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East Asian Growth Moderating, but Still Robust: Asia Economic Monitor

News Release | 9 August 2005

MANILA, PHILIPPINES - East Asia is expected to experience a moderate slowdown in economic growth this year with the external environment turning somewhat less favorable and oil prices reaching record levels, according to an ADB report released today.

Current forecasts for East Asia - defined as the 10 ASEAN member countries, the People's Republic of China (PRC) and the Republic of Korea - see average 2005 GDP growth of 6.8%, down from 7.6% in 2004, according to the Asia Economic Monitor (AEM).

Excluding the PRC, East Asia is expected to post average growth of 4.4%, compared with 2004 growth of 5.5%.

The PRC recorded GDP growth of 9.4% in the first quarter of 2005, and 9.5% in the second quarter. A gradual softening of fixed investment, already underway, and somewhat diminished export prospects are expected to slow growth in the coming quarters, according to the AEM. GDP growth for 2005 is forecast at 8.9%, down from 9.5% in 2004.

Singapore is likely to be among the economies hardest hit by the deteriorating external environment. Singapore's highly open economy will be adversely affected by weaker export prospects and slower export growth may affect consumer and business sentiments, thus affecting domestic demand, the AEM states. The economy is expected to grow 3.7% in 2005, down from 8.4% in 2004.

These forecasts are subject to risks from further increases in oil prices and a disorderly adjustment of the global payments imbalance, the report notes.

"We now face a backdrop of moderately slowing growth, a gradual buildup of inflationary pressures, and a tightening of US monetary policy," says Pradumna B. Rana, Senior Director of ADB's Office of Regional Economic Integration (OREI). "The key challenge for East Asia is to calibrate fiscal, monetary, and exchange rate policies while at the same time pursuing structural reforms to strengthen domestic demand."

The AEM, produced by OREI, cites the loss of economic momentum in major industrial markets and softness in the information technology cycle as the main reasons for the worsening external economic environment.

Exports grew at a slower rate in the first half of this year in all East Asia's larger economies except the PRC, continuing the trend since the middle of 2004, the AEM notes. Coupled with higher oil prices and a general bias toward tighter macroeconomic policies, the result has been slower growth in domestic demand in most East Asian economies.

East Asian stock markets in general held up well in the first half, while currencies remained stable or depreciated against the US dollar.

AEM welcomes the recent shift by the PRC and Malaysia from a pegged exchange rate against the US dollar to a managed float against a basket of currencies, suggesting the moves marked initial steps toward fostering greater exchange rate flexibility within the region.

In general, progress in financial and corporate reforms continues to improve the health and robustness of financial sectors in the region.

AEM analyzes East Asia's economic growth, financial and corporate sector restructuring, and emerging policy issues. Forecasts are based on figures provided by Consensus Economics. AEM is available on OREI's Asia Regional Information Center (ARIC) website.