World Bank cuts East Asia GDP growth forecast on war in Ukraine

MANILA (REUTERS, BLOOMBERG) - The World Bank cut its growth forecast for East Asia and the Pacific for 2022 to reflect the economic impact of Russia’s invasion of Ukraine, warning the region could lose further momentum if conditions worsen.

The Washington-based lender said in a report on Tuesday (April 5) it expected 2022 growth in the developing East Asia and Pacific (EAP) region, which includes China, to expand 5 per cent, lower than its 5.4 per cent forecast in October.

But growth could slow to 4 per cent if conditions worsened and government policy responses were weaker, the World Bank said.

China’s economy is expected to grow 5 per cent this year, down from a previous estimate of 5.4 per cent, it said, noting its government’s capacity to provide stimulus to offset adverse shocks.

“The region confronts a triad of shocks which threaten to undermine its growth momentum,” said World Bank East Asia and Pacific chief economist Aaditya Mattoo.

The war between Russia and Ukraine, which Mr Mattoo said was the “most serious risk” to the region’s growth outlook, is leading to food and fuel price increases, financial volatility and reduced confidence all over the world.

Mr Mattoo said Russia’s invasion of Ukraine was more worrying given that the region was still contending with the effects of the Covid-19 pandemic, a structural slowdown in China and faster inflation that could prompt quicker US monetary tightening.

The war’s impact on economies in East Asia and the Pacific would vary depending on their exposure and resilience, Mr Mattoo said. Excluding China, output in the rest of the region is projected to expand 4.8 per cent this year.

“Just as the economies of East Asia and the Pacific were recovering from the pandemic-induced shock, the war in Ukraine is weighing on growth momentum,” World Bank vice-president for East Asia and Pacific Manuela Ferro said in a statement.

“The region’s largely strong fundamentals and sound policies should help it weather these storms.”

In its outlook, the World Bank said regional firms that had already reported payment arrears will be hit by new supply and demand shocks. At the same time, real income for households will shrink as inflation soars and government debt will limit how fiscal policy makers can respond. Rising prices will also limit room for central banks to ease.

The development lender recommends four types of policy response:

• Targeted support for households and firms in order to limit pain from the shocks and create space for investment
• Stress-testing financial institutions to identify risks
• Reform of trade-related policies in goods and, especially, in still-protected services sectors would enable countries to take advantage of shifts in the global trade landscape
• Improving skills and enhancing competition would strengthen the capacity and incentive to adopt new digital technologies

While these policy steps would cushion the hit to growth, the year ahead will be challenging, said Mr Mattoo.

“This is going to be a hard year for the region, nobody is going to be immune to the shocks we described,” he said.