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ASIAN DEVELOPMENT
Outlook2007
Asian Development Bank
Update
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Asian Development Bank
All rights reserved. Published .
Printed in the Philippines.
ISSN: -
Publication Stock No.
Asian Development Bank
Te annual Asian Development Outlook provides a comprehensive economic analysis o economies in
developing Asia and the Pacic.
Te views expressed in this book are those o the authors and do not necessarily reect the views and policies o
the Asian Development Bank or its Board o Governors or the governments they represent.
Te Asian Development Bank does not guarantee the accuracy o the data included in this publication and
accepts no responsibility or any consequence o their use.
Use o the term country does not imply any judgment by the authors or the Asian Development Bank as to the
legal or other status o any territorial entity.
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Foreword
TisAsian Development Outlook (ADO)2007Update revises upward the
orecast or growth in developing Asia or 2007 to 8.3% rom the 7.6%
orecast earlier this year, inADO. Tis reassessment stems rom the
exceptionally strong perormance o Asias giantsthe Peoples Republic
o China (PRC) and India.
Buoyed by exports, investment, and consumption, the PRC posted
its astest growth rate since 1994 at 11.5% in the rst hal o the year.
India, on the back o its quickest expansion in 18 years, grew by 9.3% in
the rst quarter o FY2007 (AprilJune). Te headline number or 2007
has also been lied by aster than expected growth in Indonesia and the
Philippines.
Te Update anticipates a gentle slowing o growth through 2008, butcautions that the outlook is highly uncertain. Unolding events make
predictions at this juncture particularly hazardous. It is clear, however,
that developing Asia would not be immune rom processes that erode
consumer and investor condence in the wider, global economy. A
steep downturn in the United States, with knock-on eects in Japan and
the euro zone, would mark a signicant deterioration in the external
environment and would undoubtedly cut into regional growth going into
2008. Negative impacts would be transmitted through both trade and
nancial channels.
At the same time, however, developing Asia is in a much better
position to cope with adverse external developments: it has stout nancial
deenses and some scope or policy adjustments. A key message o theUpdate is that, beyond the gyrations in the global economy, developing
Asias growth prospects will continue to depend on how well economies
cope with their own domestic challenges.
Te Update also presents an analysis o export perormance in East
and Southeast Asia. Tis examines the inuence o real exchange rate
changes on export perormance during 19902006, a period in which
intermediate goods trade burgeoned. Te results suggest that supply-
side actorsincluding the quality o inrastructure and the business
investment climateplay a very important role in regional export
perormance. Tis is particularly true or manuactured products and or
some o the astest-growing industries in global trade, such as electrical
and nonelectrical machinery, as well as transport equipment.
Te Update was prepared by the sta o the Asian Development Bank
rom the ollowing departments: Central and West Asia, East Asia, South
Asia, Southeast Asia, Pacic, and Economics and Research, as well as the
resident missions o the Asian Development Bank. Te economists who
contributed the country chapters are: Mohammad Zahid Hossain and
Rezaul Khan (Bangladesh); Jian Zhuang (Peoples Republic o China);
Narhari Rao and Hiranya Mukhopadhyay (India); Purnima Rajapakse
(Indonesia); Hiroki Kasahara (Malaysia); Jesus Felipe and Sadar
Parvez (Pakistan); omomi amaki and Joven Balbosa (Philippines);
Luxmon Attapich (Tailand); and Dao Viet Dung and Omkar Shrestha
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iv Asian Development Outlook 2007Update
(Viet Nam). Subregional summaries were provided by Padmini
Desikachar or Central Asia (with the text box on resource windalls
prepared by Norio Usui), adateru Hayashi or South Asia, Sharad
Bhandari or Southeast Asia, and Bruce Knapman and Craig Sugden
or the Pacic. Te subregional coordinators were Padmini Desikacharor Central and West Asia, Klaus Gerhaeusser or East Asia, adateru
Hayashi or South Asia, Sharad Bhandari or Southeast Asia, and Craig
Sugden or the Pacic.
