World Bank warns of slower growth in Asia

October 7, 2013: 4:12 AM ET
world bank asia
HONG KONG (CNNMoney)

The World Bank slashed its growth forecast for East Asia on Monday, saying that lower commodity prices and China's shift away from exports will hamper economies in the region.

The bank now expects growth of 7.1% in East Asia for 2013, down from an estimate of 7.8% made earlier this year. The Washington-based group has also downgraded its outlook for China, and now predicts GDP growth of 7.5% this year for the world's second largest economy.

The World Bank had earlier forecast growth of 8.3% in China. That is now unrealistic, the bank said, primarily because a rapid expansion in credit "has been less effective in generating growth."

Growth is expected to pick up next year in China to 7.7%, but risks remain -- especially as Beijing attempts to switch from an export-dependent economy to one driven by domestic spending and consumption.

"A greater than expected slowdown of investment could have an adverse effect on the region, especially on suppliers of capital goods and industrial raw materials to China," the report said.

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The report highlights growing headwinds in the region -- which has accounted for a huge chunk of economic and trade growth in the wake of the 2008 financial crisis. Large stimulus programs put in place after the crisis helped Asia recover more quickly than other regions, but the World Bank said slower growth should now be expected as those programs wind down.

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The World Bank report comes after a similar warning last week from the Asian Development Bank, which downgraded its economic outlook for Asia and emphasized the need for structural reforms.

"Governance reform is needed to sustain development momentum and ensure that the benefits of growth are widely shared," the group said.

Both the World Bank and the Asian Development Bank cite a possible end to the Federal Reserve's stimulus program as a risk.

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A withdrawal of stimulus could continue to prompt some investors to move their assets out of the region, putting pressure on economies in countries like India and Indonesia.

"The Federal Reserve's decision to delay tapering stabilized markets for now, giving countries a second opportunity to take measures to lower risks from future volatility," said Bert Hofman, an economist at the World Bank.

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