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p. 9 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 Outlook for major economies World trade and commodity prices Capital flows and markets Subregional Summaries 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 : Prospects for the World Economy in 2006-2007

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World trade and commodity prices

The volume of world trade grew at a healthy 6.2% in 2005. The data reflect further shifts in geographic patterns of trade during 2005 as industrial-country exports posted small gains, while the share of the People's Republic of China in world trade continued to grow steadily, to an estimated 7% of world exports in 2005, compared with 4.3% in 2001. In keeping with the expected rate of global output growth in 2006, and a recovery in electronics demand, world trade is expected to grow at around 7% in 2006 and 2007.

In 2002, the Brent crude oil price averaged $25 per barrel. Prices began to increase in 2003, and have trended ever upward, if at times spasmodically, reaching $62 per barrel as of 15 March 2006. Higher prices and slower worldwide growth appear to have damped oil demand growth, which fell from a high 3.8% in 2004 to 1.3% in 2005. Price increases are widely regarded to reflect increasingly tight capacity constraints and expected escalation in oil-field development and extraction costs.

There is significant uncertainty regarding future oil prices, as evident from the extent to which futures prices, for delivery up to 7 years from now, move in tandem with spot prices (Figure 1.2.6). If futures prices were based on long-run fundamentals, they would be more stable than spot prices, which reflect short-run shifts in demand and supply. Futures and spot prices moving in tandem strongly suggests that expectations of long-term fundamentals are not well anchored.

Despite this uncertainty, cheap oil may be a thing of the past. Even the most optimistic forecasts have prices falling at most to around $40 per barrel by 2010. The baseline assumes that average oil prices will change little from their current levels (Table 1.2.1). However, because production constraints will bind tighter and more frequently, continued oil price volatility is expected.

Semiconductor sales grew by 6.8% in 2005, according to data from the World Semiconductor Trade Statistics organization. Semiconductor and wider electronics demand are volatile, as they are influenced by the development of new end-user products, and by the business cycle in consuming countries. Demand in 2005 was supported by strong sales of MP3 music players and mobile phones. Demand is expected to be robust in 2006 and 2007, with industry estimates of billing growth ranging from 8% to about 20%. This wide range reflects differing expectations of the likely success of new products, especially those not yet widely used in emerging markets. Diversity of forecasts also stems from uncertainty regarding the future replacement schedules for notebook computers and mobile phones in more mature markets. These schedules are susceptible to cyclical effects. The expected buoyancy in several electronics markets therefore contributes to the bright outlook for electronics exports in 2006.

On the supply side, industry analyses forecast semiconductor production capacity constraints. Because manufacturers place semiconductor orders with reasonably long lags (up to 1 year), such forecasts are taken seriously. Given tight supply and demand conditions, electronics prices are expected to strengthen in 2006, and significant investments are anticipated in component-manufacturing countries. As Figure 1.2.7 shows, semiconductor export revenues do not rise every year, so despite the wide range of forecasts, 2006 is clearly expected to be a strong year. The figure also illustrates the emergence of demand for semiconductors in Asia (excluding Japan). This is due to outsourcing of electronics manufacturing from industrial countries, and to rapid growth in demand for consumer electronics in emerging Asia.

Agricultural price rises in 2005 slowed somewhat on strength of supply improvements (Figure 1.2.8). Natural rubber prices were propelled by rising demand as oil prices drove up the price of synthetic rubber. Cotton prices also picked up over the course of the year, though they still posted a lower average than in 2004. Prices of raw materials (especially minerals and wood) rose on the strength of demand in Asia and the US, production bottlenecks, and increases in energy costs. They are expected to plateau in 2006 as the bottlenecks ease.

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