World Bank Raises East Asia's Growth Forecast as China Expands

Nov. 15 (Bloomberg) -- East Asia's economies will expand at the fastest pace in more than a decade in 2007 as China's accelerating growth offsets a slowdown in U.S. demand for the region's goods, the World Bank said.

East Asia, which excludes Japan and the Indian subcontinent, will grow 8.4 percent this year, faster than the 7.3 percent rate the World Bank predicted in April. Economic growth will slow to 8.2 percent next year, the Washington-based lender said its semi-annual report today.

``This year's pickup in East Asia has occurred despite an already substantial decline in U.S. import growth, and some slowing in the region's own exports,'' the bank said. ``Capacity utilization is at much higher levels now than it was in the last global downturn and the region's corporations are also stronger.''

Surging exports and business investment have driven China's trade surplus to a record and boosted its foreign-exchange holdings to the highest globally. In turn, China's appetite for raw materials and other goods purchased from its Asian neighbors is helping the region weather a slowdown in demand from the U.S., which is mired in the worst housing slump in 16 years.

The World Bank has raised its forecasts for China twice this year, predicting Asia's second-largest economy will grow 11.3 percent, before easing to 10.8 percent in 2008. It maintained that forecast in today's report. The country's inflation rate, which rose at the fastest pace in more than a decade last month, is expected to ``gradually ease'' later this year, the lender said.

No Serious Risk

China needs to address its rising trade surplus, which has forced the central bank to mop up the inflow of cash by selling bills, raising interest rates and ordering banks to set aside larger reserves, the World Bank said.

``Although there are some macroeconomic and financial trends that could pose a risk to this strong growth forecast, none appears serious enough at present to derail the current momentum or to cause authorities to make major policy changes that would lead to a marked slowing in the near term,'' the bank's report said.

China's government can rebalance growth by implementing policies including allowing more appreciation and flexibility in the yuan, as well as raising borrowing costs, it said.

Still, risks remain a decade after the Asian financial crisis, which led the International Monetary Fund to arrange more than $90 billion of loans to Thailand, Indonesia and South Korea after their currencies collapsed, the World Bank said.

Threats to the region's growth have increased in the past six months amid turmoil in financial markets and record oil prices, the lender said.

The price of crude oil prices has risen 54 percent this year. It reached $98.62 a barrel on the New York Mercantile Exchange on Nov. 7, the highest price since trading began in 1983.

`Substantial Downturn'

``There is a significant probability the subprime crisis, the associated credit squeeze and rising oil prices could force a more substantial downturn in the developed world, in particular in the U.S.,'' the World Bank said. ``If a U.S. recession were to materialize, it would likely be accompanied by a significant but not severe decline in East Asian growth.''

The collapse of the subprime market in the U.S., where borrowers with impaired credit got mortgages before home foreclosures rose to a record, spread to global credit markets and triggered about $45 billion in writedowns among the world's largest banks.

``The outbreak of the U.S. subprime crisis has had little adverse impact on East Asia so far,'' the report said. ``Risks may increase if the global instability and tightening of credit markets intensifies and leads to further declines in prices of various other structured assets held by banks.''

Investment Climate

The World Bank also raised its forecasts for Southeast Asia's middle-income countries including Malaysia and the Philippines, plus the newly-industrialized economies of South Korea, Singapore, Hong Kong and Taiwan.

Investment in Indonesia is expected to ``remain strong,'' while the country's fiscal deficit may widen further this year, the World Bank said. Growth in the Philippines may reach or exceed the government's targets, it added.

In Thailand, where domestic consumption and investment have languished amid political turmoil following a military coup, elections later this year may spur growth in 2008, the report said.

``Clearer policy direction from the new government after the December elections should help improve investor sentiment and raise investment growth next year,'' the lender said. ``Exports of goods and services remain the key driver of growth this year and will remain so next year.''

The following table contains the World Bank's April estimates of growth, as well as revised forecasts for 2007 and projections for 2008.



April's Nov.'s Estimates
Estimates & Forecasts
2007 2008 2007 2008

East Asia 7.3 7.1 8.4 8.2
China 9.6 8.7 11.3 10.8
Southeast Asia 5.5 5.7 5.7 5.8
Indonesia 6.3 6.5 6.3 6.4
Malaysia 5.6 5.8 5.7 5.9
Philippines 5.6 6.0 6.7 6.2
Thailand 4.3 4.5 4.3 4.6
Newly Industrialized 4.6 5.0 5.1 5.1
Hong Kong (SAR) 5.3 5.1 5.8 5.2
Singapore 5.5 5.6 7.4 6.4
South Korea 4.5 5.0 4.8 5.1
Taiwan (China) 4.1 4.6 4.6 4.6
Small Economies 6.0 5.8 6.4 6.2
Vietnam 8.0 8.0 8.3 8.2