The outlook for developing East Asia is expected to remain broadly positive in the next three years, driven by robust domestic demand and a gradual recovery in the global economy and commodity prices, according to a new World Bank report. Poverty in the region is likely to continue to fall, driven by sustained growth and rising labor incomes.

The global environment and domestic vulnerabilities, however, still pose risks to the region’s prospects. In the face of faster-than-expected interest rate hikes in the U.S., protectionist sentiments in some advanced economies, and rapid credit expansion and high levels of debt in several East Asian countries, the report recommends that policy makers continue to focus on prudent macroeconomic management and ensuring sustainable fiscal balances in the medium term.

The just-released East Asia and Pacific Economic Update expects theChinese economy to continue to slow down gradually, as it rebalances toward consumption and services. It forecasts China’s growth rate to be 6.5 percent in 2017 and 6.3 percent in 2018, compared with 6.7 percent in 2016. In the rest of the region, including the large economies in Southeast Asia, growth is expected to pick up slightly to 5 percent in 2017 and 5.1 percent in 2018, up from 4.9 percent in 2016. As a whole, the economies of developing East Asia and Pacific are projected to expand at 6.2 percent in 2017 and 6.1 percent in 2018.

‘Sound policies and a gradual pickup in global economic prospects have helped developing East Asia and Pacific sustain growth and reduce poverty,’ said Victoria Kwakwa, World Bank Vice President for East Asia and Pacific. ‘For this resilience to be sustained, countries will need to reduce fiscal vulnerabilities while improving the quality of public spending and fostering global and regional integration.’

Growth in the region will continue to be driven by strong domestic demand, including public, and increasingly private, investment. This trend will also be supported by gradually rising demand for exports, as emerging markets and developing economies recover. The slow pace of recovery in commodity prices will benefit commodity exporters in the region, but won’t unduly hurt the economies of commodity importers in East Asia.

In China, growth will continue to moderate, reflecting the impact of the government’s measures to reduce excess capacity and credit expansion. As a result, the report expects activity in the real estate sector to slow down.

The large developing economies in the Association of Southeast Asian Nations will likely expand slightly faster in 2017-18, although for different reasons. The Philippines will benefit from higher public spending on infrastructure, an uptick in private investment, credit expansion, and increased remittances, as growth accelerates to 6.9 percent in both 2017 and 2018. Higher government subsidies, more infrastructure spending and rising exports will push up Malaysia’s economy by 4.3 percent in 2017 and 4.5 percent in 2018.

In Indonesia, credit expansion and higher oil prices will help the economy grow 5.2 percent in 2017, up from 5 percent in 2016. In Vietnam, growth will rise to 6.3 percent in 2017, in line with favorable market sentiment and strong foreign direct investment.

The region’s smaller economies will generally benefit from the continued vitality of their larger neighbors, and some will also benefit from higher commodity prices. Cambodia’s economy will grow 6.9 percent in 2017 and 2018, with higher public spending and the expansion of agriculture and tourism offsetting a drop in the construction and garment sectors. In Myanmar, growth will reach 6.9 percent in 2017 and 7.2 percent in 2018, up from 6.5 percent in 2016, as infrastructure spending increases and structural reforms attract more foreign investment.

Papua New Guinea will see its economy gradually recover, thanks to a number of new mining and petroleum projects. Mongolia’s economy will stagnate in 2017, as the government restores its debt to sustainable levels, but a modest recovery is expected in 2018.

‘Despite favorable prospects, the region’s resilience depends on policy makers taking account of, and adjusting to, significant global uncertainties and domestic vulnerabilities,’ said Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region. ‘Policy makers should prioritize measures that counteract global risks threatening the availability and cost of external finance, as well as export growth. Efforts should also be made to strengthen policy and institutional frameworks to spur increases in productivity.’

The report calls for macroeconomic prudence to address the significant risks to the region’s economic prospects. Across the region’s large economies, increasing fiscal revenues can help governments finance programs that boost growth and foster inclusion while reducing risks to fiscal sustainability, the report says. Some smaller commodity-exporting economies will need to take steps to increase their fiscal solvency. With rising inflation – albeit from a low level – and potentially more volatile capital flows, the report says policy makers in much of the region should consider adjusting their accommodative monetary policies.

In China, the report recommends that the government sustain its efforts to reduce corporate debt and restructure state-owned enterprises, tighten the regulation of shadow banking and address rising household mortgage debt. Reforms to reduce excess industrial capacity could be complemented with improved social transfers and labor policies. With credit growth remaining high across much of the region, including Vietnam, the Philippines and Lao PDR, the report suggests an emphasis on strengthening regulation and enhancing supervision.

The longer-term challenge for the region lies in sustaining rapid growth while ensuring greater inclusion. Governments can address these challenges by increasing productivity and investment, which have slowed recently in several economies, as well as by improving the quality of public spending.

In the face of rising protectionism outside the region, East Asia can seize opportunities to advance regional integration, including by deepening ongoing initiatives, lowering barriers to labor mobility and expanding cross-border flows of goods and services within the ASEAN Economic Community.

In addition, the report says policy makers can put future economic prospects on a more sustainable path if they take steps to reduce pollution caused by farming, a rising threat amid the intensification of agriculture in the region.

The East Asia and Pacific Update is the World Bank’s comprehensive review of the region’s economies. It is published twice yearly and is available free of charge at worldbank.org/eapupdate.

Source: World Bank Group