World Bank lowers East Asian growth forecast for 2024 due to trade and debt concerns.
Economic growth in East Asia and the Pacific is expected to be the weakest in decades next year, according to a new report from the World Bank.
In its semi-annual economic outlook for the region, the institution estimates that growth in developing East Asia and the Pacific is projected to be 5 percent in 2023, higher than the average growth rate expected in other emerging markets and developing economies but unchanged from the initial estimate.
The regional economy is then anticipated to slow to 4.5 percent next year, down from the April projection of 4.8 percent.
Growth in China is slated to be 4.4 percent, driven by “persistent domestic difficulties” such as high debt, weakness in the property sectors, and “structural factors.”
But expansion in the rest of the region is estimated to be 4.7 percent in 2024 “as recovery in global growth and easing of financial conditions offsets the impact of slowing growth in China and trade policy measures in other countries.”
“The East Asia and Pacific region remains one of the fastest growing and most dynamic regions in the world, even if growth is moderating,” said World Bank East Asia and Pacific Vice President Manuela V. Ferro in the report.
“Over the medium term, sustaining high growth will require reforms to maintain industrial competitiveness, diversify trading partners, and unleash the productivity-enhancing and job-creating potential of the services sector.”
At the same time, this forecast is a downgrade from the previous estimates and is the slowest in five decades, excluding the Asian financial crisis in the 1990s and the CCP (Chinese Communist Party) virus pandemic.
The World Bank fears that this outlook has downside risks, including more geopolitical tension and extreme weather events.
Threats to EAP Growth
Three components leave the developing Asian economies vulnerable to sluggish growth: Softer global trade, industrial competitiveness, and growing debt.
Over the past 12 months, exports have eased considerably from China, Indonesia, Malaysia, and Vietnam.
In Beijing, for example, exports have fallen for six of the past eight months, including a 14.3 percent decline in July.
U.S. industrial and trade policies inside President Joe Biden’s Inflation Reduction Act and the CHIPS and Science Act have worsened conditions in this part of the world.
With the federal government showering domestic and foreign companies with hundreds of billions of dollars in subsidies like tax credits and grants, businesses are bolstering operations in the United States by reshoring or nearshoring away from China.
Recent data by the Reshoring Initiative found that U.S. companies are on track to post a record number of hires in manufacturing, with approximately 360,000 positions.
“We encourage the United States to become competitive on all tech levels to balance the trade deficit and employ a broader range of workers,” the lobby group said.
Still, the U.S. manufacturing sector remains in a recession, while Chinese factory activity returned to expansion territory in September for the first time since March.
That said, there is a contrast between the world’s two largest economies, as the United States is posting better headline data than China.
Corporate, Household Debt Up
Debt—government, corporate, and household—as a share of gross domestic product has risen exponentially over the past decade in many East Asian and Pacific countries, the World Bank’s report notes.
“Corporate debt too has increased significantly in China and Vietnam by more than 40 percentage points of GDP since 2010, and now exceeds the level in advanced economies,” the World Bank states.
“And household debt is now significantly higher in China, Malaysia, and Thailand compared to levels in other emerging markets.”
Toshiro Nishizawa, a professor at the University of Tokyo’s Graduate School of Public Policy, believes China is facing significant “debt distress” due to lending under the Belt and Road Initiative (BRI).
While Beijing has diminished its lending efforts in recent years due to borrowers’ challenges, it still faces “the risk of being debt-trapped.”
“China should release itself at an early stage from the risk of being debt-trapped,” Mr. Nishizawa wrote for the East Asia Forum last month. “Otherwise, it may make the same mistake that Western creditors made and eventually lose its financial claims.”
Federal Reserve policy is another challenge for East Asian and Pacific states like Indonesia.
The U.S. central bank’s quantitative tightening has pushed up global bond yields and has applied pressure on the Indonesian rupiah, says Nichola Mapa, a senior economist at ING.
“A weaker currency could exacerbate imported inflation pressures which in turn could dent household consumption should headline inflation accelerate past BI’s inflation target,” wrote Mr. Mapa in a research note that cites Bank Indonesia (BI).
“A potential Fed rate hike could prompt BI to hike its own policy rates, which could sap even more momentum from flagging bank lending.”
A stronger greenback has hurt Asian currencies and economies, forcing businesses and consumers to pay more for dollar-denominated commodities.
The U.S. Dollar Index (DXY), a measurement of the buck against a basket of currencies, has surged 3.3 percent so far this year.
Brief Look at Asian Markets
Asian financial markets have been mixed in 2023.
Year-to-date, the Shanghai Composite Index is up 0.7 percent, while the Hang Seng Index has plunged more than 12 percent.
Indonesia’s JSX Composite Index is up about 1 percent this year, and Singapore’s FTSE Straits Times Index has slumped by close to 2 percent.
What is the impact of Covid 19 pandemic to the tourism industry in the national capital region?
Travel restrictions, border controls and stringent community lockdowns imposed by the government as a result of the COVID-19 pandemic have halted the growth of the country’s tourism industry. After 11 years of consecutive growth, the tourism direct value added (TDGVA) declined by 61.2% to P973. , Victoria Kwakwa. “However, the COVID-19 pandemic has exposed vulnerabilities in the region’s economies, including its heavy reliance on external demand, the impact of declining tourism and travel, and the need for investment in human capital and resilience to climate change.”
The report highlights several key challenges that the region is facing. One of the major challenges is the high levels of debt in some countries, particularly in China, which is a result of increased borrowing to stimulate economic growth. This high debt level poses a risk to the stability of the financial system and could potentially lead to a financial crisis.
In addition to the debt issue, the region is also grappling with weakness in the property sectors, which is a significant contributor to China’s sluggish growth. The property sector has been facing challenges such as oversupply, tightening regulations, and a slowdown in the real estate market. These issues have dampened investment and consumer spending in the sector, leading to a decline in economic growth.
Furthermore, the report emphasizes the impact of structural factors on the region’s growth. These structural factors include an aging population, lack of innovation, and limited technology adoption. These factors hinder productivity growth and limit the region’s potential for economic expansion.
Despite these challenges, the report suggests that there are opportunities for the region to maintain strong growth. The recovery in global growth and easing of financial conditions are expected to offset the impact of slowing growth in China and trade policy measures in other countries. The region’s strong domestic demand, particularly in countries such as Vietnam and the Philippines, as well as continued investment in infrastructure and human capital development, can also contribute to sustained economic growth in the region.
To address the challenges and seize the opportunities, the report suggests that policymakers in the region should prioritize structural reforms to enhance productivity and innovation. This includes investing in research and development, promoting entrepreneurship and innovation, and improving the business environment to attract investments. Additionally, there is a need for continued investment in education and skills development to equip the workforce with the necessary skills for the future.
In conclusion, while economic growth in East Asia and the Pacific is expected to be the weakest in decades next year, there are opportunities for the region to maintain strong growth. Addressing the challenges and implementing necessary reforms will be crucial for the region to navigate the current economic environment and ensure sustained and inclusive growth in the future.
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