Growth prospects for developing East Asia and Pacific remain strong

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Prospects for a continued broad-based global recovery and robust domestic demand underpin this positive outlook. Still, emerging risks to stability and sustained growth require close attention.

 Enhancing Potential, the April 2018 edition of the World Bank East Asia and Pacific Economic Update released today, underscores that even with favorable prospects, policy makers in the region will be well advised to recognize and address emerging challenges. 

WB: Growth prospects for developing East Asia and Pacific remain strong

Attending to the short-term risks associated with a faster-than-expected rise in interest rates in advanced economies and possible escalation of trade tensions will require tighter monetary policy and larger fiscal buffers. To raise growth in the longer term, boosting public and private investment, productivity growth, and human capital will be key.

 “Robust growth has underpinned the region’s tremendous gains in reducing extreme poverty. To build on this success, and improve prospects for the large share of the population who remain economically insecure, will require sustaining growth over the longer term,” said Victoria Kwakwa, World Bank Vice President for East Asia and the Pacific. “Policy makers need to focus on addressing risks to economic stability while taking steps to enhance longer-term growth potential.”

After growing faster than anticipated in 2017, China is expected to slow moderately to 6.5 percent in 2018 as its economy continues to rebalance away from investment and towards domestic consumption with policies that focus more on slowing credit expansion and improving the quality of growth.

Excluding China, growth in developing EAP is expected to remain stable in 2018 at 5.4 percent, reflecting continued robust domestic and external demand.  Growth in Indonesia and Thailand is expected to strengthen in 2018, with improved prospects for investment and private consumption. In the Philippines, growth is likely to remain stable in 2018. In Malaysia and Vietnam, growth is expected to ease, as public investment moderates in the former and agricultural production stabilizes in the latter after rebounding in 2017.

Prospects for several of the smaller economies are generally favorable, in part due to higher commodity prices. In Myanmar, economic growth is projected to rise in 2018, although investment prospects could deteriorate with the ongoing developments in Rakhine State. Mongolia’s higher growth is predicated also on continued macroeconomic stabilization. Papua New Guinea could experience a cyclical recovery as commodity prices rise, although the recent earthquake could hurt prospects. Growth in Cambodia is expected to pick up slightly, while Lao PDR will likely see stable growth.

The growth outlook for the Pacific Island Countries is mixed. Growth in Fiji and the Solomon Islands is projected to ease. Growth in the smaller Pacific Island Countries is expected to be modest but volatile due to their high susceptibility to natural disasters and reliance on commodity imports.

“While the region’s growth outlook is positive, there are challenges for policy makers in the short and medium term,” said Sudhir Shetty, World Bank Chief Economist for the East Asia and Pacific region. “Addressing these challenges will require measures to dampen the possible impacts of a more rapid pace of monetary policy tightening in advanced economies as well as to enhance longer-term growth prospects in the face of policy uncertainty, particularly around global trade.”

To address risks to macroeconomic stability, countries will need to consider tightening monetary policies and further strengthening macroprudential regulations. This will be particularly important in countries where high debt levels or rapid credit growth could exacerbate vulnerabilities in their financial sectors as interest rates are raised in advanced economies.

To address moderating growth prospects across the region in the medium term, countries will need to find ways of raising their long-term potential growth. This could include a mix of measures aimed at: improving public spending and infrastructure provision; deepening trade integration and improving trade facilitation; implementing reforms to enhance competitiveness; and building human capital.

With continued threats to the global trading system, developing EAP can respond by deepening its own trade integration and facilitation, through such mechanisms as the ASEAN Economic Community, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the Belt & Road Initiative.

Done well, these initiatives will be even more important as countries adapt their manufacturing-led development strategies to the emerging challenges of labor saving technologies and automation, and the blurring of the lines between manufacturing and services.

Improving competitiveness will also be important for countries in the region as they seek to adjust to the ongoing changes in the manufacturing landscape with the evolution of technology. Various aspects of the business environment are likely to become more important than labor costs in determining countries’ fortunes in manufacturing. And, as technologies continue to evolve, basic numeracy and literacy and familiarity with digital technology will be essential.

Improving the effectiveness of schools is a priority in many countries in the region where most students are in school but many are not learning. A critical first step is to align institutions and create sound administrative systems to provide basic conditions for learning. Additionally, education systems should concentrate on: ensuring equity in public spending on primary education; preparing students for learning starting in preschool; raising selectivity and enhancing pay and career prospects for teachers; and using assessments systematically to inform instruction.

To ensure that those who are economically insecure are not left behind, strengthened social assistance and insurance programs and increased resilience to systemic shocks will be key. Economic resilience is particularly important in the Pacific Island Countries, and can be helped by building up sovereign wealth funds as well as improving access to temporary migration schemes.