Asia-Pacific's economic dynamism on track but softer growth in 2007

Bangkok – China, India and Japan are set to be the main driving forces for Asia Pacific's growth in 2007 against signs of a slowing in the United States and European economies, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) reported in its annual economic Survey.

The Economic and Social Survey of Asia and the Pacific 2007 forecasts softer growth across the region at 7.4% from 7.9% in 2006, but still expects the economic dynamism of recent years to continue.

But there are downside risks, the Survey warns. The main concerns lie in any fresh oil price shock, the abrupt cooling of housing markets in the United States, volatility in foreign exchange markets, a new downturn in Japan's economy, "overheating in China" and an avian flu pandemic.

The Survey says even without these sudden shocks, the region faces a less favourable global environment in 2007. It points to the evident slowing in the United States housing market and softer U.S. consumer demand leading growth to fall to 2.2% from 3.2% last year. The European Union is also facing slower growth at 2.4% from 2.7%.

At the same time, for most UNESCAP countries inflation will remain contained at just 3.8%, despite further easing in oil subsidies in some developing countries and a tightening in labour and land markets in East and North-East Asian economies.

The Survey warns the biggest challenge for Asia Pacific economies lies in managing volatile exchange rates. Major currencies in the region are expected to continue to appreciate. The imbalances in the United States and capital flows into the region are the main drivers.

"It will be increasingly difficult for monetary authorities to pursue an independent monetary policy in response to shocks, as was the case in 2006, to thwart speculative short term flows," the Survey says.

Interventions by authorities to keep currencies down have led to inflated asset values in the region. Stock markets and housing prices have significantly risen in the past year.

The Survey recommends greater exchange rate flexibility as the "one sustainable solution." Such move should take away the "one-way bet" that often leads to more capital flows. "Markets quickly realize that the currency could move in either direction."

In other areas, the global electronics sector, a vital contributor to Asia-Pacific's growth, faces a "moderate decline" in demand, together with signs of an easing in commodity prices, including oil that will prove a mixed blessing.

The economies of several oil exporting countries in the Asia Pacific have benefited from higher global petroleum prices, especially in Central Asia and the Russian Federation. But an easing in oil prices over the second half of 2006 eased inflationary pressures and the burden for oil importing countries.

The Survey says that "as the international economic environment weakens, momentum in the region is expected to come from China, India and Japan." It says "considerable opportunities" are set to arise as the three economies account for over 60% of the gross domestic product (GDP) of the Asia Pacific region and close to 45% of imports.

China, while forecast to experience slower growth of 9.9% this year from 10.7% in 2006, will still see exports and investment as the main driving forces. UNESCAP expects the yuan to strengthen, a tighter domestic policy to slow investment and weaker demand from the electronics sector.

In India, the Survey expects the central bank to "nudge interest rates" up over the year but with growth still strong at 9.0% in 2007 led by services and accelerating industrial production, raising fears of "overheating" leading to higher domestic prices.

For Japan, a slowing United States economy is forecast to lead growth to under 2.0% from 2.6% in 2006.

But UNESCAP is predicting a rebound in economic growth for South East Asian economies, buoyed by domestic demand and in particular investment.

Lower interest rates in Indonesia and a pro-business regulatory climate are set to boost investment. Malaysia's economy is boosted by strong electronics exports and increased development spending under the national latest five year economic plan.

In the Philippines, energy reforms have strengthened the investment climate. But political uncertainties in Thailand have raised the "downside risks" although growth is forecast at 4.7%.

In North and Central Asia, growth is projected to slightly ease to 7.1%. The Russian Federation is projected to grow at a robust 6.4% in 2007, and benefit from strong export earnings and healthy domestic demand.

Political instability could act as a significant drag on growth over the medium term in several countries in the Asia-Pacific region such as Fiji and Sri Lanka. According to 2007 Survey, geopolitical tensions are also weakening investor and consumer confidence in the Islamic Republic of Iran and on the Korean Peninsula.

As the region's oldest and most comprehensive annual review of economic and social developments, UNESCAP's Economic and Social Survey of Asia and the Pacific provides the only independent source of analysis covering all countries in this vast and diverse region, and considers both the social and economic spheres of development. The 2007 Survey, entitled "Surging Ahead in Uncertain Times," looks at the most critical issues, challenges and risks our region faces in the months ahead.

Headquartered in Bangkok, Thailand, UNESCAP is the largest of the UN's five Regional Commissions in terms of membership, population served and area covered. The only inter-governmental forum covering the entire Asia-Pacific region, it aims to promote economic and social progress.∞