TO GROWTH
Figure 9. Real GDP growth forecast for selected developing economies in the ESCAP region, 2007-2008
Source: ESCAP forecast.
Note: Thirty-eight developing economies (including the Central Asian countries), comprise developing ESCAP economies, and calculations are based on the weighted average of GDP figures in 2004 United States dollars (at 2000 prices).
China Hong Kong, China India Indonesia Malaysia Pakistan Philippines Republic of Korea Russian Federation Singapore Taiwan Province of China Thailand Developing ESCAP economies
0 2 4 6 8 10 12 14
Percentage
2007 2008
important role, as the Government increases its spending in rural areas and social sectors. Investment would continue to be the main demand component of growth, as policy measures to rein in spending in overheating sectors face obstacles as a result of buoyant liquidity.
India is forecast to maintain its dynamic growth in 2008, with the country remaining largely insulated from weakness in the global economy. Investment in the booming manufacturing and services sectors will remain the main driver of GDP growth. Private consumption is expected to remain healthy as the rural economy will have benefited from a reasonable monsoon season in 2007.
Government spending is likely to be high in 2008 owing to a number of demands on the exchequer, including a public-sector wage increase based on the decision of the Sixth Central Pay Commission in April 2008. The previous such Commission in 1997 authorized an increase of 31 per cent in base salaries of public sector workers.
The Russian Federation is expected to see a slower but still high rate of growth next year, with the economy continuing to benefit from high international energy prices. Exports will therefore remain strong, as will consumption. Manu-facturing and services are projected to expand strongly to feed growing domestic demand. Nevertheless, energy exports are also leading to some difficulty for the economy. Real appreciation of the currency may affect other export sectors while imports increase.
The Republic of Korea is forecast to display unchanged GDP growth in 2008. While exports will be affected by the United States slowdown, the important Chinese market will continue to offer opportunities. Exporters will also benefit from the implementation of the free trade agreement with the United States in 2008, subject to ratification by the United States Congress. Private consumption will continue to strongly support GDP, as confidence remains high owing to the lowest levels of unemployment in a decade.
South-East Asian countries, except for Thailand, Malaysia and Lao People’s Democratic Republic are expected to witness slowing or relatively unchanged GDP growth rates. Because most are highly export-dependent economies, weak United States demand will reduce the contribution of their exports to overall growth. Nevertheless, countries are expected to see increased contribu-tions from domestic demand, through both consumption and investment.
Indonesia is expected to see strong investment due to lower interest rates, the country’s new investment law and government infrastructure-spending plans.
The Philippines is expected to see robust private consumption as a result of booming remittances. Consumption in Singapore is likely to remain high as a result of rising wages, high property prices and low unemployment. Thailand is expected to experience a significant increase in GDP growth following the elections scheduled to be held at the end of 2007. Growth will stem from increased consumption and investment, following a boost in consumer and business confidence. The new Government may also be expected to pursue a relatively expansionary fiscal policy, thus increasing both investment and consumption by the public sector.
India is forecast to maintain its dynamic growth in 2008, with the country remaining largely insulated from weakness in the global economy
“ ”
Cautious monetary policy
Inflation rates in the region are expected to remain high under pressure from oil and food prices. Economies in South-East Asia and the Republic of Korea are expected to see a faster rate of price increase (see figure 10). Monetary policy in the region is likely to remain fairly neutral. On the one hand, there is a requirement for restrictive policies to counter increasing inflationary pressures.
On the other, there is a need for relatively permissive monetary policy in order to manage any significant slowdown in GDP growth as a result of external-sector difficulties. Monetary policy in India and China is expected to remain cautious as the countries continue to manage the threat of overheating domestic demand in their economies.
Countries throughout the region are expected to experience lower current account balances in 2008 due to weakness in merchandise exports (see figure 11). One factor will be the economic slowdown in the United States and lack of demand support from other non-Asian markets. Downward pressure on exports will also come from the continued exchange rate appreciation in countries of the region against major trading partners.
Commodity exporters will be relatively shielded from deterioration in export growth, although some commodity prices may ease from their high levels in 2007. Indonesia and the Philippines will continue to receive support for their current account balances from the booming remittances of their overseas workers.
Figure 10. Consumer price inflation for selected developing economies in the ESCAP region, 2007-2008
Source: ESCAP forecast.
Note: Thirty-eight developing economies (including the Central Asian countries), comprise developing ESCAP economies, and calculations are based on the weighted average of GDP figures in 2004 United States dollars (at 2000 prices).
