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Rebound Expected for East Asia in 2004 as SARS Fallout Recedes

MANILA, PHILIPPINES (30 September 2003) - East Asia is expected to grow by 5.6% in 2003 and 6.5% in 2004 as the adverse economic effects of this year's outbreak of Severe Acute Respiratory Syndrome (SARS) disappear, according to the Asian Development Outlook 2003 Update (ADO Update) released today by the Asian Development Bank (ADB).

The economies of the People's Republic of China (PRC); Hong Kong, China; and Taipei,China were among the world's worst affected by the SARS outbreak, seriously disrupting growth in the second quarter, the ADO Update says.

The report is an update of the Asian Development Outlook 2003 that was issued in April. ADO is ADB's annual flagship economic publication that analyzes and forecasts economic trends in the Asia-Pacific region.

Consumption bore the brunt of the SARS impact, with retail sales falling. Service sectors were also particularly badly affected. While domestic demand has been patchy or weak in East Asia, export growth has been strong in most economies. "This is partly because SARS has affected the movement of people more severely than the movement of goods," the report says.

In the PRC, strong investment growth more than offset the impact of SARS on consumption. Its economy remained the leading performer in the subregion, with 8.2% gross domestic product (GDP) growth in the first half of 2003.

The PRC's exports surged by 34% in the first half of 2003 and imports rose by 44.5% over the same period, providing considerable momentum for export expansion in other East Asian economies, as well as in Southeast Asia.

However, ADO Update warns that several signs of investment overheating in the PRC have emerged. These include the significantly increased contribution of investment to GDP growth, acceleration in real estate investment, and the rapid price increase of raw materials and other inputs.

By contrast, the recoveries of Hong Kong, China and Taipei,China halted abruptly in the second quarter of 2003, with their GDP contracting by 0.5% and 0.1%, respectively.

The economy of Hong Kong, China was particularly hard hit because of its role as a financial, aviation, and logistics service center, ADO Update points out. Service exports were dealt a severe blow, with a 12.6% growth rate in the first quarter of 2003 plummeting to a 14.7% contraction in the second.

Weak demand, combined with SARS and structural adjustments, is contributing to rising unemployment. For example, in the PRC, rapid economic growth has been insufficient to absorb surplus agricultural labor, new labor market entrants, and workers laid off from uncompetitive state-owned enterprises.

"While SARS exacerbated the faltering labor market in Hong Kong, China and in Taipei,China, more deep-rooted problems that are harder to address also contributed, such as the relocation of firms to the PRC and changing economic structures," ADO Update adds.

In response to increasing fiscal deficits and emerging signs of economic recovery, East Asian governments were contemplating fiscal tightening in late 2002 and early 2003. "The SARS outbreak, however, forced most of them to set aside fiscal consolidation and focus on dealing with the epidemic and stimulating the economy," the report says.

But the Update notes that East Asian economies are recovering from the economic disruption caused by SARS and consumer and business confidence are improving. Globally, there are signs of a firmer recovery in the US, and some improvements in Europe and Japan, which, taken together, should lift growth rates to varying degrees in 2004.

• In the PRC, the economic impact of SARS should diminish in the third quarter of 2003. GDP growth is expected to reach 7.8% in 2003 and 7.9% in 2004, an improvement on the forecasts of 7.3% and 7.6%, respectively.
• Hong Kong, China's GDP growth is expected to pick up in the second half of 2003, bolstered by strong exports to the PRC. GDP should grow by 2.1% in 2003 and accelerate to 4.8% in 2004, which is better than the 2% and 4% expected back in April.
• Commercial activity is rebounding in Taipei,China, which, with expanding public expenditure, will lift the economy in the second half. GDP is expected to expand by 3.1% in 2003 and 4.4% in 2004, compared to earlier forecasts of 3.7% and 3.9%.
• In Korea, reduced consumer demand caused a fall into recession in the first half of 2003. Overall GDP growth is expected to remain at around 3% in 2003, improving to 5% in 2004.
• Growth forecasts for Mongolia are unchanged from the earlier projection at around 5% for 2003 and 5.2% in 2004, as the country wrestles with the need for macroeconomic stability under increasing pressure for more expansionary fiscal and monetary policies.

"Downside risks in the subregion have been reduced over the past few months, but remain significant," ADO Update concludes. "Particular concerns include the security situation in the subregion and the possibility of another SARS outbreak."

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