Download of GDP - Casa Asia

Developing Asia 2004-2005:
Is the Boom Sustainable ?
Ifzal Ali
Chief Economist
Asian Development Bank
Economic Congress
Casa Asia, Barcelona, Spain
22 November 2004
The Global Context for 2004-2005
– and a glimpse beyond
• Synchronized robust growth in main
industrial countries in 2004, leveling off
moderately in 2005 baseline assumptions
• Oil prices to stay high
baseline assumptions
• But inflation rising moderately
• Monetary policies returning
progressively to neutral stance/some
tightening
The Global Context …
• 2004 Growth built on large imbalances (US
fiscal and current account deficits, fiscal
situation in Japan and Euro zone)
• Imbalances could start to weigh on outlook
end of 2005 and onwards:
– Increases in dollar interest rates
– Volatility in exchange rates
– Steep decline in US aggregate demand and inputs
• Will the specter of stagflation return?
Developing Asia Booming in
2004-2005
• GDP Growth much stronger than
expected in 1H 2004 GDP growth: Developing Asia
• Expansion broad based
• Return of strong investment adds to
export rebound and sustained consumer
spending
• Inflation remains generally low despite
high oil prices
Inflation: Developing Asia
Developing Asia…
• Regional current account surplus
narrowing but still 2.9% GDPCA/GDP: Developing Asia
• GDP Growth to climb to 7.2% in 2004;
still strong 6.2% in 2005, 0.5
percentage points below ADO 2004
forecast
GDP Growth:Developing Asia
East Asia: Upward Growth
Trend Continues since 2000…
• PRC Economy at near full throttle in 2004 GDP table
• Hong Kong, China and Taipei,China recovering
strongly in 2004 and remaining on track in 2005
due to buoyant exports and recovering
domestic demand
Hong Kong
Taipei,China
• Korea lagging as consumption still depressed
and low growth continuing 2005
Korea
• PRC micro soft landing in 2005
CA/GDP:East Asia
GDP Growth, East Asia
back to East Asia
CA/GDP: East Asia
GDP Growth
(%)
East Asia
2003
2004
2005
6.6
7.6
6.6
9.3
9.2
8.3
3.2
7.5
6.0
Korea, Rep. of
3.1
4.4
3.6
Taipei,China
3.3
6.5
4.8
PRC
Hong Kong,
China
Southeast Asia: at long last
awaited revival in business
investment…
• Strong growth momentum, now broad-based
• In a first since Asian crisis, business
investment doing well
• Welcome response of exports to buoyant
world economy
• But imports surging also:contribution of net
exports to GDP growth down
Malaysia
• Contribution of consumer expenditure
remaining robust
Philippines
Southeast Asia…
• Growth in 2004 revised upward to 6.2%
and 5.6% in 2005
• Outlook improving for Indonesia and
the Philippines, but deteriorating for
Cambodia
GDP Growth, Southeast Asia
GDP Growth
(%)
Southeast Asia
CA/GDP:SEAsia
2003
2004
2005
4.8
6.2
5.6
5.2
4.5
5.8
5.3
4.5
4.8
6.5
6.8
2.3
5.2
7.0
5.6
Thailand
4.7
1.1
6.8
5.5
8.1
6.4
5.5
4.2
6.6
Viet Nam
7.1
7.5
7.6
Cambodia
Indonesia
Lao PDR
Malaysia
Philippines
Singapore
South Asia: Gathering strength
despite uncertainties…
• Weather dampens growth in India and
Bangladesh
• Growth momentum remains strong but policy
choices are crucial
• Trade continues to grow at double digit rates
• End of MFA quotas – India and Pakistan
better prepared than Bangladesh
• Insurgency in Nepal continues to stifle growth
GDP Growth, South Asia
GDP Growth
(%)
CA/GDP:South Asia
2003
2004
2005
South Asia
7.6
6.4
5.9
Bangladesh
5.3
6.5
8.2
5.5
7.0
6.5
5.0
8.0
6.0
Pakistan
8.5
2.7
5.1
5.4
3.6
6.4
5.0
3.7
6.5
Sri Lanka
5.9
5.0
5.5
Bhutan
India
Maldives
Nepal
Central Asia: Bright horizon
for energy exporters…
• Oil/gas investments and higher prices
boost oil-exporting economies
• Higher commodity prices benefiting
non-oil export-led economies
• Economic diversification urgently
needed, especially to boost
employment, but structural reforms and
finding an effective strategy difficult
Pacific: Doing better than
expected…
• 2003 turned out better than expected
at 4.3%
• Second largest economy Fiji continuing
on recovery road
• Fiscal governance issues remaining
major problem
Risks to Developing Asia:
Clouds gathering beyond the
clear skies … Global Risks
• Surging oil prices could create havoc for
world economy
– Aggravate existing global imbalances
Effects of Oil Price Inc
– Duration of oil price increase more
important than the level of increase
Oil price simulation
– Higher oil price environment calls for
medium to long-term structural adjustments
(e.g., improving energy efficiency)
… Global Risks
• Japan and EU highly vulnerable to a
downturn in US
• Widening US fiscal and current account
deficits exacerbating vulnerability of
world economy
• No leeway left for macroeconomic
policy support in industrial countries
…Global Risks
• Uncertain sustainability of growth
momentum in major industrial
countries, rising inflation, rising interest
rates and persistent slide in dollar. The
specter of stagflation beyond 2005?
