn. Growth increased in over half of economies across the world. In advanced economies, the growth recovery was led by strong investment. More rapid growth among emerging market and developing economies reflected recovery in commodity exporters and continued robust activity in commodity importers. This synchronous global recovery provided a substantial boost to manufacturing and trade growth.

Zooming in on economic growth outlook for East Asia and Pacific (EAP), the World Bank said growth in this region accelerated slightly in 2017, reflecting the favorable global environment. Regional growth was faster than earlier expectations, reflecting higher than expected growth in China, as well as in Malaysia, Thailand, and Vietnam. On the back of recovering commodity prices and a rebound in global trade and manufacturing, the EAP’s exports grew strongly last year.

Meanwhile, private consumption remained solid in EAP in 2017, as consumer and producer confidence generally improved. While investment growth in China continued to ease, it accelerated in the rest of the region last year, amid improved business sentiment. Fiscal deficits were generally smaller. Inflation remained subdued in most countries. Regional financial markets generally remained buoyant, while bond spreads have continued to decline. Net capital outflows have been contained, and currencies and asset prices have generally strengthened. In early 2018, however, financial volatility has increased in response to the prospects of faster monetary policy tightening in advanced economies and escalating trade tensions.

The growth outlook for East Asia and Pacific (EAP) in 2018 remains favorable despite China’s growth being expected to slow this year to 6.5 percent year-on-year (y/y) as the country’s economy continues to be rebalanced (including authorities’ greater focus on continuing the slowing of credit growth, further reducing excess capacity in some heavy industry sectors, and putting more emphasis on the quality of growth, including attention to environmental considerations).

Due to sliding Chinese growth, growth in developing EAP as a whole will ease to 6.3 percent (y/y) in 2018. Excluding China, however, growth in developing EAP is expected to remain stable in 2018, reflecting solid prospects in Thailand and some commodity exporters, notably Indonesia. Domestic demand will remain robust in most of the region’s economies and continue to underpin growth in 2018 and beyond. With economies operating close to their potential, price pressures are expected to rise.

Growth in the large ASEAN economies is expected to be robust and relatively stable in 2018. Indonesia and Thailand are expected to see slightly higher growth, reflecting improved prospects for investment and private consumption amid improved confidence. The Philippines will likely see growth remain at the same level, while continuing to be broad-based. In Vietnam and Malaysia, growth is expected to slow in 2018. In Vietnam, this reflects an adjustment following the strong rebound in agricultural production in 2017. In Malaysia, the slowdown in growth from its 2017 peak will be on account of the anticipated decline in public capital spending, which will be only partially offset by the continued expansion of exports and private investment.

Robust economic growth in the region has underpinned and will continue to contribute to poverty reduction and a decrease in economic insecurity. The incidence of extreme poverty in the region is now in the low single digit. The extreme poor are concentrated in a few lower-income countries and in remote locations within more affluent countries. Over the last 15 years, the share of the region’s population that is economically secure or middle class has tripled. Although this proportion will likely continue to rise with the prospects for continued growth, it remains a concern that almost a quarter of the region’s population – or about half a billion people – will still be economically insecure.

However, the World Bank sees two risks to this positive outlook for the region’s economies. First, a more rapid pace of US monetary policy tightening than is currently anticipated could increase volatility and exacerbate vulnerabilities. It is now clear that monetary policy in the USA will be progressively tightened over the course of 2018. What is uncertain is the pace at which this monetary tightening will proceed. The recent fiscal expansion in the USA, including due to the passage of the tax cuts and jobs act, may mean that the pace of US interest rate increases will be faster than currently anticipated. This could exacerbate the recent volatility in equity markets, with rising interest rates pushing bond yields higher, making them a more attractive alternative to equities. This instability could interact with existing financial sector vulnerabilities in many developing EAP economies.

Secondly, heightened policy uncertainty could dim the prospects for global growth. This uncertainty stems from two sources: (1) recent actions by the USA on trade and investment policies which could reverse the recent recovery in global international trade that is expected to contribute to the region’s continued growth. The USA has imposed tariffs on solar panels, washing machines, steel, and aluminum, and is in the process of levying tariffs on a range of imports from China. While these specific measures are expected to have only a limited impact on exports of developing EAP countries, including China, they raise questions about the future of US trade policy. These measures also risk retaliation and adoption of additional trade restrictions by other countries, some of which have already been initiated. Another source of uncertainty that could affect trade and investment flows in the region stems from geopolitical tensions, particularly in the Korean Peninsula and the South China Sea. Although these tensions have abated somewhat recently, any escalation could bring financial turbulence and disrupt regional supply chains.