Frank Harrigan, Assistant Chie Economist, Macroeconomics and
Finance Research Division, assisted by Cyn-Young Park and Edith Lavia,
coordinated the overall production o the publication. Part 1, Developing
Asia and the world, was prepared by Frank Harrigan, Cyn-Young Park,
and Lea Sumulong. Juthatip Jongwanich provided the section on export
dynamics in East Asia, with input rom ed James. Paolo Hernando
contributed a box on oil subsidies, Gemma Estrada and Pilipinas Quising
provided an analysis oADOs orecasting perormance, and Shiela
Camingue authored a section on estimating regional and subregionalgrowth.
echnical and research support was provided by Shiela Camingue,
Gemma Estrada, Paolo Hernando, Pilipinas Quising, Nedelyn Ramos, Lea
Sumulong, and Rashiel Velarde.
Richard Niebuhr and Anthony Patrick as the economic editors made
substantive contributions to the country chapters, subregional summaries,
and other parts o the publication. Jonathan Aspin did the style and copy
editing. Elizabeth E. Leuterio was responsible or typesetting and data
linking, as well as graphics generation, assisted by Maria Susan orres.
Artwork and cover design were rendered by Mike Cortes o /Doubleslash/
Media Inc. Maria Susan orres, Zenaida Acacio, and Pats Baysa provided
administrative and secretarial support. Te publication would not havebeen possible without the cooperation o the Printing Unit under the
supervision o Raveendranath Rajan.
Ann Quon and Saby Mitra o the Department o External Relations
planned and coordinated the dissemination o the Update.
IFZAL ALI
Chie Economist
Economics and Research Department
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Contents
ADO 2007 UpdateHighlights
Part Developing Asia and the world Developing Asia World economy Subregional summaries
Part Export dynamics in East Asia
Part Economic trends and prospects in developing Asia
Bangladesh Peoples Republic o China India Indonesia Malaysia Pakistan Philippines Tailand Viet Nam
Part Technical notes GDP growth and ination orecasting perormance oAsian Development Outlook Estimating subregional and regional growth or developing Asia
Statistical appendix Statistical notes and tables
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Denitions
Te economies discussed inAsian Development Outlook 2007Update are classied by major analytic or
geographic groupings. For this publication, the ollowing apply: Association o Southeast Asian Nations (ASEAN) comprises Brunei Darussalam, Cambodia, Indonesia,
Lao Peoples Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Tailand, and Viet Nam.
Developing Asia reers to 43 developing member countries o the Asian Development Bank.
Central Asia comprises Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, ajikistan, urkmenistan,
and Uzbekistan.
East Asia comprises Peoples Republic o China; Hong Kong, China; Republic o Korea; Mongolia; and
aipei,China.
South Asia comprises Islamic Republic o Aghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan, and Sri Lanka.
Southeast Asia comprises Cambodia, Indonesia, Lao Peoples Democratic Republic, Malaysia, Myanmar,
Philippines, Singapore, Tailand, and Viet Nam.
Te Pacifc comprises Cook Islands, Fiji Islands, Kiribati, Republic o the Marshall Islands, FederatedStates o Micronesia, Nauru, Papua New Guinea, Republic o Palau, Samoa, Solomon Islands, Democratic
Republic o imor-Leste, onga, uvalu, and Vanuatu.
Unless otherwise specied, the symbol $ and the word dollar reer to US dollars.
Te Statistical Notes give a detailed explanation o how data are derived.
Te Update is generally based on data available up to 31 August 2007.
Acronyms and abbreviations
ASEAN Association o Southeast Asian Nations
CDO collateralized debt obligation
CPI consumer price index
EU European Union
FDI oreign direct investment
FPE raction o positive errors
FY scal year
GDP gross domestic product
GNI gross national income
IMF International Monetary Fund
MAE mean absolute error
MNE multinational enterprise
NIE newly industrialized economy
PPP purchasing power parity
PRC Peoples Republic o China
RMSE root-mean-square error
US United States
VA value-added tax
WO World rade Organization
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With growth o 8.3%, 2007 is likely to be another bumper year or
developing Asia. This estimate has been revised up rom the 7.6%
orecast in March made by Asian Development Outlook 2007.
