III. OUTLOOK FOR 2007: CONTINUED DYNAMISM
For developing Asia-Pacific economies, the economic growth outlook in 2007 is one of continued dynamism. Economic growth is projected at 6.9 per cent in 2007, marginally lower than in 2006 (see figure 7). The global economic environment is expected to remain favourable, particularly the ongoing domestic demand recovery in Japan. Economic growth in the United States is still projected to be strong, although signs of a slowdown have become clearer since the second half of 2006, as rising fuel costs, declining employment growth, and a cooling housing market are beginning to take a toll on the economy. A moderate decline is expected in global electronics demand in 2007 as well as a slightly less accommodative macroeconomic policy stance, reflected in a high level of domestic interest rates and a limited role for fiscal policy in many Asian economies. These developments are expected to marginally mitigate the positive impacts of global economic conditions on Asia-Pacific economies in 2007.
Figure 7. Real GDP growth forecast for selected developing economies in the ESCAP region, 2006-2007
China Hong Kong, China India Indonesia Malaysia Pakistan Philippines Republic of Korea Russian Federation Singapore Taiwan Province of China Thailand Developing ESCAP economies 0.0 2.0 4.0 6.0 8.0 10.0 12.0
Percentage 2006 a Source: ESCAP forecast. Note: Developing ESCAP economies comprise 38 (developing) economies (including the Central Asian countries) and calculations are based on the weighted average of GDP figures in 2000 United States dollars (at 1995 prices).
a b
2007 b
Estimates. Forecast.
19
“
Growth momentum in 2007 will come from strong growth in China, India and South-East Asia
The growth momentum in the Asia-Pacific region in 2007 is expected to come from strong growth in China and India, and a rebound in economic growth in the South-East Asian economies. In China, GDP growth is expected to be about 9.9 per cent in 2007, slightly less than the 10.2 per cent growth of 2006. The marginally easing growth in 2007 is a result of tightening domestic policy that would show its effects on the economy from the second half of 2006 in terms of a slowdown in investment and exports. India is expected to grow at 8.1 per cent in 2007, virtually unchanged from 2006. The service sector is expected to be the key engine of growth, while industrial production will also accelerate. The Government is set to follow the recommendations of its Committee on Pricing and Taxation of Petroleum Products. These recommendations include removing subsidies on petroleum products, except items that are heavily used by the poor. This will lead to an increase in the retail prices of gasoline and diesel, reflecting international prices. The Reserve Bank of India is likely to continue to nudge interest rates up over the next 12 months, and the programme of fiscal consolidation that is now under way is set to continue. Due to weakening demand for imports among the advanced economies, GDP growth in East and North-East Asia (except China) is projected to soften in 2007. The easing of demand for IT products is expected to contribute to this outcome. Even though domestic demand in these countries is expected to grow solidly in 2007, they will continue to rely heavily on the world markets and the Chinese economy. In North and Central Asia, growth is projected to ease slightly, to 6.5 per cent. Growth in the largest economy, the Russian Federation, is projected at 6.4 per cent in 2007. The country is expected to benefit from high commodity prices and correspondingly strong export earnings. Domestic demand would receive a continuous boost from high foreign exchange earnings. Meanwhile, significant progress in resolving banking system problems is also expected to improve private investment. A modest rebound in GDP growth in the South-East Asian economies is expected in 2007 as the factors constraining domestic demand recede. Domestic demand, particularly for investment, along with exports will become the engine of growth. In Indonesia, investment is expected to be boosted by lower interest rates and new probusiness regulations that are coming into effect. Strong electronics exports and higher development spending related to the Ninth Malaysia Plan (2006-2010) would help to boost investments in Malaysia. In the Philippines, energy sector reforms will help to strengthen the investment climate and investor confidence, leading to an increase in investment next year. Despite the September 2006 military coup in Thailand, GDP growth is expected to increase to 4.7 per cent in 2007. The new interim Government is likely to reduce uncertainty in government spending, especially in public investment, with spending expected to increase and play a key role in boosting GDP growth. Export growth is expected to remain at a high level as the global economic environment remains favourable. Investment and consumption are expected to grow at the same pace as in 2006. However, with the interim Government, the macroeconomic outlook in Thailand will still be subject to greater downside risks than in other South-East Asian economies (see box 1).
