World Bank cuts the growth outlook of East Asia citing China slowdown

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The World Bank has again downgraded its East Asia-pacific growth rate, stating the slowdown in china, weaker commodity process and the prospects of tighter external financing conditions as some of the reasons.

The 2015, 2016 and 2017 growth projection for the East Asia-pacific is downgraded to 6.5, 6.4 and 6.3 percent on Monday. The previous prediction in April of 6.7 percent growth for both 2015 and 2016 and 6.6 percent in 2017, and the April predictions themselves were trimmed from a previous forecast.

East Asia-pacific region which grew 6.8 percent last year comprises of 14 nations including China, Indonesia, Malaysia, Thailand, Vietnam and Philippines.

The Washington-based lender said “Growth in developing East Asia and Pacific is expected to ease,” in the report.

The report added, “China’s economy will shift to a more balanced and sustainable growth path. In the rest of the region, growth conditions will depend on the exposure of countries to accelerating demand in high-income economies, gradually tightening external financing conditions, and still-subdued international commodity prices.”

The World Bank expects that China to meet its annual gross domestic product or GDP growth target of about 7 percent this year, with economic expansion set to moderate thereafter as investment growth decelerated on the bank of tighter credit and more subdued property sector conditions.

The updated report projects China will grow 6.9 percent this year, before slowing to 6.7 percent and 6.5 percent in the following two years. This is down from its previous forecasts in April of 7.1, 7 and 6.9 percent growth respectively.

A greater-than-expected slowdown would have gave repercussions for the rest of the region given the countries tight trade and financial links.

The World Bank said, “The key trade effects would be mediated through developments in commodity prices, exports of non-commodity merchandise to China, and receipts from Chinese tourists. Financial spillovers would arise through a decline in outward FDI [foreign domestic investment] from China and an increase in volatility.”

Higher U.S. interest rates also pose a risk for the region as this could impact the cost and availability of external financing for the region.

The report said, “There is a risk that the U.S. policy rate ‘lift-off’ will trigger abrupt market reactions, causing currencies to depreciate sharply, bond spreads to rise steeply, capital inflows to fall sharply, and liquidity to tighten, as occurred during the 2013 ‘taper tantrum’.”

Southeast Asian economies are expected to grow 4.3 percent in 2015, roughly stable from the previous year, before rising to 4.7 percent next year and 4.9 percent in the year after. However, the outlook is mixed.

Among the large Southeast Asian nations, growth conditions will be most buoyant in the Philippines and Vietnam, the World Bank said. The whole outlook was less optimistic for Thailand, Malaysia, and Indonesia.

Weak global commodity prices continue to dim the prospects for business profits and household incomes in Indonesia and Malaysia. In Thailand, political uncertainty will show its effects on private investment, while high levels of household debt will hurt private consumption.

For most of the smaller economies, such as Mongolia, Cambodia and Laos, the report indicated a stable growth or slower in 2015, before picking up again in the next two years.

“Mongolia’s adjustment to the end of the mining boom is expected to continue, with only moderate economic recovery on the back of weakening mineral exports and fiscal consolidation,” it said.

“Weak agricultural output will weigh on GDP growth in Cambodia and especially Myanmar, following the severe monsoonal floods in July 2015. Growth in Lao PDR will remain buoyant, helped by new power projects, though trade and investment activity may be adversely affected by subdued economic conditions in neighboring Thailand,” it added.

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