World Bank Jacks Up East Asia Growth Forecasts

The World Bank on Thursday lifted its economic growth estimate for East Asia this year by a full percentage point after an unexpected strong spurt in China's growth in the first half of 2007.

In its semi-annual report, the World Bank predicted growth would reach a decade high of 8.4 percent for the region, which is East Asia excluding Japan.

In April, the bank had estimated growth will average 7.3 percent this year after an 8.3 percent expansion in 2006. It predicted a third year of 8-percent-plus growth next year, with GDP growth seen hitting 8.2 percent.

"Our projections for regional growth in 2007 and 2008 have been substantially increased compared to six months ago, mainly due to the unexpected and large domestic demand-led acceleration of growth in China," the World Bank said.

This year's high growth had occurred despite a weakening in U.S. import demand and a resulting slowdown in the region's exports, it said.

It said the risks of a significant cyclical slowdown had however increased. "There is a significant probability that 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."

But the World Bank believes East Asia will not be severely affected, because of its strong economic fundamentals and solid demand for high-technology products, Asia's key exports.

"There are as yet few signs of a significant pick-up in underlying core inflation pressures or of other domestic constraints or imbalances that would require a marked slowing of growth," it said.

The World Bank cited buoyant investment and consumption as prime drivers of growth in the larger economies of Asia.

It lifted China's growth projection to 11.3 percent in 2007, up from an April forecast of 9.6 percent, and predicted 10.8 percent growth in 2008.

Though there were economic and financial risks to China's rapid growth, the World Bank said "none appears serious enough at present to derail the current momentum of growth, or to cause the authorities to make major policy changes that would lead to a marked slowing in the near term."

Growth forecast for the newly industrialised economies -- South Korea, Singapore, Hong Kong and Taiwan -- was raised to 5.1 percent in 2007 from and earlier estimate of 4.5 percent, but still lower than last year's 5.5.

"Unlike in 2001, the slowdown in world growth is not spearheaded by a recession in the global high tech industry, which is by far East Asia's most important export sector," the World Bank said.

Slower Exports, Higher Oil

According to World Bank estimates, growth in developed nations will remain sluggish, with the U.S. economy avoiding a recession but its expansion slowing to 1.9 percent in 2007 and 2 percent in 2008 from 2.9 percent last year.

The euro area and Japan are also seen slowing in 2008.

The World Bank said U.S. import growth in year-on-year terms had slowed to 2.2 percent in the first three quarters of 2007, compared to 6.4 percent in the first half of 2006. In real terms, U.S. imports, have nearly stagnated, it said.

"The slowdown in the U.S. economy has already affected East Asian export growth, but is still permitting regional export growth in local currency terms of around 10-15 percent, and in dollar terms of 15-20 percent."

The World Bank cited growing evidence of strengthening domestic demand in the region, rising capacity utilisation, stronger corporate balance sheets, low core inflation rates and improving fiscal balances.

The development lender noted a further decline in poverty with the number of people living below $2 a day in east Asia estimated to have fallen below 500 million in 2007 for the first time, down from over one billion in 1990.

The World Bank, however, warned about the region's vulnerability to high oil prices. It projected crude prices will average at $68 a barrel in 2007, up from $64.3 in 2006, and rise to $72.4 in 2008.

China, Japan and Korea rank among the world's top importers of oil. Crude prices have risen more than 40 percent in 2 months and came close to hitting $99 a barrel last week.

The World Bank said an average oil price of $90 in 2008 would result in an income loss in East Asia of about 1.1 percent of GDP.