The World Bank said on Monday that the East Asia and Pacific region may see its economic growth sliding to the weakest in 11 years and cut the region's growth outlook for this year as well as the next amid a more-than-expected slowdown in China.
Releasing the East Asia and Pacific Data Monitor, the lender said growth in developing economies in East Asia is expected to decline a full percentage point to 7.2 percent this year from 8.3 percent in 2011. This was weaker than its May projection of 7.6 percent growth.
East Asia growth is seen recovering to 7.6 percent in 2013, backed by continued strong domestic demand and an uptick in global trade growth. This was, however, lower than an earlier prediction of 8 percent growth.
"This is the slowest growth rate in the Asia Pacific region since 2001, which is "even slower than the peak of the financial crisis in 2009"," said Bert Hofman, the bank's chief economist for East Asia.
Growth in China is forecast to slow to 7.7 percent this year from 9.3 percent last year, driven by weak exports and lower investment growth. This is lower than the bank's 8.2 percent forecast issued earlier.
China's growth is expected to recover next year to a projected 8.1 percent, as the impact of stimulus measures kicks in, supported further by an uptick in global trade, the report said. Nonetheless, this is down from 8.6 percent expansion predicted in May.
The bank said the risk of a "hard landing" in China remains small. The World Bank said a major fiscal stimulus package from China is unlikely as policymakers try to balance their support for growth with their concerns of a rebound in housing prices and of a reversal of hot money flows from QE3 in the U.S.
The report noted that the East Asia-Pacific outlook faces considerable uncertainties. A crisis in the euro area is expected to affect the developing economies in the region mainly through trade and to a lesser extent financial sector links.
With a "major" crisis, GDP growth could drop by more than 2 percentage points in 2013, it said. The U.S. "fiscal cliff" also poses a risk of more headwinds in the global economy, the bank noted.
However, the report added that most developing East Asian economies are well positioned to weather a European crisis or a renewed global slowdown.
"As external demand has further moderated and inflationary pressures recede, there is some space for accommodative policies in most countries, and in case of a major external slowdown, sufficient fiscal space for a stimulus," the lender noted.
The World Bank expects activity in high income countries to recover in the coming months in the wake of renewed stimulus measures taken by the Federal Reserve, the European Central Bank and the Bank of Japan in September.
However, this is unlikely to outweigh the continuing drag on growth from fiscal consolidation and deleveraging in the banking systems, it said. GDP growth in advanced countries is now expected to remain at 1.3 percent this year, with a shallow recession in the euro area. In 2013, advanced economies will grow 1.5 percent.
Global growth is now expected at around 2.3 percent in 2012 and 2.6 percent in 2013.
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