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Word Bank: East Asia Economies Resilient Amid Global ‘Deterioration’

The economic forecast for the East Asia and Pacific (EAP) region remains positive despite a “deterioration” in the external economic and geopolitical environment, according to a World Bank economic report released Thursday.

The region—which consists of key apparel and textile sourcing countries like China, Vietnam and Cambodia, as well as those with developing potential for the industry, like Myanmar, Indonesia and the Philippines—is expected to see growth reach 6.3% this year. That’s slightly below 2017 levels due to ongoing moderation in China’s growth as its economy continues to rebalance.

The World Bank’s October 2018 update, “Navigating Uncertainty,” stresses that in recent months a combination of trade tensions, higher U.S. interest rates, a stronger dollar and financial market volatility in many emerging economies has increased uncertainty in the region. In line with that, inflation has started to rise in the region, particularly in Myanmar, the Philippines and Vietnam.

“Robust growth has been and will continue to be the key to reducing poverty and vulnerability in the region,” said Victoria Kwakwa, vice president for East Asia and the Pacific at the World Bank. “Protectionism and turbulence in financial markets can hurt the prospects for medium-term growth, with the most adverse consequences for the poorest and most vulnerable. This is a time for policy makers across the region to remain vigilant and proactively enhance their countries’ preparedness and resilience.”

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Supported by strong consumption, growth in China’s gross domestic product remained resilient in the first half of 2018 at 6.8%. Growth is projected to moderate to 6.5% in 2018 and further to 6.2% percent in 2019-20 due to more moderate trade growth, weaker credit growth, greater investment uncertainty and rebalancing, according to the report, which said the ongoing trade and investment dispute between the United States and China poses some risk to China’s growth prospects and financial market stability.

Growth in developing EAP, excluding China, is expected to remain stable at 5.3% from 2018 to 2020, driven by domestic demand. In Thailand and Vietnam, robust expansion is seen for 2018 before slowing in 2019 and 2020 as stronger domestic demand only partially offsets a slowdown in net export growth, per the World Bank. Indonesia’s growth should be stable thanks to improved prospects for investment and private consumption, the report said, while the Philippines’ economy will likely slow, though the expected expansion of public investment will boost growth over the medium term.

Vietnam’s economy continues to perform well, propelled by the sustained global recovery and continued domestic reforms. “Despite improved short-term prospects, external and domestic risks and longer-term challenges remain,” the World Bank noted. “These include risks of global financial volatility and rising protectionism as well as domestic vulnerabilities associated with remaining banking sector weaknesses, elevated public debt and limited fiscal space, and subdued productivity growth.”

In the region’s smaller economies, growth prospects remain strong, averaging over 6 percent annually in Cambodia, Laos, Mongolia and Myanmar between 2018 and 2020. During the first half of 2018, Cambodia’s economy stayed strong, with garment exports reaching a two-year high. The Cambodian economy is expected to grow 7 percent in 2018, compared to 6.9% in 2017, thanks to upbeat investor sentiment and rising government spending.

Myanmar’s economy is forecast to weaken 6.2% GDP growth in 2018-19, brought down by seasonal flooding, rising production costs and slowing foreign direct investment (FDI) commitments. The implementation of the Myanmar Sustainable Development Plan and investor-friendly laws are expected to support a gradual economic recovery, but downside risks remain elevated from global economic uncertainty and the aftermath of the Rakhine crisis.

“The main risks to continued robust growth include an escalation in protectionism, heightened financial market turbulence and their interaction with domestic fiscal and financial vulnerabilities,” Sudhir Shetty, World Bank chief economist for the East Asia and Pacific region, said. “In this context of rising risks, developing EAP economies need to utilize the full range of available macroeconomic, prudential and structural policies to smooth external shocks and raise potential growth rates.”

The report recommends developing East Asian countries increase their commitment to an open, rules-based international trade and investment system, including through deeper regional economic integration. Regional economies also could benefit by deepening existing preferential trade agreements, it said, and lowering non-tariff barriers.