East Asia economies to slow further in 2012 – WB

MANILA, Philippines – Economic growth in the East Asia and Pacific region will continue to drop and will reach 7.6% in 2012 from 8.3% last year, the World Bank said on Wednesday, June 13.

In its latest Global Economic Prospects report, the Washington D.C.-based institution noted that economic growth in the region is “on a moderately easing trend” and will be slower before the global recovery lifts the demand for the exports that many Asian economies are dependent on.

“The recent deterioration in global financial conditions is expected to add to pre-existing headwinds, including relatively weak demand from the high-income world, and a slowing phase in China to moderate regional growth to 7.6% in 2012, before broader global recovery lifts exports and growth for the region in 2013 to 8.1%, easing to 7.9% in 2014,” said the World Bank in a statement.

“The after-effects of the 2008-2009 crisis have not yet played themselves out fully,” the bank said in a statement.

The World Bank recommended that developing countries should cut debt and deficits where possible.

Long period of volatility in the global economy

Developing countries like the Philippines “should prepare for a long period of volatility in the global economy by re-emphasizing medium-term development strategies, while preparing for tougher times,” the bank’s economists emphasized.

Europe remained the epicenter of the World Bank’s concerns after the region recently eroded the gains made during the first 4 months of the year, even before the massive bailout of the Spanish banking system.

“In the immediate term, tensions emanating from the euro area are the most serious potential risk for developing countries,” the economists highlighted.”If conditions in high-income Europe deteriorate sharply such that one or more countries found themselves frozen out of financial markets, global economic consequences could be severe.”

Developing countries are particularly at risk from markets jitters such as the downturn in crude oil and commodity prices, as well as the loss of value of their currencies against the U.S. dollar.

Investors are wary, and international capital has fled to safe-haven assets like German and US government bonds.

Volatile conditions

Nevertheless, the World Bank said that conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011, especially outside of Europe, Central Asia, the Middle East and North Africa.

Developing country credit default swap (CDS) rates, a key indicator of market sentiment, remain well below their maximums from the fall of 2011.

“Global capital market and investor sentiment are likely to remain volatile over the medium term – making economic policy setting difficult,” noted Hans Timmer, Director of Development Prospects at the World Bank.

Timmer added that “in this environment, developing countries should focus on productivity- enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment.”

Increased uncertainty

Increased uncertainty regarding the global economy will lead to even more budget cuts, banking-sector deleveraging, and developing country capacity constraints.

As a result, developing country growth will slow to 5.3% this year before it somewhat recovers and increases to 5.9% in 2013 and 6% in 2014.

But in developed countries the situation will be even wores: high-income countries nations will only grow at 1.4%, 1.9% and 2.3% for 2012, 2013 and 2014 respectively – and the GDP in the Eurozone area will decline 0.3% in 2012.

Overall, global GDP is projected to rise 2.5%, 3% and 3.31% for the same period.

The World Bank said that this “baseline scenario” is the most likely outcome, but if things in Europe get even worse, “no developing region will be spared” as they will either loose remittances from migrants workers like the overseas Filipino workers (OFW), tourism, commodity exports or short-term debt.

Prepare for the worse

Although they are doing now better than others, developing countries should put in place measures to mitigate the effect of a global economic meltdown spurred by Europe.

“Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance,” explained Andrew Burns, Manager of Global Macroeconomics and lead author of the World Bank report.

Burns said that “doing so will provide them (developing countries) with more leeway to loosen policy, should global conditions take a sharp turn for the worse.” – Rappler.com