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Global Economic Trends Bert Hofman World Bank Office Manila Implications of the ASEAN Charter for East Asian Integration March 12, 2008 A Good Decade Thus Far Developing Countries GDP Growth Forecasts for 2008 GDP growth have been revised downwards Projection percent 3.2 US 3.0 2.8 2.6 Japan 2.4 2.2 2.0 Euro area 1.8 1.6 1.4 1.2 n Ja 07 7 b0 Fe 7 7 7 7 7 7 7 8 7 7 7 r 0 pr 0 ay 0 un 0 Jul0 ug 0 ep 0 ct 0 ov 0 ec 0 an 0 A O J J Ma A S D N M Date of projection for 2008 Sizable slowdown in industrial country GDP growth is now expected Region/country 2007 2008 WB Consensus Forecasts Feb 2008 IMF WEO Update Oxford Econ High income OECD USA Euro-zone Japan 2.5 2.2 2.7 2.1 1.8 1.6 1.7 1.5 .. 1.6 1.6 1.4 1.8 1.5 1.6 1.5 .. 1.8 1.7 1.5 Developing 7.4 6.7 .. 6.9 .. Private capital flows are also expected to ease Net private capital flows to developing countries $ billions $998 billion in 2007 (7.3% of GDP) 1000 800 Projected Percent 2008-09 Percent of GDP (right axis) 600 3.5% of GDP average 1990-02 8 6 5.25% 4 400 200 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 0 20 6 07 20 e 08 20 P 09 P 0 Source: World Bank, DECPG 2 0 But so far the impact on East Asia has been limited East Asia - Quarterly GDP Growth East Asia - Export Growth (% Change Year Ago. 1999 Q1 - 2007 Q4) (Local Currency 3Mo. Mov. Averages - % Change E. Asia Year SEAgo) Asia 12.0 China NIEs 40 9.0 6.0 20 3.0 -6.0 -20 Source: World Bank Sep-2007 Apr-2007 Nov-2006 Jun-2006 Jan-2006 Mar-2005 Oct-2004 Dec-2003 Jul-2003 Feb-2003 Sep-2002 Apr-2002 Nov-2001 Aug-2005 NIEs China Jun-2001 Jan-2001 Q3 2007 Q1 2007 Q3 2006 Q1 2006 Q3 2005 Q1 2005 Q3 2004 Q1 2004 Q3 2003 Q1 2003 0 May-2004 E. Asia SE Asia Q3 2002 Q1 2002 Q3 2001 Q1 2001 Q3 2000 Q1 2000 Q3 1999 -3.0 Q1 1999 0.0 Several factors suggest East Asia is well placed to weather a US recession • Current accounts are in surpluses. • Debt outstanding due within a year is below 10 percent of GDP in all SE Asian economies. • Reserve levels are very high—at end January 2008 total reserves for the nine largest economies in the region stood at US$ 2.74 trillion. • Domestic conditions are much stronger: domestic demand is robust, corporate balance sheets are healthy, and capacity utilization is high, which could encourage investment. • Fiscal positions are also relatively strong in most economies in the region—enabling them to undertake counter-cyclical policies to stimulate demand if needed. Perceived riskiness of EM bonds, especially East Asian bonds, rose by much less than high-yield corporate bonds spreads, basis points 600 High-yield spread High-income countries 500 400 300 EMBI spread 200 East Asia spreads 100 2-J -07 n a 1-F -07 b e 7 07 07 07 07 -07 -07 -07 - 07 -07 l l t r -0 r y p n g v c u a u p a e u u -J -O No -S -A 1-J 9 3-M 2-A 1-J 9 2-M 31 0 8 2 2 3 2 Source: Bloomberg, JPMorgan-Chase. ...and in historical perspective the present widening of spreads is modest Bond spreads (basis points) 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 Emerging market bond spread (EMBIG) 250 0 1994M1 1995M9 Source: JPMorgan. 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5 Developing countries have become key drivers of global import growth Contribution to global nominal import growth in US$, y/y %-points 10 Developing countries 5 0 United States -5 1991M1 1993M1 1995M1 Source: World Bank, DECPG. 1997M1 1999M1 2001M1 2003M1 2005M1 2007M1 Trend developing country growth has become decoupled from trend high-income growth Developing and high-income growth and trend growth 9 8 7 Developing countries 6 5 4 3 2 1 High-income countries 0 -11962 1967 1972 Source: World Bank, DECPG. 1977 1982 1987 1992 1997 2002 2007 But the cyclical component of developing and high-income country growth remains coupled Deviation from trend GDP growth (percent) 3 Developing country cycle 2 1 0 -1 -2 High-income country cycle -3 -4 1962 1967 1972 Source: World Bank, DECPG. 1977 1982 1987 1992 1997 2002 2007 Short Term Outlook • Anticipated slowdown should help reduce some current global economic tensions: rising commodity prices, inflationary pressure, global imbalances. • Difficult challenges remain for some developing countries, with vulnerability to the possibility of capital flow reversals or the impacts of increased food and energy prices. In East Asia the latter is likely to be of much greater concern. – Overall food prices in US$ have increased by 75 percent in 2000 due to high energy and fertilizer prices, increased use of food crops for biofuels and world grain carryover stocks at record low levels – Food prices are expected to remain elevated although some decline in real terms may be expected. Demand for bio-fuels will probably increase, energy and fertilizer prices expected to remain high and pasture lands will take years before it can be cropped. Short Term Outlook cont’d • Overall outlook remains relatively strong for the East Asia region • But a severe recession in the US and other developed countries would clearly impact the region. • East Asia is the region that participates most actively in the global and regional production networks associated with MNCs. Many EA countries are involved in the assembly process at different stages, leading to product parts and components crossing borders repeatedly before they are incorporated into the final product. The final products however, are still destined primarily for the US and European Union. Long Term Outlook • More prudent macroeconomic management and technological progress have contributed to an increase in total factor productivity (TFP) and real income growth over the past 15 years. • Over the next 10 years, these same factors are expected to enable developing countries to achieve annual per capita income gains of 3.9 percent, and perhaps as much as 3.4 percent in the decade following the next. These projections imply per capita income growth that is more than twice as fast as that in high-income countries. • Growth of such magnitude would reduce the number of people living on less than a dollar a day from 1.2 billion in 1990 and 970 million in 2004 to 624 million by 2015. • Such aggregate outcomes are not guaranteed, of course, and performance across individual countries is likely to be diverse.