Strong growth in the Peoples Republic o China (PRC) (now put at
11.2%) and India (8.5%) will spearhead expansion, but there is a more
general pattern o high and, in some countries, accelerating growth.
In the rst hal o 2007, the Philippines grew by 7.3%, the highest rate
in almost 20 years, and the country is expected to post growth o 6.6%
or the ull year. In Indonesia, growth continues to edge up and is now
expected to nish the year above 6%.
The outlook or 2008 remains avorable, and the baseline orecast
points to only a marginal slowing o growth to 8.2%. Momentum in the
PRC and India is seen staying robust. In the PRC, double-digit growth
o 10.8% is expected, and the pace o expansion in India should remain
at 8.5%. Indonesias prospects continue to brighten, with growth o
6.4% penciled in.
Symptoms o overheating suggest that output is growing at close to
its potential in the PRC and India. Stoked by rising ood prices, infation
pressures are building in the PRC. Credit is expanding, and equity andproperty markets have posted strong gains. In India, even though
infation has cooled, the central bank remains vigilant and shows no
signs yet o easing interest rates.
Recent convulsions in credit markets and the possibility o spillovers
into the real economy heighten uncertainty about the uture. Events
are still unolding and predictions at this time are unusually uzzy, with
the chances o downward revisions becoming more likely.
ADO 2007 UpdateHighlights
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Asian Development Outlook 2007Update
I growth in the United States (US) lurches down, developing Asia would
not be immune. But the tremors rom a downturn in the US are likely
to be modest and short-lived even i it alls into recession. Available
evidence suggests that, depending on timing, severity, and duration,
a US recession could clip growth in developing Asia by 12 percentage
points. I a synchronous steep downturn in the US, euro zone, and
Japan were to occuran event that currently seems improbable
growth in developing Asia would be at greater risk. But stout reserves,
improved nancial systems, and scope or policy adjustments put the
region in a better position to weather any storm.
A special chapter in this Updatelooks at the dynamics o East Asias
export perormance over the past quarter century. Exports have been
an important part o its growth story. The analysis reveals important
changes over the years in the pattern and direction o exports and
traces the emergence o sophisticated supply chains in the region.East Asia has shown itsel to be particularly adept at positioning itsel
in the astest-growing global export markets.
As organizational and technological innovations have spurred the
separation and reinement o tasks, their geographic dispersal,
stimulated by the search or scale and cost advantages, has created
trade. The chapter shows that this burgeoning trade in tasks is,
in the short run, less sensitive to real exchange rate movements
than are exports o primary commodities or nished manuactured
goods. Supply-side actors, such as good inrastructure, a welcoming
investment climate, and services and logistics support, play animportant role in explaining export perormance. The chapter nds,
too, that demand external to Asia remains an important infuence on
regional exports. The parts and components that are traded within East
Asia and that account or much o the growing regional integration
are usually assembled in nal products, which are shipped to external
markets.
Technical notes look at Asian Development Outlooks orecasting
perormance and how the choice o aggregation weights infuences
estimates o regional and subregional growth.
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Part 1Developing Asia and the world
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Developing Asia and the world
Developing Asia
OverviewDeveloping Asias prodigious growth continued through the rst halo 2007, setting the scene or another bumper year. Te region is now
expected to expand by 8.3%, revised up rom 7.6% projected in Marchs
Asian Development Outlook 2007(Figure 1.1.1). Growth in 2008 is
currently anticipated to slow gently to 8.2%. But this Update cautions that
the outlook or 2008 is now hazy. Te likelihood o growth slowing more
abruptly than this Updates central projections suggest is rising.
