The World Bank has cut the growth forecast for East Asia and the Pacific (EAP) to 5 percent from the October 2021 forecast of 5.4 percent, highlighting the impact of the Ukraine war, slowing growth in China and rising interest rates.
"In the baseline scenario, growth in the region is projected to decelerate from 7.2 percent in 2021 to 5 percent in 2022, which is half a percentage point slower than expected in October 2021. Given the large uncertainty, we also consider a low-case scenario in which regional growth in 2022 could decline to 4 percent," the World Bank said in a report.
"The slowing growth will be mostly due to China, where growth will slow to 5 percent in 2022, after the 8.1 percent rebound in 2021. Even though growth in the rest of the region is projected to rebound to 4.8 percent in 2022 from 2.6 percent growth in 2021, the acceleration will be less than the 5.2 percent expected in October 2021. The forecast assumes lingering COVID-19 related disruptions and varying degrees of supportive fiscal and monetary policy in the face of external shocks," the report added.
The World Bank believes China will experience a deterioration in its terms of trade and will face a significant slowdown in global growth which will impact economic activity from the second quarter of 2022 onwards.
The World Bank underscored that most of the Covid-19 related economic shock will be felt in the first half of 2022, followed by a bounce-back in the second half of the year. The current Covid-19 outbreak, in China and elsewhere, will largely affect the demand side with a limited impact on production.
Commodity prices will decline from their current highs but will remain significantly higher than before the war because of disruptions in production and trade and the lingering sanctions, said the World Bank.
In the low-case scenario growth of the region may fall to even 4 percent, said the World Bank. This could happen if Covid-19 related shock persists and commodity prices stay at their current highs because of worsening geopolitical tensions and tightening sanctions, said the World Bank.
"In the low-case scenario, financial conditions will be tighter than in the baseline scenario and continue to be volatile. All the countries in the region will have largely exhausted their capacity to mitigate the worsening impact of the adverse shocks on growth," said the World Bank.
Moreover, the World Bank expects EAP annual median headline inflation to surpass 3 percent in 2022.
"This forecast is above previous expectations and implies that inflation will overshoot the upper band of the inflation target in several EAP economies," said the World Bank.
"Higher food and fuel prices represent a significant risk to the upward-revised inflation outlook. In addition, capital outflows triggered by faster-than-expected monetary policy tightening in the United States could put pressure on regional currencies, and passthrough into higher inflation, especially in countries that rely on short-term capital inflows (e.g., Mongolia, Malaysia and to some extent Indonesia)," the World Bank added.