Catalog

Outlook for 2007 and 2008

As usual, the outlook for developing Asia in 2007 and 2008 will hinge on prospects for the global economy. The idea that, because of its growing importance in global demand and strengthened intraregional trade linkages, developing Asia is now less susceptible to the vicissitudes of the international economy is at odds with the facts (see the chapter, Uncoupling Asia: Myth and reality, in Part 1).

As explained in the following section, Prospects for the world economy in 2007 and 2008, the outlook is broadly favorable. Although global growth is anticipated to slow, it will also become more balanced within the G3 (US, euro zone, and Japan). Growth is expected to come down in the US in 2007 before picking up in 2008, but output growth will stay close to potential in both the euro zone and Japan. Global trade is expected to expand at about 7.5%, which is close to longer-term averages. Oil and other commodity prices are expected to come down in 2007, and again in 2008. But it is also possible that the global electronics cycle could turn in 2007, which would negatively affect export prospects particularly for East and Southeast Asia.

The baseline assumptions for individual economies are set out in each country chapter in Part 2. Monetary conditions are generally set to tighten in 2007 as a number of countries attempt to tame inflationary pressures. This is particularly true in South Asia but further tightening may also occur in the PRC if liquidity continues to wash through the economy. In Southeast Asia, as the pass-through effects of high oil prices come to an end, there may be scope for interest rates to come down. They have already been reduced in Indonesia and in Thailand.

Fiscal stances are tipped toward mild expansion but most countries are mindful of the costs that rising and high public debt brings. In the Philippines, a stronger fiscal position may allow some additional spending on priority programs, including infrastructure. Larger spending on infrastructure is also planned in Indonesia, Malaysia, and Thailand. In India, spending at the state level could threaten the commitments of the Fiscal Responsibility Act. Fiscal positions are more problematic in Pakistan and Sri Lanka, but it is expected that deficits will narrow in 2007. Fiscal consolidation is also needed in several Central Asian countries. In the PRC, the central Government's deficit is expected to stay below 1%, but spending for rural development and the environment may pick up.

Set against this background, robust growth is again expected in 2007 and 2008. Growth of 7.6% is projected in 2007, nudging up to 7.7% in 2008. These projections imply that growth will move onto a more sustainable footing and that overheating pressures that surfaced in 2006 will gradually abate. Table 1.1.1 summarizes projections by subregion for growth, consumer price inflation, and the current account balance (as a percentage of GDP).

Growth in all subregions, except the Pacific, is expected to slow in 2007. The biggest deceleration is likely in Central Asia, as lower oil prices work their way through to demand. The slowdown there partly reflects the removal of the one-time impact of large investment projects. Now that they are on stream, their effects register in a higher level of income, but not in a fillip to growth. In 2007, the pace of expansion is expected to moderate in Armenia, Azerbaijan, and Kazakhstan. A more stable political situation in the Kyrgyz Republic and new mining projects should help lift growth. There is also room for faster growth in Tajikistan.

In 2007, South Asia is expected to grow by 7.7%. Steps taken by the Reserve Bank of India to cool inflation are seen slowing India's pace of investment and consumption spending in 2007, and growth of 8% is forecast for 2007. But if inflation proves to be stubborn, further tightening by the central bank is likely to follow. In Pakistan growth is expected to pick up on 2006: as stronger performance by agriculture is expected. There is also scope for expansion of the garment sector, but challenges are just over the horizon with the end of voluntary restraints on the PRC's textile and clothing exports to the US and European Union in 2008. In Bangladesh much will depend on how the interim Government performs economically, as well as on political developments. Growth in Sri Lanka will come off the record pace of 2006, but it is still expected to consolidate trend performance. If political conditions become more settled, Nepal may reap a modest dividend in 2007. Continuing recovery from the tsunami should see double-digit growth in the Maldives.

In 2007 and 2008, softer external demand and policy curbs are expected to pull growth down gradually in the PRC. But incentives for spending at the local and provincial level will remain strong in the lead-up to the Communist Party Congress later in 2007. Industrial expansion is also set to continue apace, as the PRC makes inroads into new markets and improves productivity. Growth of 10.0% is now forecast in 2007, with a further slowing to 9.8% in 2008. Outcomes have previously consistently beaten forecasts for the PRC, but if growth does not begin to slow, the authorities will most likely press harder on the brakes. Failure to moderate growth in the near and medium term would raise risks of painful adjustments later on.

