East Asia's growth is faster than the rest of the world but China headwinds weigh, World Bank says

As inflation continues to impact global economies, Asia-Pacific is the only region that will see real salary growth in 2023, according to ECA International.Azmanl | E+ | Getty Images

Growth in developing East Asia and Pacific is outpacing the rest of the world, but the region will likely see slower growth in 2024 amid headwinds in China and broader policy uncertainty, according to the World Bank.

“It is a region that is still outperforming the rest of the world, but it is underachieving relative to its own potential,” Aaditya Mattoo, East Asia and Pacific chief economist at the World Bank, told CNBC's “Street Signs Asia” on Monday.

Growth in the region is expected to ease to 4.5% this year, slowing from last year's 5.1% expansion, according to the bank's East Asia and Pacific (EAP) update for 2024, which was released Monday. The region has a population of over 2.1 billion people.

However, excluding China, growth in the region is predicted to reach 4.6% this year — higher than 4.4% in 2023.

“The outlook is subject to downside risks, which include a greater than expected slowdown in the global economy, higher for longer interest rates in major economies, increased uncertainty around the world about economic policies, and an intensification of geopolitical tensions,” the report said.

While China has set an official growth target of about 5% for 2024, the World Bank projects that growth in Asia's largest economy will moderate to 4.5% this year, slowing from last year's 5.2% expansion. The country's slowing growth has been attributed to a dent in consumer confidence domestically, as well as its high debt levels and slumping real estate sector.

All that has led to a relocation of production and investment away from China which could ultimately impact production in other countries like Vietnam and Mexico, said Mattoo.

“China has become profoundly important for the region, as a source of inputs, as a destination where value added produce in the region is ultimately consumed, and as well as a source of investment,” he told CNBC.

The report highlighted that many of the countries in the EAP region depend on external demand for export growth. “China's importance as the ultimate destination for domestic value-added in the region has significantly increased since early 2000s,” the report said citing countries like Malaysia, Thailand, Vietnam and Lao.

“Several countries in the region are also exposed through trade linkages to economic activity in the US and EU (Cambodia, Malaysia, Philippines, Thailand and Viet Nam),” the report highlighted.

There are other factors limiting growth in the region.

“Trade is recovering globally, but at the same time, we see a spate of protectionist policies,” Mattoo said.

“We're see an easing of financial conditions such as the beast of inflation seeming to be tamed, but at the same time, we see high interest rates and a region where debt is significantly higher than it was before the pandemic.”

He added that “bold policy action” is needed to “unleash competition, improve infrastructure, and reform education,” which could boost the region's economy.

Meanwhile, if China is able to negotiate its transition to high quality and sustainable growth, and avoid protectionism with other players in the region — such as Malaysia, Indonesia, the Philippines, and Vietnam — that could be a powerful catalyst to growth, the economist said.

Last week, speaking at the China Development Forum in Beijing, International Monetary Fund's Managing Director Kristalina Georgieva argued that “pro-market reforms” could spur China's growth “considerably faster than a status quo scenario.”