Risks to Developing Asia…
Regional Risks
• Hard landing in PRC still a possibility
PRC Slowdown
• With exports a main driver of growth,
region vulnerable to world economic
slowdown beyond 2005
• Weakness in financial sector regulation
and supervision could hurt domestic
demand (e.g., Korea)
...Regional Risks
• Employment generation still lagging in
spite of strong growth:risk to social
stability
• Epidemics and security threats:real
danger in the region
Developing Asia must be resilient in the face of
turbulence resulting from global and regional risks
Making Developing Asia’s
robust growth sustainable
over the medium term?
• Consolidate fiscal situations to allow for
future anti-cyclical policies
• Implement policies to bolster domestic
demand:deepen financial sector reforms
and supervision(consumer credit, longterm mortgage lending, etc.)
Making Developing Asia…
• Address investment climate problems (from
infrastructure to governance to legal systems)
• Review labor market policies to share benefits
of growth
• Adopt more flexible exchange rate policies
and ensure the productive use of foreign
exchange reserves
Growing importance of domestic demand and
increased competitiveness will ensure resilience in
the face of turbulence
Making Developing Asia’s
robust growth sustainable
over the long term?
• Developing Asia is in catch-up mode and
there is still a large scope for efficiency
improvement through reforms and adoption
of new technology, leading to a potential
increase in productivity
• Demographic outlook is positive, dependency
ratio will come down in most economies,
savings rate will stay high or increase leading
to higher investment rate
Making Developing Asia…
• Over the long term 7-8% growth rate of
GDP is feasible:a tri-polar Asia could
emerge by 2020
• Challenge: stay competitive in Asia and
the world
• Buoyant domestic demand will trigger
imports while increased competitiveness
will spur exports
Making Developing Asia…
• Increased complementarities within Asia
will strengthen trade and investment
integration thereby providing a buffer to
global turbulence
• With the increased importance of Asia
in global GDP, strengthened linkages
with US and EU will lead to win-win
outcomes
Key Messages: medium term
• Developing Asia growing at fastest rate in
2004 since 2000
• Growth more broad based:investments and
exports picking up; consumption demand
remaining sustained
• Moderate growth slowdown in 2005 mainly
due to easing of aggregate demand
• Risks linked to imbalances in world economy
increasing
• Accelerate macro and micro policy reforms to
make growth sustainable
Key Messages: long term
• Strengthened inclusiveness and improved
investment climate will boost aggregate
demand
• Aggregate supply must be made more
efficient through strengthening the
microfoundations of growth thereby
improving competitiveness
• Complementarities between South Asia, East
Asia, and ASEAN need to be fostered to boost
intraregional trade
Key Messages:…
• Complementarities between Asia, US,
and EU need to be strengthened to
augment inter-regional trade
• Open market-oriented competitive
economies will be the key to resilience
and sustained growth
Baseline Assumptions on
External Conditions
back to Global Context
2004
2005
ADO
Update
ADO
Update
Industrial Countries
3.1-3.5
3.5-3.9
2.5-3.0
2.4-2.8
United States
4.2-4.7
4.1-4.5
3.2-3.7
3.1-3.5
Euro Zone
1.7-1.9
1.8-2.0
2.1-2.4
1.8-2.2
Japan
2.5-2.8
3.8-4.2
1.5-2.0
1.6-2.0
1.1-1.3
1.2-1.4
