East Asia This Year Set to Post Highest GDP Growth Since 1997 Crisis, Despite High Oil Prices, Says ADB Report

20/12/2004 | www.adb.org

Solid growth at 6.5% is forecast for next year, says the December issue of Asia Economic Monitor (AEM

MANILA, PHILIPPINES (20 December 2004) - East Asia is likely to register this year its best GDP growth since the 1997 financial crisis, reaching 7.6%, despite high oil prices and some loss of growth momentum, according to a report released today by ADB.

But with the external economic environment turning less favorable, domestic demand set to soften and the People's Republic of China's (PRC's) economic slowdown likely to continue, lower but solid growth at 6.5% is forecast for next year, says the December issue of Asia Economic Monitor (AEM), using forecasts provided by Consensus Economics.

East Asia in the report, prepared by ADB's Regional Economic Monitoring Unit (REMU), is defined as the 10 members of the Association of Southeast Asian Nations, plus the PRC and Republic of Korea.

Forecasts for next year are subject to three main risks: continued high oil prices, a disorderly adjustment of the US current account deficit, and a hard landing in the PRC, AEM says.

"East Asian economies and financial markets have performed well despite high oil prices, as, among others, price peaks have not approached the levels of previous oil shocks in real terms and countries are now more energy-efficient and less vulnerable," says Pradumna B. Rana, REMU Director.

"But if oil prices remain high, or worse, increase further, they could push up inflation and adversely affect growth in East Asia," he adds.

East Asia's growth this year has been driven by a combination of a rapid increase in exports and the continued strength in domestic demand. The strong growth, coupled with high commodity prices, including oil prices, has led to a rise in inflation across the region. However, this has moderated in recent months, except in Malaysia and the Philippines.

The region's stock markets have generally rebounded strongly in recent months following a weak performance around the middle of the year.

Reflecting the broad weakness of the US dollar and robust balance of payments, East Asian currencies have generally appreciated against the dollar.

Current account surpluses and strong capital inflows have led to a sizable increase in East Asia's foreign exchange reserves.

Continued progress in financial and corporate restructuring and improved prudential indicators have reduced East Asia's financial vulnerability. Nonperforming loan ratios continue to trend down, and external debt to international reserve ratios are falling in most countries.

"The key policy challenge facing East Asia over the next year or two is to sustain the robust GDP growth at a time when US interest rates and domestic inflation rates are on an upward path," AEM says.

"Against the emerging global and regional economic backdrop, an appropriate policy response should have three key components: tighter fiscal and monetary policies, greater exchange rate flexibility, and structural reforms to invigorate private investment."

The AEM is available at REMU's Asia Regional Information Center (http://aric.adb.org).

Read the full report

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