AFTER rebounding strongly in the first quarter of 2006 to record 5.6 per cent
annualized real GDP growth, the US economy slowed to just below a three per cent
estimated growth rate in the second quarter. Many considerations suggest that
for the next few quarters, the US economy will grow significantly more slowly
than the 3¾ per cent average annual rate of the past three years.
Residential investment is in a slump and clearly has to go down further before
it levels off. Consumer spending is no longer being boosted by rapidly rising
home values and mortgage refinancing, while high energy prices and increased
payments on variable rate mortgages are cutting deeper into disposable income.
To restore at least a modestly positive personal saving, consumer spending
growth will need to slow below income growth - probably down to only two per
cent per year.
Business investment in equipment, software, and structures will probably
continue moderately vigorous growth for a while, spurred by strong profits, high
capacity utilization, and rising exports. But this strength will tend to wane as
it becomes clear that the slowdown in consumer spending growth is likely to
persist for some time. With government purchases likely to show only modest
growth, all of this implies that US real domestic demand over the next year or
so is likely to rise at only about half of the four per cent annual rate of the
past three years.
Real net exports may show modest improvement as import volume growth slows under
the impact of weaker domestic demand growth while export volume growth remains
strong. Nominal net exports and the current account balance, however, will
continue to deteriorate because of the effect of rising import prices,
particularly for energy and the large existing excess of the value of imports
over the value of exports. Such a gain in real net exports will provide a slight
boost to the US real GDP growth but not enough to raise it much above two per
cent.
This forecast is a percentage point below the Federal Reserve’s forecast
described by Chairman Ben Bernanke in his July testimony and is also below the
consensus forecast of other economists. However, if the US economy grows at
three per cent - in line with its potential - then significantly more Fed
tightening will likely be needed. This will mean somewhat stronger growth than
my forecast for the next couple of quarters, but then a more substantial
slowdown - possibly a recession.
Asia
Growth is expected to reach 7.3 per cent this year, declining marginally to
7.1 per cent in 2007, again outpacing other regions. Relative to the May 2006
Regional Economic Outlook (REO), this represents an increase of about ½
percentage point per year, reflecting sizable upgrades for both China and India.
While export growth for the region is projected to moderate next year in line
with slowing growth in industrial countries, overall it is expected to remain
strong, in part reflecting continued solid prospects in the electronics sector.
Moreover, with the interest cycle in Asia likely nearing its peak and the
prospect of stability in oil prices, there is an expectation that domestic
demand—in particular investment in the ASEAN countries - will pick up steam. In
China and India, rapid investment growth is expected to slow modestly in
response to policy tightening, but domestic demand is projected to remain very
robust. Inflation in the region remains well contained. Despite much higher
prices for oil and other commodities, monetary policy tightening and exchange
rate appreciation have helped keep CPI inflation at about 2¾ per cent this year,
with a similar outcome expected next year.
Relatively high-inflation economies are expected to see a significant moderation
of inflation.
The region’s current account surplus is expected to remain broadly unchanged
this year and next, at about 3½ per cent of the GDP. In emerging Asia, excluding
China, surpluses are projected to decline by ¾ per cent of GDP in 2006,
reflecting a higher oil import bill and, in some cases, the impact of currency
appreciation. But China’s surplus is projected to remain large, at about 7¼ per
cent of the GDP. The key risk for Asia is a more rapid than expected slowdown in
the United States. Despite increased intra-Asia linkages, in particular with
China, growth in the United States remains critical to Asia’s prospects. But
sharper slowdown would have a significant impact on Asia’s exports and,
indirectly, on domestic demand. East Asia:
The regional economy in East Asia will post slower growth in 2007 because of a
slowdown in America and Europe, and the region could be upset by global market
turbulence triggered by the US recession jitters. The average GDP growth for
East Asian economies would slow to 4.4 per cent next year from 4.9 per cent in
2006, according to the Manila-based Asian Development Bank’s forecast in its
twice-yearly report. Excluding Japan, the most developed economy in the region,
growth for East Asia is projected to fall back to seven per cent from 7.7 per
cent this year.
With economic growth in the US and euro zone slowing to a more tempered pace,
the external environment facing East Asia in 2007 is likely to be somewhat less
supportive of economic growth, but more conducive to containing inflation. The
bank warned that East Asia could suffer from heightened global market volatility
because of worries about the risk of a US slowdown and a sliding US dollar. A
slowdown in the US economy had become a much more threatening prospect compared
with earlier in the year, and that could undermine demand for Asian exports.
