East Asia's 2008 growth 'to slow'

China's economic growth will not be derailed by problems in the US

Slowing exports and business investment will take some of the shine off 2008 economic growth in East Asia, the World Bank has predicted.

The agency expects the region, excluding Japan, to grow by 7.3%, down from 8.7% in 2007.

The decline is blamed on financial market turmoil and a subsequent slowdown in global growth.

But it said that overall the region was "well prepared" to deal with the problems abroad.

In its latest six monthly report on East Asia, the World Bank reduced its guidance on China's 2008 economic growth rate to 9.4%, from the 9.6% it predicted in February, and lower than the 11.4% reached in 2007.

But it found that economic activity there and in the region's other economies would remain buoyant because of the investments they had made in the last 10 years in reforms and putting sound macroeconomic policies in place.

This would help East Asian economies remain healthy despite US import growth coming to a standstill, and likely to fall in the coming months, the World Bank said.

Solid growth

Exports to markets outside the US, including within the region, and strong domestic demand contributed to buoyant economic activity in the latter half of 2007, with business investment particularly strong in China, Indonesia and Vietnam.

The poverty fighting body considered that slowing exports would cut company spending, but not to the levels seen in the 2001 recession due to "stronger corporate balance sheets and profitability".

In addition, the World Bank noted that the region's banks appeared to have little exposure to investments linked to the troubled US housing market, which meant that credit terms remained unaffected.

"Current account surpluses and large foreign reserves should provide a buffer that will enable economies to accommodate volatility in international capital flows," the agency said.

Inflation risks

The real challenge for governments of the region, it said, is the inflationary effect of mounting food and fuel prices, which are hurting the poor and could heighten political tension.

"We are already seeing real incomes of poor people living in rural and urban areas decline substantially as a result of higher food prices," said Jim Adams, vice president of the World Bank’s East Asia & Pacific region.

The report also said that East Asian countries, including China, needed to move towards more flexible exchange rates so that monetary policy would become more effective in keeping inflation under control.