East Asian Economies
According to the ADB latest economic update for 2005, the economies of East Asia are projected to grow in aggregate by 6.9 per cent in 2005, in line with their strong average expansion rate of the past five years. This will represent a slowdown of nearly one percentage point from the high growth rate of 2004. All the five sub-regional economies are expected to decelerate. In 2006, sub-regional growth is projected to remain at around the 2005 level. Excluding China, the region is now forecast to register a GDP growth of 3.8 per cent for the full year. The projections for East Asia’s economies, which are increasingly linked to the Peoples Republic of China, are vulnerable to changes in that large economy’s performance. While China has expanded by 7.5–9.5 per cent annually over the past five years and looks set to stay at the top end of this range over the next two years, there are downside risks that centre on banking system weaknesses, energy bottlenecks, and overcapacity in certain industries.
China
THE country’s GDP for the first half of 2005 showed little sign of the anticipated growth slowdown. The first-half rate was 9.5 per cent year on year, similar to the rate for the whole of 2004. Underpinning growth in the first half of the year were surging net exports, still-buoyant investment, and an acceleration of consumption. The growth forecast for the whole of 2005 has already been revised upward to 9.2 per cent.
GDP growth forecast for 2006 is just below 9 per cent. It is expected that high economic growth will be supported by rising incomes and consumption, though the deceleration of investment and net exports expected from the second half of 2005 is likely to bring GDP growth down a little from the peak levels of recent years. Continuing strong growth aided employment generation: about 6 million new jobs were created in this period, or some two thirds of the target for the whole year, mainly by the private sector.
Inflationary pressures in China, and indeed in most of East Asia, have been lower than expected this year. Consumer price inflation, which hit an 8-year high of 5.3 per cent in July–August 2004, slowed to 2.3 per cent in the first half of 2005, and is expected to remain low in the second. The consumer price index (CPI) rose by just 1.8 per cent in April and May from a year earlier. The CPI forecast for 2005 is revised to below three per cent from 3.6 per cent.
Consumer inflation is expected to be just under three per cent in 2006, since excess capacity in manufacturing and expected increased grain production will likely diminish upward pressure from higher production costs, including rises in wages and benefits and in international oil prices.
A surge in net exports and—despite government efforts—stubbornly high growth in investment resulted in stronger than expected 9.5 per cent growth in the first half, the same rapid pace recorded in the whole of 2004. Exports continued to power ahead, by 32 per cent in the first seven months of the year, a rate much stronger than in other subregional economies.
Total import growth, in contrast, slowed to 14 per cent in the first seven months, significantly less than the 35 per cent-plus rate of the previous two years Particularly affected were agricultural and mineral products, base metals, machinery and equipment, and motor vehicles and parts. A good harvest, slightly slower investment growth, a stronger competitive position for some domestic industries such as automobiles, and a drawdown in oil inventories were the main factors contributing to slower import growth.
The continued upsurge in exports, combined with decelerating imports, produced a trade surplus of $39.7 billion in the first half, a turnaround from a trade deficit of $7.6 billion in the same period of 2004. Expectations of a currency appreciation also played a role in the big trade surplus, as some companies brought forward exports and delayed imports. This year’s strong trade performance has led to an increase in the forecast for the PRC’s current account surplus to 4.7 per cent of GDP in 2005 and 3.6 per cent in 2006.
The tightening of the fiscal policy appears to be on track. Revenues and expenditures, both rose by about 15 per cent in the first half of the year, with revenues rising much faster than expected. The fiscal deficit is expected to narrow to 0.9 per cent over the full year from 1.5 per cent in 2004. The deficit is projected to narrow further, to 0.7 per cent of GDP in 2006. However, there is a risk that the fiscal position could be jolted by factors such as off-budget expenditures and contingent liabilities of SOEs.