2.5-3.0
2.9-3.1
28-30
38-39
24-26
38-43
9.0-10.0 6.0-7.0
7.0-8.0
GDP Growth (%)
Memorandum Items
US Federal Funds Rate (%)
Brent Crude Oil ($/bbl)
Global Trade Volume (%
change)
8.0-8.5
GDP Growth: Developing
Asia, 2003-2005
back to Developing Asia
back to East Asia
GDP Growth
(%)
2003
Developing Asia
2004
2005
ADO
Update*
ADO
Update*
6.5
6.8
7.2
6.7
6.3
East Asia
6.6
6.9
7.6
6.8
6.6
Southeast Asia
4.8
5.7
6.2
5.4
5.6
South Asia
7.6
7.0
6.4
7.2
5.9
Central Asia
8.4
8.1
7.9
8.4
8.0
The Pacific
4.3
2.9
2.9
2.4
2.4
* as of Nov 10, 2004
Inflation: Developing Asia,
2003-2005
back to Developing Asia
2003
Inflation (%)
2004
2005
ADO
Update*
ADO
Update*
2.3
3.3
4.0
3.1
4.0
East Asia
1.2
2.6
3.4
2.4
3.0
Southeast Asia
3.1
3.6
4.2
3.8
4.4
South Asia
5.1
4.9
5.5
4.6
6.6
Central Asia
5.4
8.6
6.9
8.3
6.4
The Pacific
8.5
5.6
5.1
6.0
4.4
Developing Asia
CA/GDP: Developing Asia,
2003-2005
back to Developing Asia
Current
Account
Balance/GDP
Developing Asia
2003
2004
2005
ADO
Update*
ADO
Update*
4.6
3.2
3.3
2.9
2.8
East Asia
4.5
2.8
3.1
2.6
2.6
Southeast Asia
9.0
8.2
7.3
7.6
6.7
South Asia
1.6
0.4
1.3
0.2
0.6
Central Asia
-2.3
-3.6
-3.9
-4.3
-2.1
The Pacific
-0.6
0.9
0.8
-1.3
-1.7
CA/GDP, East Asia
go to East Asia
go to GDP:East Asia
Current
Account
Balance/GDP
East Asia
PRC
Hong Kong, China
Korea, Rep. of
Taipei,China
2003
2004
2005
4.5
3.1
2.6
3.2
1.2
0.7
10.2
6.8
8.5
2.0
4.1
3.2
10.2
6.8
6.0
CA/GDP, Southeast Asia
go to SEAsia
go to GDP:SEAsia
Current
Account
Balance/GDP
2003
2004
2004
Southeast Asia
9.0
-10.2
3.6
7.3
-10.0
3.4
6.7
-11.2
3.1
-0.3
12.9
4.2
-2.0
7.8
3.0
-1.6
7.0
2.8
30.9
5.6
-5.8
27.0
4.5
-4.1
25.0
4.5
-4.1
Cambodia
Indonesia
Lao PDR
Malaysia
Philippines
Singapore
Thailand
Viet Nam
CA/GDP, South Asia
Current
Account
Balance/GDP
South Asia
go to SAsia
go to GDP:SAsia
2003
2004
2005
1.6
1.3
0.6
0.3
10.6
1.4
-4.3
0.3
1.4
-9.1
-1.5
1.1
-
Nepal
2.6
3.5
4.0
Pakistan
4.9
-0.6
1.9
-3.0
-1.7
-3.5
Bangladesh
Bhutan
India
Maldives
Sri Lanka
Contribution to Growth,
Hong Kong, China (% points)
back to East Asia
Taipei,China
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
4.4
-0.6
4.0
4.9
7.0
12.1
Consumption
-1.9 -2.5
0.1
2.6
4.0
6.4
Investment
2.8
-1.4 -1.2
1.3
2.9
5.6
Net Exports
3.5
3.3
1.0
0.0
0.1
5.1
Contribution to Growth,
Taipei,China (% points)
back to East Asia
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
3.5
-0.2
4.0
5.7
6.7
7.7
Consumption
0.5
-1.2
1.3
1.5
2.3
2.4
Investment
1.8
-1.2 -2.9
1.5
3.9
3.4
Net Exports
1.2
2.2
2.7
0.5
1.8
5.6
Contribution to Growth,
Korea (% points)
back to East Asia
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
3.7
2.2
2.4
3.9
5.3
5.5
Consumption
0.7
-0.5 -0.6
-0.7
-0.4
0.2
Investment
2.1
-0.1 -0.3
0.3
-0.1
1.9
Net Exports
1.1
1.5
5.0
7.2
4.0
3.1
Contribution to Growth,
Indonesia (% points)
back to Southeast Asia
Malaysia
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
4.4
3.6
4.0
4.4
5.0
4.3
Consumption
3.2
3.6
3.6
4.1
4.2
3.6
Investment
1.7
-1.0
-0.2
-1.1
1.6
1.6
Net Exports
-0.5
1.1
0.6
1.4
-1.9
-1.2
Contribution to Growth,
Malaysia (% points)
Philippines
back to Southeast Asia
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
4.6
4.8
5.5
7.6
7.6
8.0
Consumption
4.9
3.3
3.5
6.3
5.3
6.2
Investment
-3.6
-3.8
-1.4
1.8
3.9
5.1
Net Exports
3.2
5.2
3.3
-0.5
-1.6
-3.3
Contribution to Growth,
Philippines (% points)
back to Southeast Asia
Singapore
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
4.8
4.2
4.8
5.0
6.5
6.2
Consumption
4.1
3.7
4.3
4.5
4.5
4.9
Investment
