World Bank raises Asia forecast on back of China

World Bank raises Asia forecast on back of China

Beijing: The World Bank on Wednesday raised its forecasts for East Asian growth, largely due to a rebound in China driven by aggressive fiscal and monetary stimulus, but warned that a true recovery inthe region was not yet at hand.

In a twice-yearly review, the Washington-based development bank revised its projection of 2009 gross domestic product growth in East Asia to 6.7% from 5.3% and pencilled in an acceleration to 7.8% next year.

But stripping out China, the bank reckons the developing economies of East

Asia would grow by only 1.1% this year, picking up to 4.5% next year. That means growth in the region outside of China, despite government spending and steady performances by the likes of Indonesia and Vietnam, will be slower on average this year than in South Asia, the Middle East and North Africa.

“China’s rapid growth is not only pulling the region along; it is also having an impact on the global economy," said Vikram Nehru, the bank’s regional chief economist.

China, now the world’s largest auto market, was contributing more to global demand than either the United States, the euro zone or Japan, Nehru said by videolink from Washington.

The bank accordingly jacked up its growth forecast for China this year to 8.4% from 7.2% and said a further pick-up was likely in 2010 to 8.7%.

Nevertheless, the bank said it was too soon for China and other East Asian governments to start unwinding the ultra-loose pro-growth policies they put in place to cushion the global downturn. “The rebound has yet to become a recovery. That is why the authorities in the region are mindful of the risks of a premature withdrawal of stimulus, given the large output gaps and concerns that developed countries are converging to a slower-growth equilibrium," the bank said.

Gradual exit

When governments do start to tug on the reins, they should generally begin with monetary policy, the bank believes.

“Macroeconomic conditions in the real economy do not yet call for a major tightening," said Louis Kuijs, the World Bank’s senior economist in Beijing.

China is implementing a 4 trillion yuan ($585 billion) pump-priming package and has prodded the country’s mainly state-owned banks into what Kuijs described as a spectacular lending spree, equivalent to 30% of annual GDP.

“However, risks of asset price bubbles and misallocation of resources in the face of abundant liquidity are real and the overall monetary stance will have to be tightened eventually," he said.

The bank’s forecasts point to a sharp reduction in China’s current account surplus, one of the imbalances that will be uppermost in the minds of finance ministers from the Group of 20 rich and emerging economies when they meet in Scotland this week to discuss how to put the global economy on a more even keel.

The bank said it expected the surplus to shrink from 9.8% of GDP in 2008 to 5.6% this year, despite a sharp drop in import prices, as stronger domestic demand buoys import volumes.

The current account surplus will fall further to 4.1% of GDP in 2010 even though net exports will recover and contribute 0.4 percentage points to GDP growth after subtracting 3.4 percentage points from headline growth in 2009.

“Growth is likely to remain robust in 2010, but the composition will change," said Ardo Hansson, the bank’s lead economist in Beijing. Stronger real estate investment will also spur growth, but the impact of government stimulus spending is set to decline sharply, while spare capacity in China and abroad will put a lid on capital spending by manufacturers, the global lender said.

Excess capacity is one reason the bank expects Chinese inflation to remain tame, with consumer prices rising 2.0 percent on average in 2010 after falling 0.8% this year.

The bank reiterated its long-standing advice to China to put more emphasis on consumption and services, and less on investment and industry, in order to rebalance the economy and generate faster domestic growth.

All countries in East Asia must liberalise its services sector, Nehru added, and do even more to integrate their trade in goods if they want to sustain rapid growth over the medium term.