”
20
Box 1. Aftermath of the military coup in Thailand: assessing the economic impact On 19 September 2006, a military coup brought an end to the political impasse that had affected Thailand for most of the year. A new interim Government was appointed for one year in order to prepare a new constitution and organize democratic elections. The coup has had no significant impact on the Thai economy. The stock market has remained steady after suffering a mild fall (1.4 per cent) on 21 September, the first post-coup trading day on the Thai financial markets. The Thai baht stabilized by 21 September after a fall of 0.6 per cent against the dollar. Because the events of 19 September were seen as limited to Thailand and as being of a political rather than economic nature, contagion to other regional markets was limited. ESCAP forecasts a slight increase in Thailand’s GDP growth of around 4.7 per cent in 2007. This “base-case” prediction is built on the assumption that the new interim Government is likely to reduce uncertainty in government spending, especially in public investment expenditure, with government spending expected to increase and play a key role in boosting GDP growth. Although the macroeconomic forecast remains favourable, uncertainty remains regarding the short-term effect of the coup. The “worst-case scenario” could develop, with a series of short-lived interim governments triggering political instability as happened in 1992. This would significantly affect investor and consumer confidence. Under this “worst-case scenario”, ESCAP predicts that economic growth would fall to 3.1 per cent, while inflation would increase to almost 10 per cent in 2007. Similar to the experience of 1992, this scenario expects consumption and investment to decline by 2-3 percentage points while exports of services (mainly tourism) would drop by 4 percentage points. The baht would depreciate by more than 20 per cent, reaching almost 46 baht per United States dollar. Even though net exports could increase as a result of exchange rate depreciation, significant reduction in consumption, investment and tourism would outweigh these gains and retard economic growth. The next few months will be closely watched by investors. The interim Government has a heavy responsibility to maintain economic stability and investor confidence in the economy. It will be important in the short-term for the new administration to outline policies regarding the investment climate (i.e., macroeconomic policies and economic governance measures) and to provide clarification on government spending (particularly on the investment component of the fiscal budget).
The headline inflation outlook in developing Asia-Pacific economies is projected at 4.1 per cent in 2007, falling from 2006 levels. Asia-Pacific economies, except China; Hong Kong, China; Singapore and Uzbekistan will see lower levels of inflation in 2007 (see figure 8). Falling oil prices since mid-2006 and tight monetary policies across the economies of the region throughout 2006 are expected to begin affecting the region in 2007. Thus, even though the Governments of some countries, such as India, Indonesia and Malaysia, have further removed oil subsidies and allowed retail oil prices to reflect international prices, inflationary pressures are expected to be subdued. For some East
21
Figure 8. Consumer price inflation a for selected developing economies in the ESCAP region, 2006-2007
China Hong Kong, China India Indonesia Malaysia Pakistan Philippines Republic of Korea Russian Federation Singapore Taiwan Province of China Thailand Developing ESCAP economies 0.0 2.0 4.0 6.0 Percentage 2006 b Source: ESCAP forecast. Note: Developing ESCAP economies comprise 38 (developing) economies (including the Central Asian countries) and calculations are based on the weighted average of GDP figures in 2000 United States dollars (at 1995 prices).
a b c
8.0
10.0
12.0
14.0
2007 c
Changes in the consumer price index. Estimates. Forecast.
