World Bank warns Asia faces worst economic outlook in half century

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The World Bank has cut its forecast for China’s economic growth next year and warned that growth in developing economies in East Asia will be among the slowest in five years as U.S. protectionism and rising debt levels weigh on the economy.

The bank’s pessimistic forecast for 2024 highlights growing concerns about China’s economic slowdown and how it will spread to Asia. Chinese policymakers have set one of the lowest growth targets in decades for 2023, at around 5%.

Citing a series of weak indicators from the world’s second-largest economy, the World Bank said it now expects China’s economic output to grow 4.4% in 2024, down from the 4.8% forecast in April.

It also cut its 2024 GDP growth forecast for developing economies in East Asia and the Pacific, including China, to 4.5% from April’s 4.8%, below the 5% expected this year.

Excluding extraordinary events such as the coronavirus pandemic, the Asian financial crisis and the global oil crisis of the 1970s, the region, one of the world’s main growth engines, will grow at its slowest pace since the late 1960s, forecasts show.

Aditya Mattu, the World Bank’s chief economist for East Asia and the Pacific, said economists expect China’s rebound from strict epidemic control to be “longer-lasting and more significant than the outcome.”

The bank pointed to China’s retail sales falling below pre-pandemic levels, house prices stagnating, household debt rising and private sector investment lagging.

Mattu warned that slowing growth would continue unless governments, including China’s, embarked on “deeper” services sector reforms. But for many developing Asian economies, the transition away from real estate and investment-led growth has been challenging.

“In a region that is really prospering through trade and manufacturing investment . . . the next key to growth will come from reforming the services sector to take advantage of the digital revolution,” he said.

Weak global demand is taking its toll. Compared with the second quarter of 2022, merchandise exports fell by more than 20% in Indonesia and Malaysia, and by more than 10% in China and Vietnam. Rising household, business and government debt further weakened growth prospects.

The worsening forecast also reflects that much of the region – not just China – is starting to be hit by new U.S. industrial and trade policies under the Inflation Reduction Act and the Chip and Science Act.

Southeast Asia has benefited for years from U.S.-China trade tensions and tariffs imposed by Washington on Beijing, driving import demand from other countries in the region, particularly Vietnam.

But the introduction of the IRA and CHIPS laws in 2022 – policies aimed at boosting U.S. manufacturing and reducing U.S. dependence on China – has dealt a blow to Southeast Asian countries. Their exports of affected products to the United States have declined.

“The entire region has benefited greatly from U.S.-China trade tensions [trade] The current shift is suffering from trade diversion,” Mattu said.

The World Bank said electronics and machinery exports fell from China and Southeast Asian countries including Indonesia, Vietnam, the Philippines, Malaysia and Thailand after President Joe Biden’s protectionist policies took effect.

By contrast, U.S. trade has not declined with countries such as Canada and Mexico, which, unlike China and Southeast Asia, are not subject to the local content requirements attached to U.S. subsidies.

“The treatment provided for in these articles is discriminatory against countries that are not exempt from local content requirements,” Mattu said.

Data from the World Bank suggests that demand is falling as a general slowdown in global economic growth affects all countries.

Concerned Southeast Asian countries have launched counterattacks. Indonesian businesses have criticized the United States as “unfair” for excluding Indonesia’s critical minerals from huge U.S. subsidies for green technology.

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

Vietnam’s business lobby similarly believes the United States should extend electric vehicle tax credits to Hanoi, especially after the two countries formally upgraded ties this month. The United States is Vietnam’s largest market, but shipments fell 19.1% from January to August this year, compared with a 13.6% increase in 2022.

Additional reporting by Andy Lin in Hong Kong