Global Slump Next Year Will Hit Asia Hard: World Bank

Source : The Business Times, December 10, 2008

S'pore, Taiwan most vulnerable as global trade set for first fall since 1982

WORLD economic growth will slump to just 0.9 per cent next year - the weakest in nearly four decades - and, with global export volumes set to decline for the first time since 1982, trade-dependent East Asian economies will suffer badly, the World Bank predicted yesterday.

In a report, it singled out Singapore and Taiwan - 'where exports are now declining' - as being among the worst hit.

At the same time, East Asia as a whole is suffering from slumping capital flows, falling investment, weaker production, falling household spending, and rising unemployment, the World Bank said.

It balanced this litany of woes by predicting that 2010 could see a rapid turnaround for the better in global and East Asian fortunes, with world economic growth rising to 3 per cent and East Asia benefiting from a projected sharp recovery in exports.

But it also warned that risks are on the downside and that a longer-than-expected recession in advanced economies could precipitate balance of payments and currency crises in this region.

In its latest Global Economic Prospects, the World Bank foresees a situation where the 'pronounced recession' that has begun in Europe, Japan and the US will bring about a 0.1 per cent overall decline in the GDP of these countries next year.

This, in turn, will push developing country growth as a whole down to just 4.5 per cent from the 6.3 per cent expected for 2008.

East Asia will fare better as a whole than other developing regions, with GDP growth (including that in Pacific Island economies) set to reach 6.7 per cent in 2009 (down from a projected 8.5 per cent in 2008). But this only because China is expected to maintain 7.5 per cent growth next year. The rest of East Asia is predicted to grow at a rate of only 4 per cent in 2009.

'China will play a key role in shaping the region's growth profile through 2010,' the bank said. 'A step down in China's import growth will dampen the momentum of intra-regional trade.'

But 'China's buffers against the financial crisis are impressive' and recent policy measures to counter economic slowdown should yield positive effects, it added.

The report contrasts the outlook for East Asia now with that perceived at the start of the current financial and economic crisis when it was expected that the region would escape fairly lightly. Instead, gross capital flows to the region plunged by one half during the first nine months of this year, equity markets collapsed, and debt spreads widened dramatically.

'Slower investment growth in East Asia is now expected to spill over into still weaker production, employment, household spending and GDP growth,' the report said. 'Regional GDP growth is projected to slow to 6.7 per cent in 2009, the weakest since the dotcom recession of 2001 and prior to that, the Easy Asia crisis of 1997-98.'

East Asia will take its biggest hit through the trade route, according to the World Bank. Regional export volumes are expected to grow by just 2.6 per cent in 2009 compared with 8.3 per cent this year, while the growth in fixed investment will fall from 10.5 per cent in 2008 to slightly under 7 per cent next year.

'East Asian export volumes are likely to fall sharply - to negative territory for many countries - with China seeing (only) a modest advance of 4.2 per cent, down form the 10.1 per cent gain in 2008.

'The fall-off in export performance is particularly acute in Singapore and Taiwan, where exports are now declining, affected in particular by a sharp drop in demand for high-tech products,' the report said. 'Export growth is also slowing in Malaysia and Thailand,' it added.

The World Bank is, for now at least, taking a more upbeat view of prospects for 2010, saying that 'recovery in regional growth during 2010 is anticipated to be fairly swift'.

'The downturn in investment should be relatively short-lived as credit and capital flows begin to thaw and expectations for stronger domestic and external demand underpin a revival in regional capital spending.'