East Asia faces uncertainty, slower 2008: World Bank

East Asia faces challenging times in 2008 as falling exports and reduced business spending result in slower economic growth at a time when rising food prices push up inflation rates, the World Bank said. In its semi-annual report released on Tuesday, the World Bank predicted 7.3 percent growth for East Asia, excluding Japan. Developing Asia, which also excludes Singapore, Hong Kong, South Korea and Taiwan, would expand 8.6 percent, which will be its lowest growth rate since 2002, and down from 10.2 percent in 2007, the fastest pace since the early 1990s. Given the high level of uncertainty about the global outlook, spawned by the U.S. subprime mortgage financial turmoil, the World Bank said it was assuming a range of outcomes for the external environment in making these forecasts. It assumes the U.S. economy could grow anywhere between 0.5 and 1.4 percent this year, down from 2.2 percent in 2007. The Eurozone could see growth in a 1.3-1.7 percent range, compared with 2.7 percent in 2007. The World Bank predicts China's growth would dip below 10 percent in 2008 after five years of double-digit rates. "The near-term outlook for the region will depend to a large extent on the robustness of domestic demand in the face of slowing exports," the World Bank said. Exports to markets outside the United States and domestic demand had propped up Asia in the latter half of 2007, it said. Private consumer spending picked up and business spending was strong in China, Indonesia and Vietnam. While business investment spending could slow this year, it could prove more resilient than in the 2001 recession, due to higher levels of capacity utilisation and stronger corporate balance sheets, it said. Moreover, domestic banks appeared to have had minor exposure to the subprime mortgage crisis and credit flows remained healthy despite the volatility in equity and bond markets. "Current account surpluses and large foreign reserves should provide a buffer that will enable economies to accommodate volatility in international capital flows without forcing the kinds of sudden large adjustments in domestic demand that became inevitable during the 1997-98 financial crises," the bank said. It said that in 2007, net current account surpluses totaled close to 9 percent of regional GDP, while net capital inflows were worth an additional percentage point of regional GDP. Limited spillover The World Bank said Asia's export growth seemed to be either gradually easing, or even recovering in parts, unlike in 2001 when a U.S. downturn caused export momentum to plunge, and that supported the case for a soft landing for the region. While regional equity markets had succumbed to the risk aversion and financial turbulence in U.S. markets and offshore financing costs had increased, domestic credit terms remained unaffected, it said. Exports to the United States as a share of East Asia's purely extra-regional exports have fallen from 34 percent in 1999 to 29 percent in 2006, it said. "Nevertheless, past experience shows that underlying deterioration in bank asset quality can remain obscured during a period of fast growth such as East Asia has experienced in recent years," it warned. It also said the spillovers from the credit market turmoil onto the East Asian financial sector would need to be closely monitored and re-evaluated as the turmoil intensifies and spreads to an increasingly wider classes of assets. Inflation risks But the bigger challenge for Asia would be managing rising inflation in economies already showing signs of over-heating and excessively rapid credit growth, the World Bank said. Rising food and fuel prices have driven inflation to a 26-year high in Singapore, nearly 14-month high in India and highest in more than a decade in Hong Kong and China. The World Bank said Asia needed to continue its move towards more flexible exchange rates, so it can make better use of monetary policy to tackle inflationary pressures. But it also warned that food comprised a larger share of consumption in developing countries than in the developed world. In East Asia, that ranges between 31 and 50 percent, it said. "Other things being equal, the surge in food prices is therefore likely to increase poverty in the low and lower middle income countries of the region, although against that must be set the poverty reducing impact of continued robust economic growth."