4.4
-0.2
-0.7
-2.9
2.5
1.6
Net Exports
-9.8
-3.4
0.0
-0.9
2.3
2.2
Contribution to Growth,
Singapore (% points)
back to Southeast Asia
Thailand
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
1.7
-3.9
1.7
4.9
7.5
12.5
Consumption
-0.8
-0.6
-0.9
1.4
3.9
4.4
Investment
-8.8
-12.3
-5.9
-2.1
8.4
5.1
Net Exports
11.5
9.0
8.6
5.8
-4.3
3.3
Contribution to Growth,
Thailand (% points)
back to Southeast Asia
2003
2004
Q1
Q2
Q3
Q4
Q1
Q2
GDP
6.7
5.8
6.6
7.8
6.6
6.3
Consumption
2.7
3.5
3.4
4.5
3.8
3.5
Investment
2.2
0.5
3.1
4.5
4.9
4.4
Net Exports
1.6
1.7
0.6
-1.7
-2.3
-1.7
Sustained
high oil price
Inflationary
pressures
Interest
rate hikes
Reversal of
Savings and
Consumption
Behavior
Investment
Setback
back to Global Risks
Rise in HH Credit
Default Rates
Reduction of
attractiveness of Asian
financial Markets
SLOWDOWN OF ECONOMIC ACTIVITY IN ASIA
Impact in 2005 of Sustained Increase*:
Scenario I vs. Scenario II
next
Scenario I ($10/bbl increase)
Scenario II ($20/bbl increase)
GDP
Trade
Balance
(% of GDP)
Consumer
Prices
GDP
Trade
Balance
(% of GDP)
Consumer
Prices
Asia incl. Japan
-0.6
-0.3
1.0
-1.2
-0.7
1.9
Asia excl. Japan
-0.8
-0.4
1.1
-1.5
-0.8
2.0
Japan
-0.5
-0.3
0.7
-1.0
-0.6
1.3
PRC
-0.8
-0.1
0.5
-1.5
-0.3
0.9
Hong Kong,
China
-0.6
-0.8
0.3
-1.1
-1.6
0.5
Korea
-0.6
-0.8
0.8
-1.2
-1.7
1.4
* Until end of 2005; from a baseline of $35/bbl; brent crude
Impact of a Sustained
Increase…cont.
back to global risks
Scenario I ($10/bbl increase)
Scenario II ($20/bbl increase)
GDP
Trade
Balance
(% of GDP)
Consumer
Prices
GDP
Trade
Balance
(% of GDP)
Consumer
Prices
Indonesia
0.1
0.9
1.3
0.1
1.9
2.1
Malaysia
-0.9
0.3
1.4
-2.4
1.1
2.7
Philippines
-1.9
-0.9
1.4
-3.6
-1.9
2.8
Singapore
-1.7
-1.3
1.3
-3.4
-2.5
2.5
Thailand
-2.2
-1.2
1.5
-4.1
-2.5
2.9
India
-0.8
-0.7
1.7
-1.5
-1.4
3.3
Key stylized facts
• The slowdown in PRC is mainly investmentinduced;
• Despite rapid growth, PRC remains a
relatively small trading partner of most Asia
developing economies, compared to the
US, Japan and EU;
• A large part of Asia's exports to the PRC
involves intermediate goods that are
processed and reexported.
Weakening fixed investment in some
selected sectors is the main component of
the slowdown of PRC
50
45
40
35
30
25
20
15
10
5
0
Fixed assets investment (YTD)
Retail sales of consumption goods
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
1
1
1
1
2
2
2
2
3
3
3
3
4
4
4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Regional Distribution of Trade in
Developing Asia, 2003 (%)
70
PRC
USA, EU and Japan
60
50
40
30
20
10
0
NIEs excl. Hong
Kong, China
Hong Kong, China
ASEAN (excl
Singapore)
South Asia
The regional production chain is
dependent on final demand from
industrial countries
Effects of a PRC Slowdown
• The simulations using a global CGE
model show that PRC’s slowdown would
have a moderate impact on Asian
economies
• A two % pts reduction in PRC’s growth
would slow GDP growth by 0.5 ppts for
NIEs, 0.24 ppts for ASEAN and 0.1 ppts
for South Asia
Effects on GDP Growth in
Selected Regions
(2 % pts reduction in PRC’s GDP growth, 2005)
US
Japan
EU
NIEs
ASEAN
South Asia
The World
-0.11
-0.24
-0.12
-0.50
-0.24
-0.09
-0.24
Sectoral Impacts
• In Japan, the textile sector is most hit due to
strong dependence on PRC market.
• NIEs are expected to experience some
production losses in their chemicals, metals,
services, and textiles sectors.
• In ASEAN, electronics and chemical industry
would be major losers from PRC’s back to Regional Risks.