World Bank raises East Asia outlook



REUTERS

Published — Thursday 20 December 2012

Last update 19 December 2012 11:22 pm

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SINGAPORE: The World Bank raised its 2013 economic growth forecasts for China and developing East Asia, and said the region remained resilient despite the lackluster performance of the global economy.
“For 2013, we expect the region to benefit from continued strong domestic demand and a mild global recovery that would nudge the contribution of net exports to growth back into positive territory, a trend projected to continue into 2014,” the World Bank said in its latest East Asia and Pacific Economic Update.
“Most countries in the region have retained their strong macroeconomic fundamentals and should be able to withstand external shocks,” it added, although it warned of risks such as a sharp drop in investment growth in China that could shake global confidence and a US failure to reach an agreement on tax increases and spending cuts before the end of the year.
The World Bank said China was expected to expand by 8.4 percent next year, fueled by fiscal stimulus and the faster implementation of large investment projects. The latest forecast is higher than the 8.1 percent figure cited in an October report.
“The slowdown in the Chinese economy appears to now have bottomed out. While third quarter growth, at 7.4 percent year-on-year, is still low compared to last year, quarter-on-quarter growth has picked up notably, reaching 9.1 percent in the third quarter at a seasonally-adjusted, annualized rate,” the World Bank said.
Growth in the world’s most populous nation is, however, expected to slow to around 8 percent in 2014, with the potential pace of economic expansion gradually declining as productivity and labor force growth tail off.
For developing East Asia as a whole, next year’s growth is expected to come in at 7.9 percent, up from an earlier forecast of 7.6 percent, with the Philippines and Malaysia growing by 6.2 percent and 5.0 percent, respectively.
The international lender’s previous forecast was for the Philippines to grow by 5.0 percent and Malaysia to expand by 4.6 percent in 2013.
The World Bank said domestic demand, in the form of both consumption and investment, has been critical to sustaining growth in East Asia, in particular Indonesia, Malaysia, Thailand and the Philippines.
“The robust growth in services this year in part reflects strong domestic demand, but is also associated with longer term trends caused by rising incomes,” the World Bank said of the four countries and Vietnam.
For Myanmar, the World Bank now expects the country to grow by 6.5 percent next year, up from an earlier forecast of 6.2 percent.
While Asian governments in general had room to boost spending in the event of an economic shock, the World Bank warned that further easing of monetary policy could be detrimental to inflation.
“In Indonesia, the Philippines and Thailand, the current policy rates are lower than those implied by the Taylor Rule, suggesting that monetary policy is already relatively relaxed. Consequently, further easing may be constrained in these countries unless conditions change dramatically.”
“This is particularly true for Thailand, which has a negative policy interest rate in real terms,” it said.
The Taylor Rule calls for raising rates if the inflation rate is above the target, or if the economy is overheating.
The World Bank was, however, sanguine about the problem of hot money arising from further monetary easing by developed countries, saying quantitative easing did not necessarily lead to more capital inflows into emerging Asia.
“QE1 did but QE2 did not. Moreover, the bulk of capital flows into East Asia and the Pacific consists of FDI (foreign direct investments), which create jobs and growth in production capacity,” the World Bank said.
A separate Thomson Reuters/INSEAD survey showed that business sentiment among Asia’s top companies improved slightly in the fourth quarter, reversing two consecutive quarters of declines, while global economic uncertainty remained the biggest concern for the region’s firms.
The Thomson Reuters/INSEAD Asia Business Sentiment Index rose to 63 in the fourth quarter from 62 in the third quarter of 2012, having peaked at 80 in the first quarter of 2011. A reading above 50 indicates an overall positive outlook, while one below 50 points to pessimism.
The results showed a stark contrast between companies in Southeast Asia, a region of about 600 million people now benefiting from an increase in foreign investment and which showed some of the highest positive readings, and manufacturing-heavy northeast Asia, which is more susceptible to the global economic downturn and had some of the lowest index readings.
