Asia faces worst economic outlook in half a century, World Bank warns

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The World Bank has cut its forecast for China’s growth next year and warned that east Asia’s developing economies are set to expand at one of the lowest rates in five decades, as US protectionism and rising levels of debt pose an economic drag.

The gloomier 2024 forecasts from the bank underline the mounting concern over China’s slowdown and how it will spill into Asia. China’s policymakers have already set one of the lowest growth targets in decades for 2023, of about 5 per cent.

Citing a string of weak indicators for the world’s second-biggest economy, the World Bank said it now expected China’s economic output would grow 4.4 per cent in 2024, down from the 4.8 per cent it expected in April.

It also downgraded its 2024 forecast for gross domestic product growth for developing economies in east Asia and the Pacific, which includes China, to 4.5 per cent, from a prediction in April of 4.8 per cent and trailing the 5 per cent rate expected this year.

The projections show that the region, one of the world’s main growth engines, is set for its slowest pace of growth since the late 1960s, excluding extraordinary events such as the coronavirus pandemic, the Asian financial crisis and the global oil shock in the 1970s.

Economists expected China’s rebound from strict pandemic controls would be “more sustained and more significant than it turned out to be”, said Aaditya Mattoo, World Bank chief economist for east Asia and the Pacific.

The bank pointed to Chinese retail sales tumbling to below pre-pandemic levels, stagnant house prices, increased household debt and lagging private sector investment.

Mattoo warned that slower growth would persist unless governments, including China’s, embarked on “deeper” service sector reforms. But a transition from property- and investment-led growth has been challenging for many developing Asian economies.

“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.

Softer global demand is taking its toll. Goods exports are down more than 20 per cent in Indonesia and Malaysia, and more than 10 per cent in China and Vietnam compared with the second quarter of 2022. Rising household, corporate and government debt has further dented growth prospects.

The worsening forecasts also reflect that much of the region — not just China — is starting to be hit by new US industrial and trade policies under the Inflation Reduction Act and the Chips and Science Act.

For years, US-China trade tensions and tariffs imposed on Beijing by Washington benefited south-east Asia, driving demand for imports towards other countries in the region, especially Vietnam.

But the introduction of the IRA and Chips laws in 2022 — policies designed to boost US manufacturing and cut American dependence on China — has hit south-east Asian countries. Their exports of affected products to the US have fallen.

“This whole region which had perversely benefited from US-China trade tensions in terms of [trade] diversion now is suffering trade diversion away from it,” said Mattoo.

Electronics and machinery exports from China and south-east Asian countries including Indonesia, Vietnam, the Philippines, Malaysia and Thailand declined after President Joe Biden’s protectionist policies came into force, according to the World Bank.

By comparison, US trade with countries including Canada and Mexico, which unlike China and south-east Asia are exempt from the local content requirements attached to US subsidies, has not declined.

“The treatment under these provisions is discriminating against countries which are not exempt from the local content requirements,” Mattoo said.

The World Bank data factors in a reduction in demand due to the overall slowdown in global growth that is affecting all countries.

Concerned south-east Asian countries are rushing to fight back. Indonesian business has criticised the “unfair” exclusion of the country’s critical minerals from a huge package of US subsidies for green technology.

Indonesia holds the world’s largest reserves of nickel, which is crucial for producing electric vehicle batteries. Jakarta is trying to negotiate a provision that would make its mineral exports eligible for similar treatment to Canada or Mexico.

Business lobby groups in Vietnam have similarly argued that the US should extend electric vehicle tax credit benefits to Hanoi, especially after the two countries formally upgraded ties this month. The US is Vietnam’s largest market, but shipments fell 19.1 per cent from January to August this year, compared with a 13.6 per cent rise in 2022.

Additional reporting by Andy Lin in Hong Kong