World Bank flags China risk to Asian economies

Tokyo

WITH China's growth expected to slow further this year, even as some other major emerging markets remain in recession, global growth will depend critically upon continued strength in the advanced economies, the World Bank said in its flagship report on Wednesday.

Its latest Global Economic Prospects report identified India as a bright spot among emerging economies, but noted that the picture was darker for other emerging economies such as Russia and Brazil, which remain in recession.

Global economic activity should pick up modestly to a 2.9 per cent this year, from 2.4 per cent in 2015, but the report said that a further slowdown in China, combined with a more protracted deceleration of activity in other large emerging markets, could put this scenario in question.

Other downside risks will come from persistently subdued growth in major high-income countries, heightened geopolitical tensions and the monetary policy tightening cycle in the United States.

But the World Bank stressed that China was a critical factor in the performance of the global economy. "For policy-makers in China, a key short-term challenge is to rebalance the economy towards a more consumption- and services-based growth model while limiting financial vulnerabilities."

The report pointed out that countries in East Asia and the Pacific are deeply integrated with the global economy and with each other, and that China had become the largest trading partner and source of foreign direct investment for the region.

"Reflecting this integration, a growth slowdown in China could result in sizeable spillovers to many countries in the region. Slowdowns in other major advanced economies outside the region could also have sizeable spillovers."

World Bank chief economist Kaushik Basu said: "Global economic growth was less than expected in 2015, when falling commodity prices, flagging trade and capital flows and episodes of financial volatility sapped economic activity.

"Firmer growth ahead will depend on continued momentum in high-income countries, the stabilisation of commodity prices, and China's gradual transition towards a more consumption and services-based growth model."

The report said that Beijing's policies, aimed at rebalancing growth and reducing debt in some sectors of the economy, contributed to an easing of growth to 6.9 per cent in 2015, down from 7.3 per cent in 2014; growth in the world's second largest economy is expected to slow further to 6.7 per cent in 2017.

By contrast, growth in South Asia rose to 7 per cent in 2015 from 6.8 per cent in 2014 - the fastest growth rate among developing regions; within the region, India is on track to maintain a 7.3 per cent growth rate in fiscal 2016.

Meanwhile, growth in East Asia and the Pacific as a whole is projected to slow to 6.3 per cent in 2016; the rest of the region outside China expects growth to accelerate modestly in 2016 to 4.8 per cent.

"The region is expected to benefit from the strengthening recovery in advanced economies, low energy prices, improved political stability and continued favourable conditions in global financial markets, despite the anticipated monetary policy tightening in the United States."

Slowing growth in China is expected to offset a modest pickup in growth among members of Asean (the Association of South-east Asian Nations) this year, said the report.

Growth in Indonesia is projected to pick up to 5.3 per cent in 2016 from 4.7 per cent in 2015, provided reforms are implemented to encourage investment and boost productivity. Growth in Malaysia could slow to 4.5 per cent in 2016 from 4.7 per cent on slowing domestic demand.

Growth in Thailand is expected to slow to 2 per cent in 2016 from 2.5 per cent in 2015, as high household debt holds back consumption and export growth is subdued. Growth in the Philippines is expected to accelerate to 6.4 per cent in 2016 from 5.8 per cent in 2015.

Meanwhile, Vietnam is projected to grow at a faster 6.6 per cent from 6.5 per cent in 2015 due to rapid investment growth, consumption growth and export growth.