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p. 13 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World Developing Asia and the Pacific: Performance and Prospects Prospects for the World Economy in 2006-2007 Subregional Summaries Central Asia East Asia South Asia Southeast Asia The Pacific Textiles and Clothing in the Post-Quota Era: The Outlook for Asian Suppliers The Doha Development Agenda: Asian Challenges and Prospects after the Ministerial Meeting in Hong Kong, China II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006 : I. Developing Asia and the World : Subregional Summaries

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East Asia

Economic performance

Economic growth for East Asia as a group was 7.7% in 2005, 0.6 percentage points below that of 2004. All five economies in the subregion posted lower expansion rates than in 2004. The deceleration was slight in the PRC, the biggest economy, and sharp in Mongolia, the smallest (Figure 1.3.2).

Growth in the PRC, at 9.9%, was slightly below that in 2004 and, once again, was driven by investment and export-oriented industrial production. Gross fixed capital formation increased by 16%, supported by expanding liquidity and credit. Merchandise exports grew by about 30% thanks to robust global demand and increasing market penetration of PRC-manufactured goods in foreign markets, while import growth decelerated to 17.6%, as a result of the use of inventories accumulated in earlier years and increasing domestic substitution for imports.

Mongolia grew by 6.2%, still a robust rate but slowing sharply from an exceptionally strong 10.7% in 2004, when GDP surged on the rebuilding of livestock herds and the expansion of mining. The services sector made the biggest contribution. Agriculture also contributed, but industrial production was hit by cutbacks in the clothing industry after the end of global quotas in major export markets. In Korea, growth of 4.0% was led by a recovery in private consumption, following a 2-year slump, and a strong performance by exports (though they grew far more slowly than in 2004). Growth of fixed capital formation remained weak. Taipei,China's expansion decelerated to 4.1% as export growth slowed. Merchandise import growth also fell (more than exports), reflecting weak domestic investment demand. Although public investment strengthened significantly, private investment fell, so the overall contribution of capital formation to GDP growth was negligible. Hong Kong, China registered growth of 7.3% in 2005. This rapid pace was mainly the result of an acceleration in net exports, reflecting the linkages between the economy and that of the PRC. Private consumption contributed the rest; government consumption detracted from growth as a result of a conservative fiscal stance, and investment made a minor contribution.

The impact of soaring global oil prices on inflation was muted, in part because fuel subsidies in the PRC shielded its consumers from the full effect. Inflation in the PRC eased from 3.9% in 2004 to 1.8%, and in the subregion as a whole from 3.3% to 2.0%. In Mongolia, consumer price inflation accelerated to 12.7% as the money supply grew at a significantly faster pace than nominal GDP. Korea's inflation eased to 2.7%, damped a little by interest-rate rises. In Taipei,China, inflation was held to 2.3% by currency appreciation and imports of low-priced manufactured goods from the PRC. After years of deflation, prices rose by 1.1% in Hong Kong, China, largely in response to the broad-based economic pickup.

Prospects for 2006 and 2007

East Asia's growth in 2006 in aggregate is expected to remain at 7.7%, and in 2007 it is seen decelerating by about a half percentage point to 7.1%. Growth in the PRC will abate slowly, to 9.5% in 2006 and to 8.8% in 2007. Under the recently approved 11th Five-Year Program for 2006—2010, the authorities there have provided an indicative average target of 7.5% for 2006—2010. It seems unlikely, however, that growth will slow to that rate in the near term, since for this to occur, investment would have to decelerate significantly, which is difficult as the country is facing rising unemployment, and local governments and state enterprises face incentives that are biased toward investment.

Mongolia's economy is expected to expand by about 6% in 2006 and by about 5% in 2007, after the livestock sector returns to its trend growth rate. In the case of Korea, growth is expected to increase significantly in 2006 to 5.1%, supported by the upswing in global electronics demand, and remain close to 5% in 2007. Expansion in Taipei,China is expected to pick up to 4.4% in 2006, also as a result of a stronger global electronics industry, before decelerating in 2007. Hong Kong, China's growth is expected to slow in 2006 and 2007 to about 5.5% and 5%, respectively, mainly as a result of the increase in domestic interest rates, but also due to the slight deceleration in growth in the PRC.

The subregional current account surplus is expected to decline to 5.5% of GDP this year, from 5.8% in 2005. The PRC's current account surplus will fall a little as export growth moderates and the trade surplus is partly offset by a services deficit. Korea's trade and current account surpluses will decline as stronger domestic demand and recent appreciation of the won push up imports.

Inflation is seen edging up in the PRC in the next 2 years to about 2-3%, as administered prices of electricity, gas, water, and petroleum products increase. In contrast, the prices of some manufactured products may decline. Price rises in Mongolia are expected to ease to about 5—5.5%, reflecting likely lower upward pressure from oil prices and steps taken by the Mongolian central bank. Inflation in Korea is expected to remain at about 2.8—3%, and in Taipei,China to moderate to 1.6% and to 1.3% over the next 2 years. Finally, prices are expected to continue creeping up in Hong Kong, China on the back of tightening labor and land markets and of rising energy prices.

Medium-term outlook

The major challenge for the PRC in the medium term is how to guide its economy to a more sustainable growth path where private consumption plays a more prominent role. After many years of phenomenal expansion, several structural weaknesses have surfaced, including—especially—overcapacity (in various industries) and income inequalities (primarily between rural and urban areas). Unemployment and underemployment are also on the rise. Finally, the environment has suffered from heavy industrialization. To address these problems, the Five-Year Program aims to achieve more balanced, equitable, and sustainable growth through strategies designed to boost private consumption and rebalance the composition of aggregate demand, and to promote rural development, protect the environment, and reduce income inequality.

Over 2006—2010, the average growth rate for the PRC is likely to be about 9%. Growth in Mongolia over this period is forecast to average about 5%, with the primary sector a more significant contributor to growth. For Korea, the estimated growth rate in the medium term is 4.5—5.0%, substantially higher than most other economies in the Organisation for Economic Co-operation and Development, but lower than rates achieved by Korea in its earlier stages of development. Taipei,China is expected to grow in the range 4.0—4.5%, on the assumption of stable cross-strait relations and continued efforts to address structural reforms, while Hong Kong, China is seen expanding by an average of 5% in the medium term.

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