and North-East Asian economies, such as China and Hong Kong, China, inflationary pressures from the removal of oil subsidies and tightening labour and land markets, would be partly offset by tightening monetary policy and exchange rate appreciation. This is particularly true for Hong Kong, China. The current account surplus for emerging Asian economies is expected to deteriorate slightly in 2007, though it will remain high. Based on the 12 emerging Asian economies (see figure 9), the current account surplus is projected to be 4.7 per cent of GDP , compared with 5.1 per cent in 2006. With the expected rebound in domestic investment and the continuing high level of oil prices, the current account surplus is expected to decline in all Asian economies. In particular, a moderate decline in the current account surplus is expected in China due to policy measures supporting consumption, reduction in oil subsidies, and greater exchange rate flexibility. The above forecast on the economic performance of the Asia-Pacific region is rather robust, but several downside risks still remain. The possibility of a supply-side oil shock and a disorderly adjustment in global imbalances, among others, cannot be ignored. As such, the base line forecast would be increasingly tilted towards the downside risks. The potential for a supply-side oil shock could provide impetus for further rises in international oil prices, thereby negatively impacting projected economic growth, inflation and the current account. In the baseline forecast, the international oil price (Brent crude
22
Figure 9. Current account balance for selected developing economies in the ESCAP region, 2006-2007
China Hong Kong, China India Indonesia Malaysia Pakistan Philippines Republic of Korea Russian Federation Singapore Taiwan Province of China Thailand Emerging Asia -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0
Percentage of GDP 2006 a Source: ESCAP forecast. Note: Emerging Asia comprises selected developing Asian economies and calculations are based on the weighted average of real GDP figures in 2004 United States dollars (at 2000 prices).
a b
2007 b
Figures for 2006 are estimates. Figures for 2007 are forecasts.
oil) is expected to move to approximately US$ 65 a barrel in 2007. Nonetheless, as spare capacity remains low, even a moderate disruption in production capacity and/or a further escalation of security concerns in the Middle East, could raise oil prices above the baseline assumption. The widening of global imbalances is a concern. The current account deficit in the United States has steadily increased to 6.5 per cent of GDP in 2006 from 6.3 per cent in 2005. This deficit has been financed by economies registering current account surpluses. The surplus is, however, increasingly concentrated on a few countries – China, Germany, Japan and oil-exporting economies. A disorderly unwinding of global imbalances would lead to a sharp depreciation of the United States dollar together with a sudden increase in interest rates. A global recession with severe negative impacts on the Asia-Pacific region would be the result. Within the region there are some risks emerging from the two largest economies. Sustainable recovery of the Japanese economy depends on the ongoing process of fiscal consolidation to address ballooning domestic debt. Any disruption to fiscal consolidation could negatively affect consumer confidence and spending and, in turn, would threaten the Japanese recovery. As discussed earlier, the spectacular investment growth in China has raised worries about “overheating”. Given the increased importance of intraregional trade and investment linkages, a sharp slowdown in Japan and China could adversely affect other Asian economies.
“
Downside risks to 2007 growth from a supply-side oil shock and a disorderly adjustment in global imbalances cannot be ignored
”
23
The final potential risk is related to an avian influenza pandemic. The structure of the poultry industry, consisting of many small-scale, backyard operations, makes the region vulnerable. The outbreak of a full-blown pandemic could generate significant economic and social costs in the region.4
NOTES
1
Charlene Chu, Lynda Lin, Kate Lin, and David Marshall, “China: taking stock of banking system nonperforming loans,” Fitch Ratings (May 30, 2006). Found at http://www.fitchratings.com/dtp/pdf2-06/bchi3005.pdf. There are some issues about the comparability of data as the latest data is with reference to an expanded number of companies. With the same companies as previously, profit growth would be lower. Country coverage is constrained by data availability. Note that reserve adequacy assess the (stock) reserve level in relation to the stock of volatile (mobile) capital. In this study, ESCAP employs a broad definition of mobile capital that covers items of non-FDI inflows, namely portfolio investment, bank credits, balances on nonresident bank accounts and trade credits. The data series on this variable was constructed by carefully accumulating the relevant items in balance of payment records. For all countries, except for the Russian Federation, the starting year used in this compilation is 1980. For the Russian Federation, it is 1993 because of data limitations. However, it was found that the results were highly insensitive to the choice of starting year. See the potential costs of this pandemic in ESCAP Economic and Social Survey of , Asia and the Pacific 2006 (United Nations publication, Sales No. E.06.II.F.10).
2
3
4
24