Revisions to 2007s growth projections are again heavily inuenced
by exceptionally strong perormance in both the Peoples Republic o
China (PRC) and India. In the rst hal o 2007, the PRC grew at 11.5%,
aster than at any time since 1994. India, building on its astest growth
in 18 years in FY2006 (which ended in March 2007), registered growth o9.3% in the rst quarter o FY2007. ogether, the PRC and India account
or 55.3% o total gross domestic product (GDP) in developing Asia and so
exert a powerul inuence on regional trends (Figure 1.1.2). Teir impact
on aggregate projections and outcomes would be greater still i weights
were calibrated in purchasing power parity terms rather than by the
Atlas method (see the technical note, Estimating subregional and regional
growth or developing Asia, in Part 4). Te momentum o the PRC and
India is expected to sustain solid regional perormance through 2008.
Tough these two countries imprint dominates, a more general
pattern o ast and, in places, accelerating growth is evident. Te
Philippines enjoyed its astest growth in almost 20 years in the rst hal
o 2007, and Indonesias trend growth rate is steadily edging up. Central
Asia, with oil and gas prices remaining high, continues to expand at a
double-digit pace. So ar, downside surprises have been ew, though the
process o healing Nepals economy is slow and the Fiji Islands is now
expected to contract more sharply in 2007 than previously thought.
So ar, the storm in global credit markets has created only some
turbulence in developing Asiaequity markets ell by an average o just
6% in August (Figure 1.1.3). Yet it is not clear whether the storm has blown
itsel out or merely paused. Financial innovation in global credit markets
has succeeded in dispersing risks but this has created opacity about these
risks true magnitude and location. Increasing wariness about trading
1.1.1 GDP growth, developing Asia
0
2
4
6
8
10
BABABA
%
2006 2007 2008
A = ADO 2007; B = ADO 2007 Update.
Note: Full-year data have led to upward revisions or 2006.
Source: Asian Development Outlookdatabase.
Click here or fgure data
1.1.2 Weights in regional aggregate
0
20
40
60
80
100
Rest of developing Asia
India
China, People's Rep. of
0605040302012000
%
Source: World Bank, World Development Indicators onlinedatabase, downloaded 16 February 2007.
Click here or fgure data
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Developing Asia and the world Developing Asia
Global risks to the outlook now appear accentuated. Te possible
implications o a US slowdown or developing Asia are assessed
below. But other risks remain. Avian u is still a signicant source o
uncertainty with potentially devastating consequences, and concerns
remain about growing trade protectionism. Geopolitical and securityrisks are heightened in some parts o the region, and political
uncertainties, with important elections coming up, obscure the outlook
or some countries.
Can developing Asia weather a US slowdown?Te odds are still against a recession in the US, but they are narrowing.
Te baseline orecast in this Update is that the US will experience a
slowdown in 2007 and that growth will then pick up in 2008. It is
expected that any acceleration in 2008 will be gentle and that output
will remain below its potential level. Yet there is now much greater
uncertainty around this baseline projection, with the tails on theprobability o bad outcomes getting atter. One measure now puts the
chances o a US recession at over 1 in 4, its highest value since the last
quarter o 2001 (Figure 1.1.5). Te question is whether developing Asia
could weather a much sharper slowdown than is currently anticipated.
Despite rapid expansion in developing Asia and other parts o the
world, the US remains the dominant economy globally in terms o its
weight in GDP and in global nancial market transactions. Te US
share o world exports is second only to that o the euro zone, and the
country is the worlds top importer. Tough it is true that the weight o
other regions, including developing Asia, is rising, and that their internal
markets are becoming more closely integrated, it does not automatically
ollow that they have become impervious to the ortunes o the worldslargest economy.
Other than economic size, there are several other reasons why the
US is still likely to exercise a noticeable pull on other regions, and
particularly on developing Asia. Te rst is that tighter regional trade ties
are largely complementary to external trade linkages with the US. Indeed,
in East and Southeast Asia, closer trade integration emerges largely as
a result o back and orth trade in intermediate goods and parts, much
o which is assembled in nal goods or export to the US and other
industrial countries.Asian Development Outlook2007(Figure 1.5.5, p. 69)
estimates that just under 79% o the merchandise that leaves Asias ports
eventually ends up in external markets. A chill in the US is thereore
likely to send a downdra along the regions supply chains. In a recent
study at the European Central Bank, Dees and Vansteenkiste (2007)
estimate that working back along the chain o direct and indirect demand
or the regions exports, a 1% reduction in US GDP could instigate a
contraction o 0.37 percentage points in developing Asias GDP, having
allowed or inuences transmitted through adjustments to demand in
other regions.
