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PECC sees slower Asia-Pacific growth in 2008

Think-tank forecasts 4.9% GDP growth this year and next

(SINGAPORE) Asia-Pacific’s economic outlook is now more uncertain than any time since the 1997 Asian crisis, and the region is expected to post slower economic growth in 2008, according to one think-tank.

In its latest State of the Region report, the Pacific Economic Cooperation Council (PECC) forecast a 4.9 per cent real gross domestic product (GDP) growth for the region this year and next – lower than the 5 per cent seen in 2006. The equivalent forecast for 2009 is 5.2 per cent.

East Asia is expected to post GDP growth of 6.4 per cent and 5.6 per cent in 2008 and 2009 respectively.

PECC is an international tripartite partnership of senior individuals from business and industry, government, academic and other intellectual circles. Its forecasts are based on the assumptions that the US will not enter into a recession and that there will be a recovery in the housing sector there in the second half of next year.

‘The US slowdown will affect exports from East Asia but this will be offset somewhat by robust import growth in China,’ the report says.

PECC said that the external sector continues to be characterised by huge current account imbalances across the Pacific.

While the weakening greenback had slowed the growth of American imports to just 2.2 per cent this year and PECC expected the deficit to be about 5.1 per cent of US GDP by 2009, the deficit will still remain very large in dollar value terms.

After falling from US$794 billion in 2006 to US$760 billion in 2008, the deficit is expected to balloon again in 2009, to around US$786 billion, the report said.

As for China, the current account balance is forecast to balloon to about US$507 billion in 2009, which is roughly 10 per cent of GDP.

The Chinese currency is expected to appreciate to an average of 6.9 yuan (S$1.35) per US dollar in 2008 and 6.4 yuan in 2009.

The report singled out the spillover of recent financial market volatility into the real economy as a major new source of risk, especially in the US.

‘The full extent of the damage from the sub-prime mortgage crisis is still being worked out, but it could be as much as US$300 billion,’ it says.

‘Together with a falling dollar, the result will be downward pressure on investment, employment, asset prices and consumer confidence.’

On the impact of the crisis on Asia, the report believes that a large share of the sub-prime mortgage market may be held by Asian investors from both private sector and public sector, who will be hit by value downgrades in their holdings and a depreciating greenback.

Asian central banks will be concerned that massive withdrawals from US dollar assets could lead to domestic currency appreciation and a loss of export competitiveness.

‘With the Federal Reserve expected to cut interest rates at its forthcoming meetings, Asian central banks will face conflicting pressures to either follow suit – and thus hold back the upward pressure on their currencies and the costs of sterilisation activities – or to keep domestic interest rates high in order to restrain inflation and to cool overheated property markets even at the expense of export competitiveness,’ says the report.

Although it said that the possibility of a severe market crash leading to systemic financial sector crisis and a deep US recession is small, it cannot be ruled out entirely.

There are also worries about inflationary pressures in the world economy, speculative bubbles in Asia and the rapid unwinding of the US current account imbalance.

The report pointed out that while East Asian economies continue to show strong growth, it is premature to suggest that the region has ‘decoupled’ from North America.

 

Source: Business Times 14 Dec 07

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