World Bank Raises East Asia Growth Forecast but Flags AI Risks

The World Bank has updated its economic outlook for East Asia and the Pacific, forecasting a 4.5% expansion in 2024, an increase of 0.3 percentage points from its April projection. This upward revision is largely driven by a surge in exports tied to artificial intelligence (AI) technologies. The region, which encompasses 23 diverse economies including China, Vietnam, Indonesia, Malaysia, and Thailand, is expected to maintain moderate growth with forecasts of 4.4% in 2027 and 4.3% in 2028.

Among the region’s major economies, Vietnam saw the most significant improvement in its growth forecast, climbing 1.1 percentage points to 7.4%. This reflects strong demand for AI-related products, which have become a key factor supporting export growth. The World Bank’s report highlights that AI-related goods have accounted for over half of export growth in most countries within the region. In Malaysia, the Philippines, Thailand, and Vietnam, AI products represent more than 70% of export increases.

China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam collectively exported $1.4 trillion worth of AI-related goods in the 12 months leading up to April 2024. South Korea also reported robust export growth, with shipments reaching a record $120.9 billion in September, an 83.5% rise driven primarily by semiconductors, which make up half of its exports. The semiconductor sector’s dominance is underscored by the fact that Samsung and SK Hynix, two of South Korea’s largest chipmakers, account for 43% of the Kospi index’s value as of the end of April.

Despite these positive indicators, the World Bank cautions that the region’s economic growth remains highly vulnerable due to its heavy reliance on the AI sector. While exports related to AI have been strong, trade in other goods has been weak or even negative. This concentration risk is compounded by the nature of AI-related investment, which has surged rapidly and may be susceptible to a correction.

AI capital expenditure in the United States alone has reached about 6% of GDP, mirroring the peak seen in IT investment around the year 2000. The current AI investment cycle has accelerated more quickly than previous technology booms. The Bank for International Settlements recently compared the scale and speed of this surge to the dot-com bubble and other historical market manias. A significant portion of AI investment—$800 billion out of $2.9 trillion planned between 2025 and 2028—is expected to come from private credit. This form of financing presents additional risks, as private credit markets are less transparent and have not been tested during a severe economic downturn. AI-related lending surged to 34% of private credit activity in 2025, up from an 18% average over the previous five years.

The tightening of monetary policy by major central banks could slow the pace of AI investment. The U.S. Federal Reserve recently raised interest rates for the first time since 2023 and indicated one more increase this year. This shift in financial conditions may temper the rapid growth in AI capital expenditure, which the World Bank notes has outpaced actual demand. While this adjustment does not necessarily signal a collapse in the AI-driven growth cycle, it could reduce momentum.

A slowdown in the U.S. economy by one percentage point is expected to lower growth in emerging markets by approximately 0.6 percentage points, with investment experiencing an even larger decline. This is particularly significant for East Asia, given its integral role in the AI supply chain. The region’s exposure is further complicated by significant foreign-currency liabilities in banking sectors, such as Malaysia with 29.2% of GDP and the Philippines with 20.7%.

In Taiwan, AI demand prompted an upward revision of the 2026 growth forecast to 11% from a previous 9.6%. However, local authorities have warned that any challenges in the high-tech sector could have a larger negative impact on the economy than anticipated.

These developments underscore the dual nature of AI’s influence on the East Asia and Pacific economies. On one hand, AI-related manufacturing and exports are driving growth beyond earlier expectations. On the other, the region faces potential setbacks if investment levels retract or if global technology spending slows due to tighter financial conditions or other external shocks.

As East Asia continues to deepen its involvement in AI sectors, policymakers and investors will need to monitor these risks carefully while capitalizing on the opportunities presented by this rapidly evolving technology landscape.