World Bank turns pessimistic on Asia growth

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Asia faces one of the worst economic outlooks for half a century thanks to a sluggish post-pandemic recovery, China’s property crisis, rising levels of debt and US protectionism.

That’s today’s verdict from the World Bank which downgraded its growth forecast for China from 4.8 per cent to 4.4 per cent next year and for the broader set of developing economies in east Asia and around the Pacific from 4.8 per cent to 4.5 per cent.

The region, one of the world’s main growth engines, is now likely to experience the slowest pace of improvement since the late 1960s, barring extraordinary periods around the pandemic, the 1970s oil shock and the Asian financial crisis.

China is the main barrier to progress due to a number of factors including the precarious state of its property sector, which normally accounts for more than a quarter of activity in the world’s second-largest economy, prompting Beijing last month to unleash a huge stimulus programme to rekindle demand.

Retail sales meanwhile have fallen to pre-pandemic levels, although economists believe there could be a boost in spending on restaurants and outings during China’s Golden Week, the longest holiday break of the year, which starts today. 

Foreign investors are concerned but there have been signs of life in the past few weeks. Factory activity expanded in September for the first time in six months according to government PMI data on Saturday, while S&P Global data yesterday also showed improvement. Consumer prices have edged back from deflation and the rate of decline in exports has eased.

There has also been positive news on trade tensions after a new “mechanism” was agreed with the EU to discuss export controls, mirroring a similar effort between Beijing and Washington. As the FT’s chief economics commentator Martin Wolf recently concluded, it’s far too soon to write off China just yet. 

Elsewhere there are signs that weakening global demand is taking its toll.

Goods exports are significantly down in Indonesia, Malaysia and Vietnam and the World Bank’s worsening forecasts reflect the potential damage from US industrial and trade policies encapsulated in the Inflation Reduction Act and the Chips and Science Act. Countries such as Vietnam are fighting back, unveiling billions of dollars in deals with the US on semiconductors and AI.

The way forward for the region was through deeper service sector reforms, said World Bank economist Aaditya Mattoo. “In a region which has really thrived through trade and investment in manufacturing . . . the next big key to growth will come from reforming the services sectors to harness the digital revolution,” he said.

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Some good news

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