"The baseline scenario for regional growth is subject to a greater-than-usual degree of uncertainty, and risks are weighted to the downside," the World Bank said in its latest East Asia and Pacific Economic Update report on Monday. "In particular, uncertainty surrounds the trajectory of, and spillovers from, China's economic rebalancing and the expected normalization of U.S. policy interest rates."
The World Bank on Monday cut is growth forecast for the East Asia and Pacific (EAP) region – which also includes China – to 6.5 percent in 2015 and 6.4 percent in 2016, down from 6.8 percent growth in 2014. Economic output of the 14-country region that includes China, Indonesia, India and Vietnam expanded by 6.8 percent last year. The forecast excludes Japan and South Korea. The World Bank said the downward revisions to regional growth forecasts mainly reflect a moderate slowdown in China’s economy, which it sees growing 6.9 percent in 2015 and 6.7 percent in 2016, down from an earlier forecast of 7.1 percent and 7 percent respectively.
Since the forecast in April, “greater uncertainly about the global economy has weighed on the performance and prospects of developing East Asia and Pacific,” the World Bank said in a report.
The bank, however, allayed concerns of a “hard landing” in China, saying that the world’s second biggest economy has “sufficient policy buffers” to address the risks to its economy and prevent a sharp slowdown. It cited Beijing’s effort to steer China’s economy to slower, more sustainable growth and a widely expected U.S. interest rate increase from ultra low levels in place since the global crisis in 2008. U.S. interest rates are expected to rise for the first time in nearly a decade in the coming months, which could result in capital leaving emerging markets as Asian currencies are taking the hit.
“While this increase has been anticipated and is likely to be orderly, there is still a risk that markets could react sharply to such tightening, causing currencies to depreciate, bond spreads to rise, capital inflows to fall, and liquidity to tighten,” the bank said.
China is the biggest trading partner for most of its Asian neighbors and a precipitous decline in China’s growth could propel the fragile demand for raw materials and industrial components. For years, the People’s Republic has been trying to shrink its manufacturing sector and expand its consumer services, a transition aimed at putting it on a more sustainable path to growth. But obstacles abound. Perhaps the most troublesome has been China’s property market, which is responsible for about 20 percent of the overall economy. Slowing economic growth means slowing housing sales, which eventually could further drag down the overall economy.