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World Bank pares China, East Asia growth forecast

Bruno De Hogues | Photolibrary | Getty Images

The World Bank trimmed its 2015-2016 growth forecast for developing East Asia, citing a continued slowdown China as its policymakers work to address financial vulnerabilities and shift to a more sustainable growth path.

The region is forecast to grow 6.7 percent in both 2015 and 2016, down from forecasts of 6.9 percent and 6.8 percent in October, the Washington-based lender said in its East Asia and Pacific Economic Update published on Monday. Growth in 2014 had been 6.9 percent.

China is projected to expand 7.1 percent in 2015 and 7.0 percent in 2016, down from earlier estimates of 7.2 percent and 7.1 percent, the report showed.

"Continued measures to contain local government debt, contain shadow banking, reduce excess capacity, curb energy demand, and control pollution will reduce investment and manufacturing growth," the World Bank wrote in the report.

"However, targeted stimulus is expected to continue to mitigate the impact on short-term growth, should this show signs of slowing considerably below the government's indicative target of about 7 percent," it said.

Investors will gain further clarity on the health of the world's second largest economy on Wednesday with the release of first quarter gross domestic product (GDP) data. Economists forecast growth cooled to 7 percent in the first three months of the year, the weakest pace in six years.

Oil price boon

Outside of China, the growth picture is more upbeat, with the precipitous fall in oil prices a boon for many countries in the region.

Growth in the rest of developing East Asia is expected to rise by half a percentage point from last year, to 5.1 percent this year.

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"Lower oil prices will boost domestic demand in most countries in the region and provide policy makers a unique opportunity to push fiscal reforms that will raise revenues and reorient public spending toward infrastructure and other productive uses," Axel van Trotsenburg, vice president, East Asia and Pacific Regional at World Bank said in a statement.

"These reforms can improve East Asia's competitiveness and help the region retain its status as the world's economic growth engine," he said.

Cambodia, Laos, the Philippines, Thailand, and the Pacific island countries will benefit most developing countries in East Asia will benefit most from low global oil prices.

On the flipside, the region's net fuel exporters, including Malaysia and Papua New Guinea, will see slower growth and lower government revenues.

Risks to watch for

The headwinds facing the global economy – including a slow and uneven recovery in high-income countries, the prospect of higher U.S. interest rates and strengthening U.S. dollar – pose risks to East Asia's globally-integrated economies, the World Bank warned.

Higher U.S. interest rates and an appreciating U.S. dollar could raise borrowing costs, generate financial volatility and reduce capital flows to East Asia.

Continued strengthening of the greenback against other major currencies also could hurt highly-dollarized economies such as Cambodia and Timor-Leste, it said.

"To address these risks, improving fiscal policy is key. With low oil prices, countries – whether oil importers or exporters – should reform energy pricing to usher in fiscal policies that are more sustainable and equitable," said Sudhir Shetty, chief economist, East Asia and Pacific Region a the World Bank.