World Bank cuts growth forecasts

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by Chris Becker

The World Bank just released its East Asia Pacific Economic Update (link here), reducing almost across the board its forecasts for growth in the most dynamic region of the global economy.

They specifically target China’s structural rebalancing as the reason for its downgrade of growth to 7.4% for 2014 and 7.2% next year, and hint at the possibility of a sharp slowdown in China. Although their risk management suggestions place too much emphasis on monetary and fiscal stimulus, and too little on structural reform.

Linking the acceleration of growth in the region, on the back of exports, to increased demand from “high-income economies” should read as, “let’s hope the US economic recovery continues”.

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More from the report:

  • Overall, developing countries in East Asia Pacific will grow by 6.9% this year and in 2015, down from 7.2% in 2013.
  • Excluding China, developing countries will grow at 4.8% this year, before rising to 5.3% in 2015, as exports rise and domestic adjustment in the large Southeast Asian economies is completed.
  • China, Vietnam, Malaysia and Cambodia are well positioned to increase their exports. Malaysia, for example, will grow by 5.7%, up from 4.9% in April, reflecting robust exports in the first half of the year.
  • In Indonesia, which still relies on exporting commodities, growth will drop to 5.2% this year from 5.8% in 2013. That’s because of falling commodity prices, lower-than-expected government consumption and slower credit expansion.
  • The region’s economies are supported by robust private consumption, such as election-related spending in Indonesia, a strong labor market in Malaysia, and remittances in the Philippines.

On China’s rebalancing, the Bank is adamant about structural reforms taking precedence over stimulus:

  • In China, as the government seeks to strike a balance between containing growing risks and meeting growth targets, we believe structural reforms in sectors previously reserved for state enterprises and services could help offset the impact of measures to contain local government debt and curb shadow banking.
  • In the long run, we encourage countries to carry out structural reforms needed to boost their export competitiveness and maximize the benefits from the global recovery.
  • Key reforms include infrastructure investment, logistics, and the liberalization of services and foreign direct investment.
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It also kept to a 2.6% world GDP target for this year, averaging 3.3% until 2017, but this medium term view is still dependent on rebalancing a post-GFC stimulus goosing:

“In this uncertain global environment, there is still a window of opportunity to enact critical, and in some cases overdue, reforms. The short-term priority in several countries is to address the vulnerabilities and inefficiencies that have been created by an extended period of loose financial conditions and fiscal stimulus.”

Pray tell which central bank or indeed, which politician will put their hand up to stop the printing press?

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