A few large economies need to watch for possible overheating
SINGAPORE, April 15, 2013 – Driven by strong domestic demand, economies of developing East Asia and Pacific continue to be an engine of global growth, growing at 7.5 percent in 2012 -- higher than any other region in the world, says the World Bank in its latest analysis of the regional economy. As the global economy recovers, the report, released today, projects that regional growth will rise moderately to 7.8 percent in 2013 and ease to 7.6 percent in 2014.
“The East Asia and Pacific region contributed around 40 percent of global growth in 2012, and the global economy continues to rely on the region’s growth, with investor confidence surging and financial markets remaining solid” said World Bank East Asia and Pacific Vice President Axel van Trotsenburg. “Now is the time for countries to focus on helping the remaining poor, with more and better quality investments to accelerate inclusive growth.”
Fiscal and monetary policies to boost consumption and investment helped sustain growth in 2012 across the region, with middle-income countries performing particularly well. Developing economies excluding China grew 6.2 percent in 2012, up from 4.5 percent in 2011.
In China, growth slowed to 7.8 percent in 2012 due to rebalancing efforts, while real disposable income of urban households rose by more than 9 percent, supporting household consumption, which contributed 4.4 percentage points to GDP growth. China is projected to grow 8.3 percent in 2013 and 8.0 percent in 2014.
Risks emanating from the Eurozone and the U.S. have declined since the middle of last year. The World Bank’s baseline projections for global growth are for a modest expansion of 2.4 percent in 2013 and a gradual strengthening to 3.0 percent in 2014. While still fragile, there are signs of a turnaround in real activity in high income economies, thus external demand for the East Asia and Pacific region’s exports will stabilize this year. The most recent numbers on industrial production and producer’s expectations confirm continued solid growth.
Movements in high-income country currencies, such as the yen, are likely to affect trade and investment flows in the region in the short term. Some countries, notably suppliers of parts to Japanese industry and countries with considerable Japanese investment could gain, whereas countries that compete directly with Japan in third markets may face some headwind in the short run. The report said, though, that a return to sustained growth in Japan would benefit the region as a whole.
As the global economy recovers, an emerging issue is the risk of overheating in some of the larger economies. The latest numbers suggest that, if global demand continues to revive, some major economies may reach the limits of their current production capacity, as the output gap has closed in those countries.
“Most countries in developing East Asia are well prepared to absorb external shocks, but continued demand-boosting measures may now be counterproductive, as it could add to inflationary pressures,” said World Bank East Asia and Pacific Chief Economist Bert Hofman. “A strong rebound in capital inflows to the region induced by protracted rounds of quantitative easing in the U.S., EU and Japan, may amplify credit and asset price risks.”
In East Asia and the Pacific, overall economic management has been effective in dealing with the global economic crisis, which has enabled the region to remain resilient and sustain growth.
The challenge for policy makers now is to build on these strengths and address short and long term challenges with smart policies:
- Policymakers need to continue to be vigilant to react to shocks in the world economy, but be prepared to withdraw stimulus as the world economy recovers. For countries that show some signs of inflationary pressures, it would be a good time to rebuild policy buffers.
- Several countries need to manage strong capital inflows by maintaining an appropriate macro policy mix, sufficient flexibility in the exchange rate and macro-prudential policies.
- Most countries could increase productive capacity by investing in infrastructure and human capital, and thus pave the way for continued high and equitable growth.