Elsewhere in East Asia, growth is expected to soften in Hong Kong, China and in Taipei,China, partly because of their close economic ties to the PRC, though local factors will also play a part. Korea, too, is expected to slow as exports cool with the moderate slowdown in the US economy. Mongolia should continue to enjoy fast growth over the next 2 years as agriculture, mining output, and construction continue expanding. For East Asia as a whole, growth of 8.0% is projected in 2007 and 2008.

Overall, Southeast Asia will show little change in 2007 relative to 2006. Growth is put at 5.6%, edging up to 5.9% in 2008. But Indonesia, Southeast Asia's largest economy, is seen accelerating as lower interest rates and weaker inflation give a boost to domestic spending. Efforts to improve the investment climate may also begin to pay off. In Malaysia, growth is likely to ease a little in 2007. Electronics activity will remain susceptible to global developments and any slowing of durable goods demand in the US. The Philippines is expected to maintain steady growth of around 5.4%. The investment rate may stabilize and then pick up, and although expansion of infrastructure spending would be helpful, the benefits would unlikely be felt before 2008.

Cambodia, Lao PDR, and Viet Nam will again grow quickly in 2007 and 2008. But Cambodia will need to diversify its export base and improve productivity if it is to stand up to stiffening garments competition. In Thailand, prospects are dominated by political factors. Since the coup of September 2006, business and consumer confidence have declined. Shifts in policy and uncertainty about future direction have kept consumers and investors on the sidelines. Growth of 4.0% is penciled in for 2007, but has a larger than usual degree of uncertainty.

Growth is expected to accelerate briefly in the Pacific in 2007 before reverting to a more lackadaisical pace. The anticipated leap in growth in 2007 largely reflects the stimulus to demand provided by the deployment of a large international force in Timor-Leste for peacekeeping and to assist in the conduct of elections. However, stronger growth in Papua New Guinea will also help lift the average. With the planned departure of peacekeepers in 2008 and slower growth in Papua New Guinea, the subregional average will drop back. A coup and the withdrawal of new aid have added to already difficult circumstances in Fiji Islands. Its economy may well contract in 2007, with growth remaining anemic in 2008.

Inflation is expected to ease in 2007 (Figure 1.1.8). Falling prices of commodities in international markets will help, as will vigilance from monetary authorities across the region. The largest reduction in inflation is expected to be in Southeast Asia: inflation will slow in nearly all subregional countries, but the largest contributor to the deceleration is likely to be Indonesia. Running at double digits in 2005 and 2006, inflation is expected to drop to 6.2% in 2007, stabilizing at about that level in 2008. Only in Singapore is inflation expected to pick up, and even then not by much.

In South Asia, falling inflation in India-prompted by slower credit growth and higher interest rates-will lead the headline figure down. Inflation in Pakistan is forecast to move closer to the State Bank of Pakistan's target, and is seen coming down to about 7% in 2007 and further to 6.5% in 2008. Despite rapid growth, inflation is expected to remain tame in the PRC. Any further currency appreciation would tend to restrain it. The main downside risk to inflation across developing Asia remains the possibility of a rebound in oil prices.

Developing Asia's current account is expected to remain firmly in surplus in 2007 and 2008 (Figure 1.1.9). In nominal US dollar terms, the surplus will widen but should steady as a share of GDP. Although some further appreciation of regional currencies is expected, both exports and imports are again likely to grow strongly. On the export side of the trade balance, productivity gains and lower unit costs will help offset impacts of any currency appreciation on prices. Remittances will stay an important source of foreign exchange for some countries. Import demand will be supported by stronger domestic spending, but lower prices for oil and other commodities will reduce import bills for some economies. The profile of the surplus is unlikely to change much, with South Asia continuing to run a deficit, and all other subregions in surplus. Southeast Asia's surplus is expected to close somewhat as expenditure switches more to domestic demand.