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World Bank sees robust East Asia growth next year

But if oil prices hit new highs, region’s resilience will be tested, it cautions



THE East Asian economies will continue to see robust growth next year despite a likely US slowdown, but new highs for oil prices will test the region’s resilience, says the World Bank.


The bank has, in its latest East Asia & Pacific Update, raised its growth forecasts for emerging East Asian economies in 2007 and next year, despite heightened downside risks to global growth from financial turmoil and soaring oil prices.


‘We expect the stronger growth momentum in the region to carry through 2008,’ says Milan Brahmbhatt, principal author of the report. The bank’s optimism stems from a sharp spurt in East Asia’s growth in the first half of this year, and its confidence that the region’s domestic demand is strong enough now to offset a slowdown in exports.


Emerging East Asian economies are projected to grow at a robust 8.4 per cent overall in 2007 – the fastest pace in three years – and to moderate only slightly to 8.2 per cent next year. Its forecasts see the Singapore economy growing 7.4 per cent this year, and 6.4 per cent in 2008.


Even if the US falls into recession as a result of the sub-prime mortgage crisis and growth there plunges to zero in 2008, that should shave only one percentage point off the median growth of emerging East Asian economies, the bank says.


But rising oil prices are a key risk. The bank’s growth forecasts for 2008 are based on an assumption that oil prices will average US$70 a barrel next year. But if they stay at around US$90, this could shave a further one percentage point off growth projections, it says. Thus far, even though oil prices have more than doubled over the last three to four years, the impact on world growth has been fairly muted, the bank notes.


One reason is that the surge in prices has come mostly from strong global demand growth rather than a decrease in supply. The bank also cites research suggesting that the sensitivity of growth in developed countries to oil shocks has fallen sharply in the last two decades – with impact for East Asian economies. But further new oil price highs next year will test the robustness of the region’s and global growth, it cautions.


Overall, the World Bank is sanguine about the outlook for East Asia, saying that ‘the region’s performance in previous global downturns suggests that the impact on East Asia is unlikely to be especially severe or protracted given the region’s strong macroeconomic fundamentals and in the absence of a major downturn in global high- tech demand such as occurred in 2001’.


It ‘substantially increased’ its growth forecasts for 2007 and 2008, compared with six months ago, mainly because of the ‘unexpected and large domestic demand-led acceleration of growth in China (which is forecast to grow at 11.3 per cent this year and 10.8 per cent in 2008)’. Growth has also picked up in most of the other larger economies of the region as a result of more buoyant investment and spending on consumption, it adds.


Emerging East Asian economies are defined by the World Bank to include those of China, Indonesia, Malaysia, the Philippines, Thailand, Hong Kong, South Korea, Singapore and some unspecified smaller economies in the region. In contrast to its upbeat outlook for East Asia, the bank revised down its growth projections for the US and the OECD area as a whole by one percentage point and one-and-a-half percentage points respectively. Growth across the OECD as a whole is likely to be only 2.2 per cent in 2008, it says, while growth in Japan is expected to fall from 2.2 per cent in 2006 to 2 per cent this year and to 1.8 per cent in 2008.


The outbreak of the US sub-prime crisis has had little adverse impact on East Asia so far, the World Bank notes. ‘Preliminary assessments suggest that direct exposures of East Asian financial institutions to sub-prime risks are relatively limited.’ But ‘risks may increase if global instability and tightening of credit markets intensify and lead to further declines of prices of various other structured assets held by banks.’


Source: Business Times 16 Nov 07

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