(Bloomberg) -- The World Bank has lowered its growth forecasts for East Asia and the Pacific to 5% from 5.4% forecast in October, and warned growth could slow to 4% if conditions weaken further.
The latest outlook reflects a hit to the region from Russia's invasion of Ukraine, rising interest rates in the U.S. and slowing growth in China. Ongoing supply chain shocks are continuing to hamper manufacturers and push up prices, the World Bank said in its Spring 2022 East Asia and Pacific Economic Update.
China, which accounts for 86% of regional output according to the World Bank, is tipped to expand by 5% in its baseline scenario and 4% in the downside scenario. For the rest of the region, output is tipped to expand 4.8% in the base case and 4.2% in the downside scenario. The latter outcome would trigger 6 million more people remaining trapped in poverty at the $5.50 per day threshold, the development lender warned.
In its outlook, the Washington D.C.-based institution said regional firms that had already reported payment arrears will be hit by new supply and demand shocks. At the same time, real income for households will shrink as inflation soars and government debt will limit how fiscal policy makers can respond. Rising prices will also limit room for central banks to ease.
The development lender recommends four types of policy response:
- Targeted support for households and firms in order to limit pain from the shocks and create space for investment
- Stress-testing financial institutions to identify risks
- Reform of trade-related policies in goods and, especially, in still-protected services sectors would enable countries to take advantage of shifts in the global trade landscape
- Improving skills and enhancing competition would strengthen the capacity and incentive to adopt new digital technologies
While these policy steps would cushion the hit to growth, the year ahead will be challenging, said the World Bank's East Asia and Pacific Chief Economist Aaditya Mattoo.
“This is going to be a hard year for the region, nobody is going to be immune to the shocks we described,” Mattoo said.
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