East Asian recovery remains on track

PUBLISHED : Friday, 18 October, 2002, 12:00am
UPDATED : Friday, 18 October, 2002, 12:00am

East Asia's economic recovery will remain on track this year and next despite indications of moderately slower growth in the United States and Europe, the Asian Development Bank (ADB) has said.

However, the Manila-based lender tempered its cautiously optimistic outlook yesterday with a stark warning that a military conflict in Iraq would drive oil prices higher, depress regional growth and raise inflation rates.

'At this stage there are no compelling reasons to drastically revise growth forecasts across the region, although some downward revisions of growth forecasts for next year, especially for the more open economies . . . are in order,' it said in its latest quarterly survey.

The ADB cited aggregate private-sector estimates from Consensus Economics for 6 per cent gross domestic product growth in East Asia this year, compared with the previous forecast of 5.8 per cent.

Next year, the East Asian economies of China, South Korea and the 10 states of the Association of Southeast Asian Nations would see growth of 5.9 per cent, 0.3 percentage point down from its previous call, the ADB said.

Excluding the fast-growing China economy, the region was now forecast to grow 4.9 per cent this year compared with 4.8 per cent forecast in June, it said.

Despite the continued solidity of the overall projections, the bank said that downside risks had grown in recent months.

It highlighted the potential impact of an unexpectedly harsh downturn in the European Union and the US; the cumulative impact of the El Nino weather phenomenon; and the weekend attack on the Indonesian island of Bali.

The outbreak of war in the Gulf could also derail East Asia's recovery, it concluded.

'[A] major risk to East Asia's economic rebound would arise if the US takes military action against Iraq. Apart from the uncertainty about the possible conflict and the damaging consequences for investors across the globe, the first reaction would be a sharp increase in international oil prices, as happened in 1990 when the Gulf War started,' it said.

Higher energy prices would trigger 'a negative supply shock' to Asia's net oil importers with lower growth, higher inflation and smaller current account surpluses or higher current account deficits, it said.

As costlier crude would also retard growth among industrial countries, exports from East Asia would slow, it added.

'Even the net oil-exporting countries in the region would be adversely affected by any sharp increase in oil prices because of their reliance on external demand for their non-oil exports,' the bank said.

The ADB quoted research from the International Monetary Fund that suggested that with each US$5 per barrel rise in crude costs, growth would drop 0.1 percentage point in Indonesia, 0.4 percentage point in China and 0.9 percentage point in South Korea and Thailand.

'Since such an increase in oil prices would also cause higher inflation - the effect would be to raise inflation rates by about one percentage point for some of the countries in the region - and a deterioration in current account balances, it would limit the scope of using fiscal and monetary policies to spur domestic demand and growth in these countries,' the study said.

The ADB advised economic policymakers around the region to 'push ahead with the remaining agenda of financial and corporate-sector restructuring and reforms, in order to improve resilience to external shocks'.