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Developing economies tipped to gain as global growth rises

World Bank report puts global growth at 3% this year
Tuesday, April 8, 2014 - 06:00

THE World Bank, noting that developing economies in East Asia have so far successfully navigated their way through the straits of tightening global liquidity, is confident that they will continue doing so.

In a report which could be a salve to markets and policymakers, it said that, following several years of subdued performance, global growth is projected to accelerate to 3 per cent this year from 2.4 per cent last year, and to continue expanding both next year and in 2016.

The latest East Asia Pacific Economic Update said that this stronger global growth "will help most developing East Asia Pacific countries grow at a steady pace while they adjust to tighter global financial conditions". The tailwinds from improving global trade will offset the headwinds from the tightening of global financial markets, it added.

The report may thus allay concerns that the monetary "tapering" by the US Federal Reserve could be a serious dampener on Asia and other developing regions of the world, although the World Bank warned that there is no room for complacency and that policy reforms need to continue throughout the region.

"Developing countries of the East Asia and the Pacific region successfully navigated the stalled global economic recovery in the first half of 2013 and the expectations of a scaling back of quantitative easing in the second half, to grow by 7.2 per cent in 2013 - only marginally lower than the 7.4 per cent in 2012," said World Bank.

"Growth is expected to remain at 7.1 per cent in 2014 as well as in 2015 and 2016."

These forecasts are similar to those made last week by the Asian Development Bank, which had suggested that growth in the developing economies of Asia as a whole should accelerate slightly this year and the next.

The bulk of growth in the developing economies of East Asia last year was attributable to China, which grew at 7.7 per cent last year, matching the rate in 2012 and exceeding the government target of 7.5 per cent, the World Bank noted in its report.

Growth in China is expected to decrease marginally to 7.6 per cent this year and to 7.5 per cent next year.

Meanwhile, the larger economies within Asean are operating close to potential and facing tighter global financial conditions and higher levels of household debt, the World Bank said.

"In 2014, growth is expected to slow in Indonesia (to 5.3 per cent) and the Philippines (to 6.6 per cent), remain unchanged in Thailand (3.0 per cent) and accelerate modestly in Malaysia (4.9 per cent)."

No forecast was made for Singapore, which is not classified as a developing economy.

After deteriorating in the first half of last year, the trade and current account balances of several East Asia Pacific countries have improved on the back of rising external demand and weaker currencies, the World Bank noted.

In addition, foreign direct investment flows into the regions have remained robust, enabling them to offset portfolio outflows associated with the scaling back of the quantitative easing programme by the US.

"They have also further accumulated reserves to insure against temporary trade and external financial shocks."

The World Bank added that recent developments have reinforced the importance of having a flexible exchange rate regime to defend against external shocks, including capital flow reversals.

While credit growth has started to slow down, the legacy of past credit booms remains a concern, especially among the region's larger economies, including China, it said.

The authorities in some large economies have employed macro-prudential measures to contain the risks arising from an asset price boom, including in the real estate market, the World Bank noted.

"China's priority is to further reduce total credit growth in the economy, which is still well above nominal Gross Domestic Product growth.

"There are modest fiscal consolidation efforts underway in several countries, with an emphasis on rationalising fuel and rice subsides, although more needs to be done to rebuild policy buffers and create space for priority spending."

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