As a consequence of rapid economic growth over many years, China has become the second biggest consumer of oil and one of the largest oil importers in the world. More than 40 per cent of the economy’s oil requirements are imported. Until 1993 the country was a net oil exporter. The thirst for oil has been abetted by a more than 20 per cent annual average increase in private vehicles over the past three years. Last year, China’s economy was the sixth biggest in the world. However, its per capita GDP still ranked lower than 100th in the world. More than 100 million Chinese still lived in poverty.
According to a UNDP report, the growing income gap between the rich and poor in China could threaten its stability. The income inequality is markedly higher than that of the avowedly capitalist US. The richest 10 per cent of the population enjoyed 41 per cent of China’s wealth. The government needs to reform the fiscal system and push reforms to narrow the gap. The country should increase spending on health, welfare and education.
Hong Kong
THE economy grew by 6.5 per cent in the first half of 2005, compared with 8.1 per cent in all of 2004. Its export growth eased to 12 per cent from about 15 per cent in the year-earlier period. This comparatively stronger export result was attributed to the economy’s close integration with the rapidly developing Pearl River Delta, and to strong growth in re exports originating in the mainland. Growth of imports slowed to nine per cent in the first half from 19 per cent a year earlier, and the trade deficit narrowed. Services exports, a major earner for the economy, grew strongly. Net exports are expected to contribute to growth in 2005.
Consumption and investment have held up, reflecting gradual growth in employment and wages, and firmer asset markets. Share prices reached their highest levels in more than four years in August, and property prices have rebounded about 70 per cent since the housing market bottomed out in August 2003. The forecast for Hong Kong, China’s growth in 2005 is trimmed by 0.3 percentage point to 5.4 per cent in recent month. For 2006, these factors will remain in place, such that growth is expected to moderate to 4.3 per cent. The current account surplus will decline from the high levels of the past two years, but still exceed seven per cent of GDP this year and next. Inflation is forecast at 1.2 per cent in 2005, rising to 2.2 per cent in 2006.
The Asian Development Outlook Had earlier projected the economy to slow to more sustainable rates of 5.7 per cent in 2005 and 4.1 per cent in 2006 before inching up to 5.6 per cent in 2007. Private consumption and investment, rather than exports, were forecast to be the locomotives for growth. Private consumption was expected to grow by 6-7 per cent each year, while investment growth forecast was in the range of 7-9 per cent till 2007. Inflation was forecast to be in the range of 1.5 per cent in 2005 and 1.6 per cent in 2006. It is now expected to be in the range of 1.2 per cent and 2.2 per cent.
South Korea
KOREA, the second-largest economy in East Asia, posted growth of 3.0 per cent in the first half of 2005, well below the 4.6 per cent rate for the whole of 2004. Its export growth rate fell to 11 per cent, from 38 per cent in the year-earlier half. As a major producer of electronic products, Korea has followed the global electronics cycle, benefiting from a strong upswing in 2004, than suffering from the downswing in the first half of 2005.
The drop in Korea’s export growth also reflects to some degree the slowdown in the Chinese imports, because China buys capital equipment, steel, and other industrial materials from Korea. The growth rate of imports into Korea slowed in the first half, to 15 per cent from 26 per cent a year earlier. This slowdown would have been sharper except for higher prices paid for imported oil and other energy.
The trade surplus fell by 18 per cent to $12.5 billion and the contribution of net exports to GDP growth is expected to decline in the full year. Domestic demand in Korea has picked up from the prolonged slump in consumption caused by the 2003 credit card crisis, when household debt exceeded 70 per cent of GDP and about eight per cent of the population were delinquent on credit card payments. By mid-2005, private consumption had increased consecutively in four quarters.
However, corporate investment remained weak because of the slowdown in exports, high global oil prices, and a stronger local currency. Rising oil prices in the international market lowers the 2005 forecast growth rate for Korea by a half percentage point to 3.6 per cent, nearly two percentage points below the average for the past five years.
In 2006, Korea’s growth rate is projected to rebound by one percentage point to 4.6 per cent, influenced by the expected upturn in the global electronics cycle. Domestic demand will continue to recover, but at a modest pace.