October 17, 2007	Wednesday	Shawwal 4, 1428

The global economy continued to expand at a brisk pace in the first half of 2007. Although growth in the United States slowed in the first quarter, recent indicators suggest that the economy regained momentum in the second quarter. Activity in most other countries continued to expand strongly. In the euro area and Japan, growth has remained above trend with some welcome signs that domestic demand is taking a more central role in the expansions. Emerging market countries have continued to expand robustly, led by rapid growth in China, India, and Russia.

Inflation remains generally well contained despite strong global growth, although some emerging market and developing countries have faced rising inflation pressures, especially from energy and food prices. Oil prices have risen back toward record highs against the backdrop of limited spare production capacity, while food prices have been boosted by supply shortages and increased use of bio-fuels. Against this background, global growth is now projected at 5.2 per cent in 2007 and 2008—0.3 percentage point higher for both years.

The major upward revisions have been for emerging market and developing countries, with growth projections substantially marked up for China, India, and Russia. Among the advanced economies, growth in the United States is now expected at 2 percent this year—0.2 percentage point lower than projected—although activity should regain momentum through the year and return to potential by mid-2008. Growth projections for the euro area, particularly Germany, and Japan have also been raised.

The overall balance of risks to the global growth outlook remains tilted modestly to the downside. Nevertheless, there have been some changes in the IMF staff’s assessment of individual risk factors. With sustained strong growth, supply constraints are tightening and inflation risks have edged up, increasing the likelihood that central banks will need to further tighten monetary policy. The risk of an oil price spike remains a concern. Financial market risks have also increased as credit quality has deteriorated in some sectors and market volatility has increased. A number of other risks, however, look more balanced. Upside risks to growth in the euro area and emerging market countries have partially materialized and have been built into the baseline projections.

Further, some progress has been made toward reducing risks of a disorderly unwinding of global imbalances, although protectionist pressures are a continuing concern. The world economy is poised to maintain a healthy rate of expansion in 2007, with an unprecedented fourth consecutive year of more than 4% growth likely, in large part because of China, India, and the US. Of course, any prolonged deceleration in the U.S., which accounts for more than one-fifth of global GDP and is the world’s biggest importer, would naturally curb growth globally.

Europe’s economic growth in 2006 turned out to be even stronger with GDP growth reaching an estimated 2.7 per cent in the Eurozone, and the UK. economy growing at a similar rate. Although no final data is available for the fourth quarter of 2006 as yet, estimates suggest that the Eurozone economy finished the year on a high, with GDP expanding 3% in real terms (3.4 per cent in the UK.)

The economic outlook for Latin America in 2007 and 2008 is extremely favorable. Despite some deceleration in the US sound growth prospects elsewhere and robust growth in emerging Asia should support strong global trade flows and commodity prices. Favorable global liquidity conditions not only bolster growth in the region, but also the appetite for local-currency-denominated paper among emerging-market investors.

Developing Asian economies

According to the newly released report by the Asian Development Bank, developing economies from Asia will register solid economic growth in 2007, driven by fast growth China and India, which together account for 55.3 per cent of the total gross domestic product (GDP) in developing Asia. China and India recorded their fastest growth in 13 years during the first half of 2007 and 18 years in fiscal year 2006. The growth in Asia is currently more broad-based as other regions like South Asia and Central Asia have continued to post robust growth, and growth accelerates in other economies, such as Indonesia and the Philippines. However, the economic outlook for 2008 is hazy as uncertainty reigns in global financial markets and the health of the U.S. economy does not seem too good.

Growth in Asia and the Pacific to be of 8.3% in 2007, up from an earlier estimate of 7.6 per cent, provided the global economy steadies. A growth of 8.2 per cent is anticipated in 2008. The developing Asia would surely suffer if the US economy slows abruptly, though the impact may be modest and short lived, provided they manage the external shocks and the internal challenges properly. The Asia Bank report also lists avian flu, geopolitical and security risks in some parts of the region and political uncertainty in a few countries as downside risks obscuring the outlook for a number of economies.

East Asia is currently expected to see growth rate of 8.9 per cent in 2007. The Bank lifts growth forecast for China to 11.2 per cent this year. It expects brisk exports, strong investment and buoyant consumption to drive economic growth to 10.8% in 2008, an upward revision from the 9.8 per cent projection in March. South Asia is expected to grow at 8.1% in 2007. Potential growth rates in Bangladesh, India and Pakistan now appear to be on a more stable trajectory. Indian economy is anticipated to grow by 8.5

Per cent in 2007 and 2008. Southeast Asia as a whole is now expected to grow at 6.1% in 2007. Central Asia’s growth estimates for 2007 has been raised to 11.1 per cent as high oil prices and mineral exports continue to support economic expansion in the region

China

Brisk exports, strong investment and buoyant consumption will lift economic growth in China to 11.2 per cent this year, up from an earlier estimate of 10 per cent. The faster than expected growth momentum built up this year is expected to carry into 2008. The Chinese economy grew at a faster-than-expected 11.5 per cent in the first half of 2007. It expanded at 11.1 per cent in 2006. The report forecasts growth of 10.8 per cent for 2008, also an upward revision from the 9.8 per cent projection in. Further steps to cool the rapid investment expansion are likely and the Government will put more emphasis on improving energy efficiency and on cutting pollution.

The 11.5 per cent Gross Domestic Product (GDP) growth in the first half, its fastest rate since 1994, was led by industry, especially in such sectors as steel, electricity, chemicals, and oil processing. Strong profitability, buoyant sales and still-low lending rates drove investment during the period. Investment administered by local governments grew by 28.1% in the first six months, nearly double the equivalent central government rate, suggesting that efforts by the center to tighten local investment have not had lasting effects. Supported by policies to boost the rural economy, investment in agriculture surged by 37.5 per cent in the first half, faster than that in industry (29 per cent) and services (24.6 per cent).

The bank in the ADO report says that domestic agriculture should be boosted by policies to lift rural incomes and improve rural infrastructure. Growth in the services sector will be supported by the summer Olympics next year. Rising incomes bolstered by enterprise profits, salary increases for civil servants and higher minimum wages for some employees and policies to spur the rural economy will drive consumption. Higher incomes and improvements in the social security system will continue to underpin consumption growth. Top priorities remain the creation of jobs for nearly 8 million rural surplus workers migrating to cities each year and on lifting income growth in lagging regions and areas.

China’s inflation is estimated to be 4.2 this year and 3.8 per cent in 2008 against the previous forecasts of 1.8 and 2.2 per cent, respectively. Rising global grain prices and a pig disease outbreak led to sharply higher food prices, but this is expected to ease next year, paving the way for the implementation of planned reforms in the pricing of state-controlled sectors such as water, power and natural gas. Significantly higher than expected inflation, however, poses a risk to the outlook. Adverse weather would lower domestic grain production at a time when imported grain prices are high.

Exports rose by 27.6 per cent in the first half, exceeding import growth of 18.2 per cent. Exports are forecast to grow by 20 per cent and imports by 16 per cent in the second half, resulting in a record full-year trade surplus of around $300 billion, up more than 60 per cent from 2006. The current account surplus is now expected to swell to 10.9 per cent and 10.5 per cent of GDP in 2007 and 2008, respectively, revised up from the 8.8 per cent and 8.9 per cent projected earlier this year. The gap between export and import growth will probably narrow slightly as the changes to export tariffs and export tax rebates take effect. However, the report also reveals that China faces the key challenge of reducing the country’s reliance on exports and investment for growth in favor of private consumption. Such a switch could lessen vulnerability to external shocks and ease environmental strains caused by the emphasis on export- and investment-led heavy industry.