Domestic demand to drive Asian economies in coming slowdown

BUSINESSDESK: The emerging economies of East Asia will rely on the growing spending power of their own people more than exporting to rich nations over the next year, with a slowdown in growth across the Asia-Pacific region, the World Bank says.

Its latest East Asia and Pacific Economic Data Monitor has China slowing from annual growth in 2011 of 9.3% to 7.7% this year, before rebounding to 8.1% next year as looser monetary policy and fiscal stimulus by the Chinese government kicks in.

The forecasts are highly dependent on the eurozone not experiencing a full-blown financial crisis.

"Tensions in the eurozone have eased following the European Central Bank's announcement to defend the euro in July and the launch of its bond-buying programme that significantly calmed the markets," the report says.

"However, should conditions in Europe deteriorate sharply, the risks are high that developing economies might be affected ... mainly through trade and links to the financial sector."

With rice supplies abundant, the bank sees diminished risk of food price spikes affecting the region.

The new round of quantitative easing by the US Federal Reserve had also helped revive global equity markets.

Growth in developed countries such as Australia and New Zealand is forecast to "remain modest, with recovery in the region to be driven mainly by strong domestic demand in developing countries".

The bank noted East Asia and the Pacific region's share in the global economy has tripled in the last two decades, from 6% to almost 18% today, making it increasingly important for world growth.

It also expects the number of people in the region living on $2 a day – a broad poverty measure – to keep falling from 28.8% in 2010 to 24.5% by the end of next year.

Weaker demand for East Asia's exports is slowing the regional economy, but compared to other parts of the world, it's still growing strongly, and thriving domestic demand will enable the region's economy to bounce back to 7.6% next year.

Like New Zealand with the Christchurch rebuild, the report says reconstruction spending in Thailand after last year's floods will "buttress domestic demand, while Indonesia and Malaysia are currently enjoying a boom in spending by their governments and the private sector on capital goods".