China, where exports support an estimated 200 million jobs, showed the most positive response in the northeast Asian region, but companies in other export-focused economies such as Japan, South Korea and Taiwan remained more cautious.
“External risk factors that may pose problems in Asia are European debt crises re-escalating and if US growth disappoints,” said Juuso Mykknen, chief executive of JOM Fund Management Ltd. in Helsinki, which is running an investment company that have funds focused on investing in Asia.
“Asian own-risk factors are political ones that should be watched carefully. Territorial disputes should be also watched carefully.”
The index surveyed more than 100 of the Asia-Pacific region’s top companies in 11 economies. There were 96 responses.
The poll, conducted by Thomson Reuters in association with INSEAD, a global management and business school, was compiled between Dec. 3-14 and covered sectors such as autos, finance, property, resources and technology.
Indonesia, India, Malaysia and the Philippines all had the maximum scores of 100, followed by Thailand and China, whose indexes improved to 75 and 64 respectively from 64 and 50 in the previous quarter. South Korea also showed a sharp improvement from 20 to 50.
“Indonesia will remain our favorite destination in Asia due to very attractive structural forces in play currently. However, having said that, we have tactically increased weight in China in recent months as cyclical factors are on our side and valuations remain very compelling,” said Mykknen.
In contrast, companies in Taiwan were the most negative in Asia with a 33 index reading, the lowest level since the third quarter of 2011. It also compared with a reading of 40 in the third quarter.
Companies in Japan were the second-most negative, with a reading of 44 compared with a third-quarter reading of 48. It was the lowest reading in a year, underscoring the slow pace of recovery in the world’s third-largest economy.
Many economists are betting Japan will ease monetary policy this week to pull the country out of a shallow recession, a Reuters poll showed.
Japan’s economy recovered earlier this year from damage caused by March 2011’s devastating earthquake, tsunami and subsequent nuclear crisis on spending for reconstruction.
As that boost tapered off, and the global slowdown hit Japan’s export markets harder, the economy suffered a second straight quarterly contraction in July-September, putting it in a technical recession.
Offering a glimmer of hope, sentiment in the auto industry, a core part of Japan’s manufacturing base, improved to 60 in the fourth quarter from 50.
As uncertainty over the global economy persists, with the so-called “fiscal cliff” impasse in the US now adding to the debt crisis in Europe, companies in defensive industries such as food showed more positive sentiment.
Asian companies are closely awaiting the result of last-minute negotiations in Washington on the fiscal cliff — nearly $600 billion of tax increases and spending cuts set to take effect in January that could cause a sharp slowdown in growth or even tip the US into recession.

“Generally in Southeast Asia we are focusing on the consumer sector due to rising wages, the infrastructure/construction sector, property developers, some insurance companies as they have very low valuations and good growth prospects due to low starting value,” said Mykknen.
The food sector was the most positive among industries, with a reading of 77 compared with 73 in the third quarter, followed by the drug sector with a reading of 72, although that was a decline from the 80 recorded in the third quarter.
The retail sector also posted a solid improvement, with its index reading rising to 75 from 50 in the third quarter, with four participants saying they were positive and the remaining four neutral, as the industry gears up for the year-end shopping season.
Fast Retailing Co. Ltd, the operator of the Uniqlo casual clothing chain, reported a nearly 14 percent jump in November same store sales in Japan due to strong sales of its down jackets and winter wear. Its shares hit 2012 highs this week, fueled by solid earnings recovery.
The shipping industry also saw an improved reading to 67 from 50, with none of the six shipping companies polled being bearish. None of them said they were worried about rising costs or foreign exchange volatility, and most of expected customer payments to remain the same.
In contrast, the airline and building sectors were the most negative with index readings of 0 and 25 respectively.
High fuel prices and regulatory uncertainty remain concerns for Asia-Pacific air carriers, while global economic uncertainty threatens to curb long-haul travel.

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