Growth in the North Pacific Expected to Slow while Inflation Falls in 2012 - ADB

PONHPEI, FEDERATED STATES OF MICRONESIA – The latest issue of the Pacific Economic Monitor projects growth in the North Pacific will slow to 2.8% in 2012 from 3.4% in 2011. Growth in the region is forecast to slow even further to 1.5% in 2013. The winding down of large public construction projects in the Federated States of Micronesia (FSM) and slower growth in tourism inflows into Palau account for most of the decline.

The Monitor notes that the International Monetary Fund forecasts that the US will grow at around the same rate in 2012 as in 2011, and that US growth will strongly influence the North Pacific’s economic performance in 2012.

Inflation in the North Pacific is expected to fall significantly in 2012, with the average annual inflation rate projected at 2.9%, down from 7.2% in 2011. Stabilizing prices of imported commodities, particularly food, largely explain the fall. Uncertainty about future prices of energy poses a risk to the forecast, although energy prices are projected to moderate over the year.

The FSM economy grew by 1.4% in 2011 but is expected to grow by only 1.0% in 2012 and 0.5% in 2013. Reductions in the annual financial assistance from the US and a lackluster business performance contribute to FSM’s weak economic outlook.

The ADB report says tourism, the largest sector of Palau’s economy, is unlikely to sustain the very strong growth registered last year. Gross domestic product is expected to grow by 3% in 2012 and to moderate to 2% in 2013. Ongoing efforts to foster private sector development through business law reform and strengthening fiscal management will be important to Palau’s economy.

ADB projects the Republic of the Marshall Islands’ economic growth will accelerate to 5.4% in 2012 from 5.0% in 2011, driven by expansion of the fishery sector and government spending related to airport upgrading. However, growth is forecast to moderate in 2013 to 2.6%. Structural reforms, particularly in the fishery sector and state-owned enterprises, are needed to spur future private sector activity and economic growth in the country.

“With ongoing fiscal tightening from the winding down of compacts with the US, improving the environment for business and boosting investment will be important to the North Pacific’s future economic prospects,” said Christopher Edmonds, Senior Economist in ADB’s Pacific Department and the report’s chief editor. “Future development efforts in the region should focus on investments in vital public infrastructure and economic reforms to improve public sector efficiency.”

Published three times each year, ADB’s Pacific Economic Monitor reviews economic developments and issues in the Pacific Islands, Papua New Guinea, and Timor-Leste.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.