Growth in Asian economies may be slowing due to weakening external demand, but the World Bank says Asian economies have the room to use fiscal stimulus to protect their economies from an escalation in the European debt crisis that may have substantial spillovers in the region.
In the half-yearly East Asia and Pacific Economic Update report, the World Bank predicts that developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and India, will expand at 7.8 percent in 2012 after an 8.2 percent growth this year.
While the East Asian economies have coped well in the global downturn, it would not remain unscathed.
"Lower growth in Europe in the course of fiscal austerity and the banks' needs to increase capital coverage would affect East Asia," said Bert Hofman, World Bank Chief Economist for the East Asia and Pacific Region.
The World Bank said that the prospects for growth in the region were further constrained by the natural disasters the region has seen recently. Flooding in several countries, especially Thailand which has seen the worst floods in decades, has caused countries to revise growth downwards.
But in the report, the World Bank maintains that for growth to persist there must be a creation of stronger domestic and regional demand.
"Governments can take this opportunity to refocus on reforms that will enhance growth in the medium and long term," said Ekaterina Vostroknutova who is lead author on the report. "Higher investments in infrastructure, education and social security systems can help countries increase productivity and move toward higher value added production."
At the same time, Asian policy makers have shifted their focus to shielding growth rather than fighting inflation, as Europe’s debt woes and the struggling U.S. economy increases the risk of another global recession.
“Investors still do not fully discount the possibility of a disorderly sovereign debt restructuring in the advanced economies,” the World Bank said. “Should such an event occur, it may well trigger another recession in Europe. Spillovers to developing East Asia will be substantial, through trade, financial flows, remittances, and consumer and investor sentiment.”
While new capital rules being introduced in Europe will constrain the ability of the region’s banks to lend in Asia, high reserves and current account surpluses in most East Asian countries will protect them from the impact of possible renewed financial stress, the World Bank said.