East Asia to slow, govts must spend more-World Bank

East Asia to slow, govts must spend more-World Bank

Editor: evewen
10 Dec 2008 07:08:44 GMT

SINGAPORE, Dec 10 - Economies in East Asia will slow substantially in 2009 as the credit crisis depresses capital flows, exports and investment despite government attempts to boost domestic demand, the World Bank said on Wednesday.

In its semi-annual report, the World Bank predicted, however, the East Asian region will a less severe slowdown than Europe, Central Asia or Latin America, which are similarly exposed to international trade and finance.

It also advised governments to use direct spending, particularly on ongoing infrastructure projects, to stimulate demand.

Economic growth in East Asia, excluding Japan, will slow to 5.3 percent in 2009 -- its slowest pace since 2001 - from a projected 7 percent this year and 9 percent in 2007, it said.

China's growth could ease to 7.5 percent in 2009 from 9.4 percent in 2008, the World Bank said.

(for a graphic with key forecasts, please click on: https://customers.reuters.com/d/graphics/AS_GDPFCST1208.gif)

It said the region had entered the crisis in far better shape than during the 1997 Asian financial crisis, with stronger public finances, external balances and healthier banks and companies.

"Nevertheless, the sudden withdrawal of liquid assets by non-resident investors, combined with capital flight by residents in some places, has pushed these economies back into the danger zone from which they had exited only a few years ago," the World Bank said.

Most expenditure components, barring increased government spending in some countries, will be under pressure in east Asia in 2009, the World Bank said. Export markets would also be sluggish.

"Investment looks likely to be constrained by receding capital inflows and poor prospects for exports.

"Private consumption will be under pressure from more sluggish earnings, weaker employment, and an increased desire to save in hard times," the World Bank said.

The projections could be skewed to the downside by a much longer and deeper downturn in developed economies and the risk of capital flows remaining weak for a prolonged period, the World Bank said.

Commodity prices may slump further should global growth weaken more substantially, bringing in challenges related to deflation, it said.

GOVERNMENT SPENDING

The World Bank said that even though aggressive monetary easing appeared to have cushioned the impact of the crisis on domestic liquidity, difficulties lay ahead.

"The authorities need to be mindful that companies and commercial banks will remain under financial stress that will probably get worse as economic activity slows, defaults accelerate and balance sheets deteriorate," it said, while advising further medium term efforts to improve banking and financial supervision.

Governments trying to buffer their economies through fiscal measures will find the market continuously shifting its assessment of how these countries can finance fiscal stimulus programs without endangering fiscal sustainability, it said.

While tax cuts could help consumer spending over a longer horizon, there is concern consumers would save rather than spend money under current circumstances, it said.

"Direct government spending at this point, therefore, is likely to be a superior option to boost economic activity," the World Bank said.

"New infrastructure spending, however, has long lags before making an impact on the economy, unless the authorities are accelerating projects already under implementation."

Social transfers have also typically been most effective in stimulating spending, and would also protect the poor from the worst effects of the crisis, it said.

(For a table on the World Bank's GDP forecasts, click on [ID:nSGE000084])