Many East Asian economies, with significant trade exposure to the US economy and
persistently high current account surpluses are very much exposed to this risk.
Uncertainties also hang over China’s ability to rein in over-investment.
Beijing’s attempts to restrain investment appear to have taken effect late in
the year, with fixed-asset investment dropping sharply from a peak of 33 per
cent in June to 16 per cent in October. But measures have been limited to
specific sectors such as real estate, the ADB said. Authorities must now steer
the economy toward an orderly transition to a slower but still high pace of
economic growth.
There is a risk that investment can reaccelerate, which would build up to
vulnerabilities characteristic of an economic bubble. Improving the quality of
investment rather than focusing on the volume of investment, which is already
very high, is important. China’s GDP growth is expected to ease to 9.5 per cent
in 2007 from an estimated 10.4 per cent growth this year. In Japan, growth is
likewise expected to slow down as export growth decelerates, with GDP growth
falling to 2.4 per cent in 2007 from 2.8 per cent this year.
The East Asian economy (excluding Japan) is projected to grow by 7.4 per cent in
2006, according to a report released today by the Institute of Developing
Economies, Japan External Trade Organization (IDE-JETRO). The forecast for 2007
is based on the following assumptions: the advanced economies will grow at
slightly slower paces (the US at between 2-2.5 per cent, Japan at around two per
cent, and the EU at between 2-2.5 per cent); the yen-US dollar exchange rate is
expected to remain at the level seen in the later half of 2006; and crude oil
prices will decrease by seven to eight from their 2006 level.
According to the report, the East Asian economy as a whole will post solid
growth of 7.4 per cent in 2007, down 0.5 points from last year’s figure,
underscoring concerns over slower economic growth in China and the four Asian
NIEs. The combined inflation rate is estimated to decline 0.4 points
year-on-year to 3.5 per cent. The combined growth rate for the four Asian NIEs
in 2007 is estimated at 4.7 per cent, down 0.5 points from the projected 2006
figure, owing to a slowdown in external demand. ROK and Taiwan are expected to
grow at lower rates in 2007, 4.4 per cent and 4.1 per cent respectively, due to
weaker demand resulting from a slowing Chinese economy. Estimated growth rates
for Hong Kong, SAR and Singapore in 2007 are also low (as compared to this
year’s projected figures), at 5.9 per cent and 6.1 per cent, respectively.
The report predicts 5.6 per cent growth for the combined economies of the ASEAN
in 2007. Individually, Indonesia and Thailand are forecast to post accelerated
growth rates of 5.8 per cent and 4.9 per cent, respectively, on the back of
strong domestic demand. Malaysia will grow at 5.2 per cent, reflecting slower
domestic and external demand, while the Philippines will expand 5.3 per cent,
also reflecting a slowdown in (external) demand. The Vietnamese economy is
forecast to grow at an accelerated pace of 8.4 per cent in the coming year.
According to the IDE-JETRO report, the East Asian economy as a whole is
predicted to post growth of 7.9% in 2006, up 0.4 points over last year’s figure,
driven by accelerated growth in China and the four Asian NIEs. The combined
inflation rate is estimated to increase 0.5 points year-on-year to 3.9 per cent.
Driven by growth in investment, the Chinese economy is projected to grow by 10.5
per cent in 2006, 0.3-points higher than the figure achieved in 2005.
The combined growth rate for the four Asian NIEs in 2006 is estimated at 5.2 per
cent, a 0.6-point increase over last year’s figure. Individually, ROK and Hong
Kong SAR are estimated to grow at 4.8 per cent and 6.8 per cent, respectively,
driven by growth in domestic demand (and despite an expected decrease in net
external demand). The Taiwanese economy is predicted to grow at 4.4 per cent in
2006, with solid exports offsetting weaker domestic demand.
The combined growth rate for the ASEAN in 2006 is estimated at 5.4 per cent,
roughly the same as last year’s figure. Indonesia, despite stagnant investment
growth, is estimated to grow by 5.2 per cent. Buoyant external demand
compensated for slower domestic demand in Thailand, where 4.8 per cent growth is
expected. Malaysia is estimated to grow at 5.7 per cent, due to expanding
investment, while Vietnam is predicted to grow at 8.2 per cent, led mainly by
the industrial and services sectors. The Philippines, despite weak investment,
is estimated to grow by 5.5 per cent, on the back of thriving external demand
and consumption.