China Hong Kong, China India Indonesia Malaysia Pakistan Philippines Republic of Korea Russian Federation Singapore Taiwan Province of China Thailand Developing ESCAP economies
0 1 2 3 4 5 6 7 8 9 10
Percentage
Downward pressure on exports will come from continued exchange rate appreciation against major trading partners
“ ”
2007 2008
Coping with a United States slowdown
The major downside risk to the forecast for 2008 emanates from outside the region: the possible effect of spillovers from the downturn in the United States housing market. The broader effect on the real sector of the housing market weakness largely remains to be played out. The scale of losses in the subprime sector is expected to increase considerably in coming months. The subprime market difficulties could be a possible harbinger of larger debt problems in the housing market. Subprime borrowers are naturally the first to be affected as they comprise the most vulnerable section of society. Defaults may therefore be set to spread on a significant scale to more creditworthy borrowers over the next few months. One pressure point will occur when subprime and other borrowers see their mortgage interest payments on vari-able rate loans revalued at the end of 2007. However, the uncertainty over subprime mortgages could continue for up to two years as the stock of existing loans continues to reset at higher rates.
Tighter lending conditions and greater difficulty in obtaining new loans since the subprime crisis broke, such as through mortgage refinancing and home equity lending, will lead to further reduced demand for housing. The resulting slowdown in United States growth could cause further problems for credit markets and financial institutions. Such a situation could occur as a conse-quence of an increase in defaults on segments of consumer debt and corporate loans, also affecting another set of financial products known as credit default swaps.
The widespread decline in the value of housing assets and tighter credit conditions would lead to a reduction in consumer spending and imports. The
Figure 11. Current account balance for selected developing economies in the ESCAP region, 2007-2008
Source: ESCAP forecast.
Note: Emerging Asia comprises the 12 economies listed in the figure.
China Hong Kong, China India Indonesia Malaysia Pakistan Philippines Republic of Korea Russian Federation Singapore Taiwan Province of China Thailand Emerging Asia
– 10 – 5 0 5 10 15 20 25 30
Percentage of GDP
The broader effect on the real sector of the United States housing market weakness largely remains to be played out
“ ”
2007 2008
27 Morgan Stanley Global Economic Forum, “The decoupling debate”, 4 September 2007.
United States slowdown to date has been notable for affecting mainly residen-tial investment, while consumption has held up reasonably well.
The resulting slowdown in growth would lead to further downward pressure on United States interest rates to stimulate the economy. Consequently, the value of the dollar would fall further. Asia-Pacific economies would thus face a situation in which the prices of their exports to the United States would be higher and the demand for their products would be lower owing to declining consumption in that country. Economies in the Asia-Pacific region remain highly reliant on exports, both directly and indirectly through supplying intermediate inputs for Chinese exports. Dependence on exports is greater for all economies than in the pre-1997 crisis era, except for Indonesia and the Philippines.
Nevertheless, over the last few years the dependence of the region on the United States market has decreased somewhat. Europe now receives about the same share of exports (16 per cent) from Asian countries (except Japan) as does the United States. Recently China has seen some signs of redirection in its exports, with sales to Europe in July and August having been larger than those to the United States. Exports by China to Europe increased by 31 per cent in the first eight months of 2007.27 However, increasing diversification of Asia’s exports may not help to offset the slowing growth in the United States.
Japan and the European Union have not displayed signs of developing into alternative growth drivers for the Asia-Pacific region. Japan registered negative GDP growth in the second quarter of 2007 and European Union GDP growth in the second quarter was the lowest since the end of 2004.
READERSHIP SURVEY
The Poverty and Development Division of ESCAP is undertaking an evaluation of the publication, Key Economic Developments and Prospects in the Asia-Pacific Region 2008, with a view to making future issues more useful for our readers. We would appreciate it if you could complete this questionnaire and return it at your earliest convenience to:
Director
Poverty and Development Division ESCAP, United Nations Building Rajadamnern Nok Avenue Bangkok 10200, THAILAND
QUESTIONNAIRE
Excellent Very Average Poor good
1. Please indicate your assessment of the quality of the publication with regard to:
•
•• ••
Presentation/format 4 3 2 1•
•• ••
Readability 4 3 2 1•
•• ••
Timeliness of information 4 3 2 1•
•• ••
Coverage of subject matter 4 3 2 1•
•• ••
Analytical rigour 4 3 2 1•
•• ••
Overall quality 4 3 2 12. How useful is the publication for your work?
•
•• ••
Provision of information 4 3 2 1•
•• ••
Clarification of issues 4 3 2 1•
•• ••
Its findings 4 3 2 1•
•• ••
Policy suggestions 4 3 2 1•
•• ••
Overall usefulness 4 3 2 13. Please give examples of how this publication has contributed to your work:
...
...
...
4. Suggestions for improving the publication:
...
...
...
5. Your background information, please:
Name: ...
Title/position: ...
Institution: ...
Office address: ...
Please use additional sheets of paper, if required, to answer the questions.
Thank you for your kind cooperation in completing this questionnaire.
_________________________________________________________________
Printed in Bangkok December 2007 – 1,335 United Nations publication
Sales No. E.07.II.F.28
Copyright © United Nations 2007 ISBN: 978-92-1-120523-7
ST/ESCAP/2461