Ukraine War, US Monetary Tightening, and China Slowdown Threaten the East Asia and Pacific Economic Recovery

By The World Bank

Cover Image Attribute: A Street in Shanghai by Ted via Pixabay.com

Ukraine's conflict is jeopardizing the unequal recovery of developing East Asia and Pacific (EAP) countries from the COVID-19 shock, the World Bank warned on Monday. The war comes on top of the economic suffering caused by the lingering COVID-19 epidemic, the tightening of financial conditions in the United States, and the pandemic's reappearance in China despite zero-COVID regulations.

According to the World Bank's East Asia and Pacific Economic Update (Spring 2022): Braving the Storms, shocks resulting from the Ukraine crisis and Russian sanctions are disrupting commodity supply, increasing financial stress, and lowering global growth. Countries in the region that import significant amounts of fuel – such as Mongolia and Thailand – and food – such as the Pacific Islands – are experiencing a fall in real incomes. Countries with high levels of debt – such as the Lao People's Democratic Republic and Mongolia – and a heavy reliance on exports – such as Malaysia and Vietnam – are particularly vulnerable to global financial and economic shocks.

“Just as the economies of East Asia and the Pacific were recovering from the pandemic-induced shock, the war in Ukraine is weighing on growth momentum,” said World Bank Vice President for East Asia and Pacific Manuela V. Ferro. “The region’s largely strong fundamentals and sound policies should help it weather these storms.”

While commodity producers and fiscally prudent countries may be better equipped to weather these shocks, the repercussions of these events will dampen the growth prospects of most in the region. Overall economic growth is projected to slow to 5 percent in 2022— 0.4 of a percentage point less than expected in October. If global conditions worsen and national policy responses are weak, growth could slow to 4 percent. China, which accounts for 86 percent of regional output, is projected to grow 5 percent in the baseline and 4 percent in the downside scenario. Output in the rest of the region is projected to expand 4.8 percent in the baseline and 4.2 percent in the downside scenario. In the downside scenario, 6 million more people in the region would remain trapped in poverty in 2022 at the US$5.50/day poverty line.

The conflict, financial tightening, and slowing growth in China are all expected to exacerbate already-existing post-COVID challenges. Regional businesses that are struggling, with more than 50% reporting payment arrears in 2021, will face fresh supply and demand shocks. Households, many of which went back into poverty during the pandemic, will see their actual earnings continue to decline as prices climb. Indebted governments will struggle to give economic help, as their debt as a percentage of GDP has increased by ten percentage points since 2019. Increased inflation, at least one percentage point higher than previously anticipated as a result of the oil price shock alone, will reduce the room for monetary easing.

“The succession of shocks means that the growing economic pain of the people will have to face the shrinking financial capacity of their governments,” said East Asia and Pacific Chief Economist Aaditya Mattoo. “A combination of fiscal, financial and trade reforms could mitigate risks, revive growth and reduce poverty.”

The report makes four recommendations for policy action. Rather than price controls and blanket assistance, targeted support to people and businesses would mitigate the impact of shocks and free up capital for growth-enhancing investment. Stress-testing financial organizations may aid in identifying dangers lurking beneath the cloak of regulatory forbearance. Reforming trade regulations, particularly in the still-protected services sector, would enable countries to capitalize on changes in the global economic landscape. By strengthening skills and increasing competition, we can increase our capacity and motivation to adopt new digital technologies.

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