Te explosive growth and integration o global nancial markets
constitute a second reason why signicant uncoupling seems unlikely.
Home bias in international nancial markets is waning and investors
increasingly have a global reach. Tere is compelling evidence not just o
1.1.5 Recession probability index
-25
0
25
50
75
100
125
042000969288848076721968 07
Note: The chart was prepared using US GDP growth dataor the second quarter, released on 27 July 2007.
Source: http://www.econbrowser.com/archives/2007/07/
recession_proba_2.html, downloaded 31 August 2007.
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Asian Development Outlook 2007Update
Te global economy has been experiencingrising uel costs, with the price o crude oil
nudging per barrel in early September. Rising global consumption, coupledwith supply restraint rom the Organizationo the Petroleum Exporting Countries(OPEC) and sluggish growth in non-OPECoil production, has led to a tight market.Demand is expected to outrun supply in, resulting in a drawdown o oil stocks.
In this context o rising and high uelprices, some governments have sought tomoderate the pass-through to consumers. oassess the extent o their interventions, retailprices in developing Asia were surveyed
by Asian Development Bank residentmissions in August . Te results o theirsurvey update earlier exercises describedin Asian Development Outlook (ADO) (published in April) and the ADO Updateso and . (As or those publications,the basic methodology is that developedby the German echnical Cooperation,which runs similar surveys, the last being inNovember .)
Retail uel prices rom the various surveyswere compared against three benchmark
prices and classied into our price bands.Te rst benchmark is Brent crude. Retailprices below this benchmark are subsidizedand all in the rst price band, BC. Tesecond benchmark is retail uel prices in theUnited States (US). Prices above crude butbelow the US benchmark all in the secondprice band, AC. Te US uel price is usedas the cost recovery price; however, a rangeo actors, such as local processing anddistribution costs, determines actual costrecovery or specic countries.
Te third benchmark is retail uel prices
in Luxembourg, assigned as the EuropeanUnion (EU) benchmark. Luxembourg uel prices reectEU-wide taxes, and allow or environmental costs. Fuelcosts above US prices but below Luxembourg prices allin the third price band, AUS, and suggest greater costrecovery, but are unlikely to mean that the consumerpays or environmental costs. Retail prices above the EUbenchmark are put in the ourth price band, AEU.
Te le panel o able presents data or retail dieselprices drawing on our surveys rom to (ADO Update, ADO ,ADO Update, and the latestsurvey). It shows that over the months between August
and August , diesel prices have generally movedto higher price bands. In act there is only one economythat has dropped to a lower-priced band. Nine economieshave moved to the next highest price band. Out o economies in the August survey, charged retailprices above the US benchmark. But only one o these(Republic o Korea) had prices above the EU benchmark.
