Growth in the East Asia and Pacific (EAP) region is projected to accelerate this year with the domestic demand mainly driving growth while contributions from exports are expected to decline, according to the World Bank.
In its East Asia and Pacific April 2023 Economic Update, growth in EAP is forecast to expand to 5.1 percent in 2023 from 3.5 percent in 2022, as China’s swift reopening helps the economy rebound to a 5.1 percent pace from 3 percent last year.
Growth in the rest of the region is projected to slow to 4.9 percent in 2023 from 5.8 percent in 2022, it said.
The report said high inflation is likely to dampen private consumption as high household debt in some EAP countries could exacerbate the impact of high interest rates, increase financial burdens and further weigh on consumption.
“Private investment growth is also expected to be tempered by the high interest rate environment and uncertainty from external headwinds. Contributions from exports are expected to decrease due to the moderation in global growth resulting in a slowdown in external demand,” it added.
The report said the main risks to the economic outlook related to global growth, commodity prices and financial conditions.
It said while sentiments for global growth have recently improved, a sharper-than-expected slowdown could occur due to synchronic monetary tightening and geopolitical uncertainty.
“In principle, stronger recovery in China could provide substantial positive spillovers to global activity, benefiting regional economies through trade and tourism channels. However, although China’s reopening may provide a boost, it is unlikely to offset the slowdown in advanced economies in most EAP countries,” it added.
The report also pushed needed macroeconomic policy actions, including exchange rate policy, trade-offs between controlling inflation and supporting growth, inclusive and sustainable fiscal policy and financial sector policies.
Like price controls, it said exchange rate interventions can lead to misalignments and distort price signals that are important to ensure efficient allocation of resources.
“An overvalued exchange rate can dampen necessary external adjustments and expenditure switching (substitution of imported with domestically produced goods). Surrender requirements at below market rates effectively tax exporters, undermining export competitiveness and creating disincentives to repatriate export earnings. At the same time, scarcity of foreign exchange may lead to supply shortfalls of critical commodities,” it added.
The bank further said long-term inflation expectations seem to remain well-anchored for the major economies in the region.
“Nevertheless, central banks need to stay alert. Core inflation is still running above target. The big supply shocks and permanent structural realignments associated with the pandemic have made calibrating monetary policy particularly challenging,” it said.
The report added central banks should reaffirm their commitment to price stability and be prepared to hike rates if core inflation does not show clear signs of returning to target.