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p. 4 of 68 BACK | NEXT I. Developing Asia and the World Overview of Economic Trends and Prospects Overview of Economic Trends in Developing Asia in 2002 Macroeconomic Conditions in 2002 Outlook for Industrial Countries Developing Asia: Subregional Trends and Prospects Developing Asia: Risks and Uncertainties Overview of Fiscal Policy in Developing Asia II. Economic Trends and Prospects in Developing Asia III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : I. Developing Asia and the World : Overview of Economic Trends and Prospects

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Macroeconomic Conditions in 2002

Major External Markets

Industrial countries remain by far the largest market for DMC exports, a market that strengthened significantly in 2002. In the US, the destination for about one fifth of developing Asia's exports, consumer spending, particularly on cars and housing, was buoyant. Along with a modest revival in equipment and software investment as well as restocking, this served to sustain the growth momentum. However, by the end of the third quarter some of the steam had gone out of consumer spending, suggesting that growth would be slowing over the next few quarters (Figure 1.2). In the last months of the year, consumer confidence indicators dipped and investment spending slowed. Concern over conflict with Iraq, weak stock and job markets, and uncertainty over the form of fiscal stimulus all served to shake consumer confidence.

Both the euro area and Japan depended to a significant extent on external markets to drive economic growth in 2002. In the euro area, weak domestic demand conditions combined with slowing external demand toward the end of the year to produce very modest economic growth of less than 1% for the year. In Japan, consumer spending and exports strengthened in the second and third quarters. However, later in the year the yen strengthened, export performance deteriorated, unemployment increased, and consumer confidence fell. Growth for the year was minimal.

Consumer price inflation remained very low in 2002. Indeed there was some concern that a deflationary cycle might arise in some countries. Inflation in the US and the euro area was low, averaging around 2% in both cases. Prices continued to fall in Japan for the third year in a row, although the trend was toward greater price stability throughout the year. Several factors contributed to a low level of inflation, including stiff price competition among exporters, generally strong supplies of primary products (aside from oil toward the end of the year), and innovations that continue to lower the costs of technologically based goods and transportation.

Fiscal policy in most industrial countries became more accommodating and then expansive as the year unfolded and the recovery turned more tentative. Government deficits in Organisation for Economic Co-operation and Development (OECD) countries generally increased as a percentage of GDP from 1.4% in 2001 to 2.9% in 2002 most strongly in the US, where the deficit increased from 0.7% of GDP in 2001 to over 3% in 2002. While the stability and growth pact limits the deficit to 3% of GDP in the euro area, Germany and France were approaching that limit. In Japan, the deficit, which was already high at 7.2% of GDP at the end of 2001, widened somewhat further.

Likewise, monetary policy remained accommodative throughout the year in industrial countries. In the US, the Federal Funds rate remained at 1.75% for nearly a year and was reduced further to 1.25% in November 2002. Policy rates in other OECD countries also remained largely unchanged through the year zero or close to zero in Japan, 3.25% for the euro area until early December when it was reduced by 0.5%, and 4% in the United Kingdom (UK). Long-term interest rates have fallen, particularly after the first quarter, as the weakness of the overall recovery became more apparent and inflationary expectations continued to abate.

World Trade in Goods and Services

Developments in external markets are critical for DMCs since their exports respond very quickly to changes in the pattern of world import demand. Growth in the world economy and in import demand improved in 2002, albeit at a modest pace (Figure 1.3). Import demand of industrial countries grew by 3% and economic growth in this group of countries accelerated to 1.4% from 0.8% in 2001. As the world economy recovered, some commodity prices firmed somewhat. Despite the uncertainties associated with the conflict in the Middle East, average oil prices increased by only 2.25% in 2002 compared with the 2001 level. Other commodity prices that are sensitive to increasing uncertainty, such as rare metals, also increased. Overall, prices for manufactured goods remained weak in 2002, but prices for many food and agricultural products, grains in particular, increased significantly for various reasons, including adverse weather conditions (e.g., drought in major wheat-producing countries) and civil disturbances in some commodity-producing countries (e.g., Cote d'Ivoire).

Global Financial Markets

Worldwide equity markets continued to trend downward in 2002. A combination of lower corporate earnings, fallout from accounting irregularities, and concern about geopolitical instability and its impact on petroleum prices were responsible for continued weakness. By the end of the year, the Nikkei 225 index, the Dow Jones Industrial Average, and the FTSE All-Share index were down, respectively, by 19%, 17%, and 32%, for the year.

In credit markets, short-term interest rates remained at historically low levels for the year, having fallen substantially from the previous year's level. The yield curve flattened out, reflecting a continuation of a low inflation environment and weaker equity markets.

Emerging market sovereign risk spreads widened slightly in the middle of 2002, and then narrowed in the second half of the year. By the end of the year they were very close to their levels of the end of 2001. Spreads were highest for Latin American countries at over 900 basis points while the spreads for African, European, and Asian sovereign risk were 400-500 basis points lower.

During the first 2 months of 2002, the US dollar strengthened against a trade-weighted basket of currencies—the Federal Reserve's "broad index". Subsequently, the dollar weakened as capital inflows slowed (Figure 1.4). By the end of the year, the dollar had fallen by 2.6% against this broad index. The dollar depreciated by 17.6% against the euro and by 10.2% against the yen in 2002 (Figure 1.5). The dollar's weakness reflected low nominal interest rates on treasury securities relative to those of other OECD countries. It also reflected a reappraisal of investment returns in the US equity market following weak earnings reports and a decline in corporate profits, lower returns on foreign direct investment (FDI), and continued concern following auditing irregularities and the need to finance a growing US current account deficit.

 

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