Comparisons o surveyed prices with gasolinebenchmarks are shown in the right panel. Tere hasbeen some back and orth movement o gasoline pricesin Asia relative to the US benchmark. As reported in
ADO Update, o economies priced above the
.. Evolution o retail uel prices in Asia
Movement o prices in terms o our price bands, diesel and gasoline
Economy Diesel Gasoline
Update5
ADO
Update
Update
Update5
ADO
Update
Update
Turkmenistan BC BC BC BC BC BC BC BCMalaysia BC BC BC BC AC AC AC ACIndonesia BC AC AC AC AC AC AC ACKazakhstan AC BC BC AC AC AC AC ACMyanmar BC BC AUS AC BC BC AC BCAzerbaijan BC BC BC AC AC BC BC ACPakistan AC AC AC AC AUS AUS AUS AUSViet Nam AC AC AC AC AC AC AC ACKyrgyz Republic AC AC AC AC AC AC AC ACUzbekistan AC BC BC AC AC AC AC ACBangladesh AC AC BC AC AUS AC AC AUSChina, Peoples Rep. o AC AC AC AC AC AC AC ACMaldives - - AC AC - - AC AC
Sri Lanka AC AC AC AC AUS AUS AUS AUSAghanistan AUS AC AC AC AC AC AC AUSIndia AUS AC AC AC AUS AUS AUS AUSTajikistan AUS AC AC AC AUS AC AC AUSThailand AC AC AC AC AUS AC AC AUSPhilippines AC AC AC AC AC AC AC AUSCambodia AUS AC AUS AUS AUS AUS AUS AUSTaipei,China AC AC AC AUS AUS AC AUS AUSBhutan AUS AC AC AUS AUS AUS AUS AUSPapua New Guinea AUS AUS AUS AUS AUS AUS AUS AUSLao Peoples Dem. Rep. AC AC AC AUS AUS AUS AUS AUSMongolia AUS AC AUS AUS AUS AC AC AUSNepal AC AC AC AUS AUS AUS AUS AUSSingapore AC AC AUS AUS AUS AUS AUS AUSArmenia - AC AC AUS - AUS AUS AUS
Timor-Leste, Dem. Rep. AUS AUS AUS AUS AUS AUS AUS AUSHong Kong, China AEU AEU AUS AUS AEU AEU AEU AEUFiji Islands AUS AUS AUS AUS AUS AUS AUS AUSKorea, Rep. o AUS AEU AEU AEU AEU AEU AEU AEU
Memorandum items (prices in US cents per liter)Brent crude oil 9 9 US retail Luxembourg retail 9 9
- = data not available; BC = below crude price; AC = above crude price but below US price;AUS = above US price but below Luxembourg price; AEU = above Luxembourg price.
Note: Economies arranged according to diesel prices in August 2007 (ascending order).
Sources: Surveys by ADB resident missions; national press reports; Bloomberg; Energy InormationAdministration, available: www.eia.doe.gov, downloaded 10 August 2007; German TechnicalCooperation, International Fuel Prices, available: www.gtz.de/uelprices.
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Developing Asia and the world Developing Asia 7
US benchmark. At publication oADO this was nolonger true, as the US had racked up retail prices more
quickly than the Asian economies in the sample, but byAugust , some lagging economies in Asia had caughtup with US price adjustments, so that two thirds oeconomies in the sample surpassed the US benchmark.
In terms o pricing regimes, able summarizes theAugust survey data on retail uel price policies. Atthat date, uel prices were still government controlled inmore than hal the economies in the sample. In limitingthe pass-through eects o high crude prices to consumers,governments have resorted to direct and indirect means ocontrolling retail uel prices.
Direct subsidies to lower retail prices or the wholepopulation were used by o the economies or
gasoline and or diesel. Direct subsidies or tax breaksor targeted industries, such as arming, shing, andtransportation, and or selected uses, such as cooking andelectricity, were used by o the economies.
Indirect methods o lowering uel prices or the wholepopulation, such as regulated pricing, compensatory taxchanges, and use o state-owned petroleum companies toabsorb losses, were used by o the economies.
Whether directly or indirectly controlled, in over halthe economies, regulated prices were raised as world
prices rose.o nance direct and indirect subsidies, governments
primarily relied on budgetary provisions, with halthe economies that administered uel prices nancingtheir subsidies through the budget. One third usedcompensating changes in taxes to soen the impact o uelprice increases. Others () nanced subsidies throughstate-owned enterprises, use o bank loans, issuance obonds, or cross-subsidies.
Te survey data suggest a slowly changing paradigmin uel price policy in developing Asia. Tere has been agreater tolerance o the need to pass through rising uelprices to consumers, even in economies where prices
remain administered, suggesting some rebalancing o scalpriorities. Nevertheless, subsidies and controlled pricespersist, and prevail in a majority o economies.
Some governments view price controls and subsidiesas an important way o providing support to those onlow income, but poor targeting oen means that thesesubsidies are captured by other groups. Te opportunitycost o subsidizing uel remains high.
