World Bank Slashes East Asia Growth Forecasts

By MICHAEL S. ARNOLD, The Wall Street Journal

TOKYO -- The World Bank Tuesday slashed its 2009 economic growth forecast for developing East Asia to 5.3% from 6.7% and warned of a "painful surge" of unemployment as the global recession hits home.

In its semiannual update on East Asia and the Pacific region, the bank reiterated its projection that China's economy will expand 6.5% this year and called the prospect that China's economy will bottom out midyear, as its massive stimulus package kicks in, a "ray of hope" for the region.

But a sustainable recovery will depend on developments in the advanced economies that take most of Asia's exports, and recovery there isn't expected until 2010, the report said.

The projected 5.3% growth for developing East Asia this year marks a sharp slowdown from an estimated 8% expansion in 2008 and amounts to less than half the 11.4% growth rate in 2007, but still leaves the region as the fastest growing part of the world economy.

Excluding China, however, the rest of the region is expected to grow just 1.2% this year, a "lackluster performance" that places it behind the Middle East and North Africa, South Asia and Sub-Saharan Africa, the bank said.

Developing East Asia includes China, Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Lao PDR, Mongolia, Papua New Guinea and the island economies of the Pacific.

Asia's increased integration into the global economy is proving to be a double-edged sword, as "the impact of the crisis in the advanced economies was transmitted to the economies of the region with unusual speed," the report said.

Chastened by the 1997-98 Asian financial crisis, some middle-income countries -- Thailand, Malaysia, Indonesia and the Philippines -- were better prepared for the recent upheaval in global financial markets, having improved banking supervision, strengthened their external balances and increased foreign exchange reserves.

But the economic slowdown has hit emerging Asia hard, especially the poorest countries. As worldwide demand declines, exports and industrial production across the region are falling, leading to factory closures, rising unemployment and lower real wages, the report found.

Unemployment in the region is reported to have increased to 24 million in January, up 1 million from a year earlier, the World Bank said. But it said the official numbers capture "only a small part of the deteriorating employment situation" and warned of "the beginning of a painful surge in unemployment throughout the region."

The bank praised Asian governments for reacting swiftly, cutting interest rates and taking other steps to ensure adequate liquidity in their financial markets, despite the increased burden it means for some countries already struggling under heavy debt loads.

Governments in developing East Asia have announced stimulus packages equivalent to 3.6% of their combined domestic product, and are expanding social programs to aid the most vulnerable.

The report said "the size of the fiscal stimulus may be increased in some countries with available fiscal space," such as China and Thailand.

Still, in a news conference in Tokyo, Vikram Nehru, the bank's regional chief economist for East Asia, said some countries with the ability to support more stimulus may be holding a bit in reserve in case additional measures are needed in the future.

The bank urged countries to focus on outlays to remove infrastructure or social bottlenecks and improve human capital, among other areas. "The countries that are able to tackle short-term challenges while staying focused on longer-term priorities will likely emerge better-placed after the crisis to resume stronger growth," the report said.

The World Bank said Asia's rapid growth of recent years may be a thing of the past. Even when global demand picks up, the report noted, "the region's outward-oriented economies are unlikely to enjoy the same success in the medium term as they did in the previous decade" as the developed world tries to save more and consume less.

The weaker growth also means some 10 million fewer people in the region will escape from poverty in 2009 than previously expected, the World Bank said. In Malaysia, Thailand, Cambodia and East Timor, poverty rates are expected to rise.

Looking ahead, the bank recommends that developing Asia boost domestic demand and seek to grow through innovation, rather than imitation.

"Over the medium term, the countries of developing East Asia can achieve high rates of economic expansion in a slowly growing world economy to the extent they are able to extract more growth from domestic demand, boost competitiveness, penetrate new markets, and further improve the attractiveness of the region as a key destination for foreign investment," the report said.

Write to Michael S. Arnold at Michael.Arnold@dowjones.com