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Credit crisis ‘unlikely to faze East Asia’

World Bank expects region to shrug off sub-prime woes, high oil prices to log in solid growth

THE sub-prime crisis in the United States is not posing a significant risk to East Asia‘s rapid growth, according to the latest World Bank forecasts.

 

The region is expected to expand by a solid 8.2 per cent on average next year, shrugging off the subprime fallout and high oil prices, said the bank’s half-yearly report released yesterday.

 

This is slightly lower than the 8.4 per cent growth rate projected for this year, following last year’s 8.3 per cent expansion. ‘The impact of the US sub-prime housing crisis and the renewed surge in oil prices have clearly increased downside risks,’ said Mr Milan Brahmbhatt, the principal author of the report. ‘Nevertheless, we expect that the stronger growth momentum in the region will carry through in 2008.’

 

In fact, the bank’s overall outlook for East Asia – spanning economies from China to Vietnam – has turned rosier over the past six months. This is despite sub-prime woes shaving a projected 1 percentage point off US growth next year, which could lead to waning appetites for East Asian-made imports in America and other rich countries.

 

One reason is that the region’s strong expansion has so far been driven by domestic, not external, demand. This is especially so in countries such as China and Singapore, which are experiencing investment booms. ‘It is worth noting that this year’s pickup in East Asia has occurred despite a substantial decline in US import growth, and some more modest slowing in the region’s own exports,’ said the report.

 

The bank does not believe the US will slide into a recession, but even if that does occur, the impact on East Asia will not be severe, it said. ‘A fall in US growth to, say, zero in 2008 – a 2 percentage point growth decline – might be accompanied by a 1 percentage point fall in median East Asian economic growth from around 6 per cent to 5 per cent – significant but no disaster,’ it said.

 But it did warn about the impact of soaring crude prices: ‘New highs for oil…will test the solidity of the East Asian and global economic expansions in 2008. ‘We calculate that an average oil price of US$90 in 2008 will be associated with an income loss in East Asia

of about 1.1 per cent of gross domestic product.’

 In its latest regional outlook, the International Monetary Fund (IMF) also highlighted the issue of rising food prices in economies such as China. The fund’s resident representative in Singapore, Dr Ranil Salgado, presenting the outlook yesterday, noted that inflation has picked up in Asia‘s newly industrialised economies as well as in China.

Furthermore, despite the run-up in global oil prices, China decided to raise its domestic oil prices only recently, with Malaysia and Indonesia likely to follow suit. Consequently, ‘there could be even more inflationary pressures than shown here’, he said.

The IMF predicts that Singapore‘s GDP growth this year will hit 7.5 per cent before easing to 5.8 per cent next year. ‘Assuming that credit markets gradually normalise, the fallout from the global financial turmoil should be manageable for emerging Asia owing to strong economic fundamentals and healthy corporate and banking sector balance sheets,’ noted the report.  Source: The Straits Times 16 Nov 07

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