Developing EAP countries will therefore need to be prepared to address the risks associated with monetary tightening in advanced economies and their possible interactions with domestic financial vulnerabilities. As advanced economies pursue monetary tightening, countries in the region may need to respond by increasing their policy rates and allowing some exchange rate depreciation to reinforce the current account balance and prevent sharp capital outflows. Countries could also look for ways to reduce their dependency on short-term, foreign-currency-denominated debt to respond to shifting global liquidity conditions. There is also a need to focus on strengthening financial sector oversight by improving data quality, introducing risk-based supervision, ensuring compliance with the latest international Basel standards, and setting up crisis management frameworks. Macroprudential regulation can also be a suitable tool to mitigate certain risks such as over-borrowing. Where fiscal buffers are limited, and public debt levels high or rising, it will be necessary to move toward a more conservative fiscal stance and improve public debt management.

In tandem, the prospects of moderating growth across the region in the medium term mean that countries will need to find ways of raising their long-term potential growth. This could include measures aimed at improving public spending and infrastructure provision, deepening trade integration and improving trade facilitation, implementing reforms to enhance competitiveness, and building human capital.

With the threats to the continued openness of the global trading system, it is advisable for developing East Asia and Pacific (EAP) to continue enhancing trade facilitation and integration. Developing East Asia and Pacific (EAP), as one of the regions participating more prominently in global trade, will need to keep removing barriers to trade and pursuing further integration. Thus, ensuring trade and investment policy coordination in the region and avoiding tariff escalation would be especially desirable at this juncture. Regional trade agreements and initiatives such as the ASEAN Economic Community, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Belt & Road Initiative, and the Regional Comprehensive Economic Partnership offer opportunities in this regard. Deeper trade integration and better trade facilitation will be even more important as countries in the region adapt to the emerging challenges of labor-saving technologies and automation, and the blurring of the lines between manufacturing and services.

Improving competitiveness will also be important as developing East Asia and Pacific (EAP) countries adjust to the ongoing changes in the manufacturing landscape. As labor costs become less important in determining firms’ location decisions, various elements of the business environment will become more significant in shaping the ability of countries to retain their positions in existing manufacturing activities or in moving up into high-skill and medium-skill industries over time.

Increasing the contribution of education to economic growth will require increasing the effectiveness of schools and education systems. This will require action in the following five main domains so as to raise learning outcomes and the quality of human capital:

(a) aligning institutions and creating sound administrative systems to ensure basic conditions for learning;
(b) concentrating equitable public spending on primary education;
(c) increasing teaching accountability, raising selectivity in recruitment, and providing adequate pay and career prospects;
(d) providing a key package of services (for example, health coverage for children of preschool age) that can help ensure children’s physical and cognitive development, thus raising readiness to learn; and
(e) adopting a systemic approach to assessment and using feedback to inform instruction.

As technologies continue to evolve, including with greater automation, more emphasis will be needed on upgrading capabilities and ensuring that workers and managers have the necessary skills. Basic numeracy and literacy, as well as familiarity with digital technology, will be important, as will access to higher-quality tertiary education. To ensure that improved production technologies diffuse across firms, it will also be necessary to implement measures that help firms improve their basic managerial and organizational practices so that they can use and adapt new processes.

To provide economic security, more focus will be needed on strengthening social assistance and insurance programs and on increasing resilience to systemic shocks. Social assistance programs can be strengthened, particularly in lower-income countries with less capacity, by introducing cash transfer programs and improving targeting. Expanding the coverage of measures, such as pensions, that help households insure against idiosyncratic risks and ensuring their sustainability can help strengthen social insurance schemes. Resilience to systemic shocks can be increased by instituting country-level risk management mechanisms to manage risks ex ante or cope with their impacts ex post.

[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row][vc_column][mk_padding_divider][vc_row_inner][vc_column_inner][vc_column_text]Source Article:

https://www.indonesia-investments.com/news/news-columns/world-bank-keeps-favorable-growth-outlook-for-east-asia-pacific/item8728

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