.. Evolution o retail uel prices in Asia (continued)
Survey o retail uel price policy in developing Asia, August
Economy Fuel price controlled or Fuel price subsidized or Change in
administeredprice or
subsidy in
Direct subsidies
or tax breaksor certain uses
or targetedconsumers
Subsidy nanced through
A B C D A B C D Govt.budget
Changein tax
Obudget
Other
Turkmenistan Malaysia Indonesia Kazakhstan Myanmar Azerbaijan Pakistan Viet Nam Bangladesh China, Peoples Rep. o Maldives Sri Lanka Aghanistan India Thailand
Philippines Cambodia Taipei,China Bhutan Papua New Guinea Lao Peoples Dem. Rep. Nepal Armenia Samoa Timor-Leste, Dem. Rep. o Fiji Islands
A = gasoline; B = diesel; C = kerosene; D = LPG/uel oil/gas.
Note: At the time o the survey, the ollowing economies neither provided uel subsidies nor controlled uel prices: Hong Kong, China; Republic o Korea; KyrgyzRepublic; Mongolia; Singapore; and Tajikistan.
Sources: ADB resident missions; national energy agencies; international press reports.
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Asian Development Outlook 2007Update
strong comovement o prices or similar assets but also comovement o
asset price volatility across markets. IMF (2007) observes that contagion
through nancial channels, in terms o both prices and volatility, is a
particularly potent orce or spillovers during asset market retreats. As
the US is the global nancial center, disturbances there almost inevitablyreverberate in other regions.
More traditional transmission channels are also likely to be still in
play. For example, a dip in global growth will probably inuence the
trajectory o primary commodity prices and thereore terms o trade.
Exchange rate and interest rate changes may also have wealth eects
and inuence scal positions. But disentangling these and other possible
sources o spillovers and making conjectures about their impact i growth
in the US lunges downward is ar rom easy.
The evidence
One approach is to si or clues rom past episodes o US slowdowns.
According to the National Bureau o Economic Research (NBER), theUS has experienced only seven slowdowns since 1970 (ve classied as
recessions). Small-sample problems in the historical data are exacerbated
by the act that only a handul o countries in developing Asia actually
have quarterly measurements o output that span these events. Annual
data or East and Southeast Asia are shown in Figure 1.1.6.
IMF (2007) calculates that or the ve US recessions between 1974
and 2001, developing Asias growth ell by about 0.28 percentage points
or each percentage point decline in US growth. But this average masks
a wide range. As a broad observation, US recessions that were triggered
by wider global shocks (such as the oil price rises o the 1970s) were more
closely associated with downturns in other regions. Tose recessions
incubated domestically (such as the aermath o the savings and loancrisis o the early 1990s), had more limited spillovers. As the current
problems in credit markets bear some supercial resemblance to those
that suraced aer that crisis, it might be tempting to conclude that
the threat rom current ructions is not great. But in the early 1990s,
global nancial markets were much smaller than now, and not nearly so
integrated.
Te most recent recession, which started with the dot-com
meltdown in 2000 and was propagated by a cyclical downturn in the
electronics industry, presents a somewhat more arresting picture. During
this recession, IMF (2007) estimates that growth in the US declined
by 2.9 percentage points with growth in developing Asia alling by
1.1 percentage points. Only the oil price shocks o the early 1970s show
more pronounced synchronization o growth decelerations.
Recessions and slowdowns appear to be quite dierent creatures rom
the perspective o their potential or spillover eects. NBER identies
two (non-recession) growth slowdowns in the US, in 1986 and 1995. In
1986, developing Asia was rebounding rom a homegrown slowdown in
growth that occurred in the rst hal o the 1980s. In the mid-1990s, the
regions growth was high and stayed unrufed by slowing in the US. And
again, during the course o the current slowdown in the US, growth has
accelerated in developing Asia.
Averaging out across dierent phases o the US business cycle allows
1.1.8 Share in overall balance o payments
-50
0
50
100
150
2000 01 02 03 04 05 06
%
Current account
Capital and financial account
Net errors and omissions
Note: Data reer to Bangladesh; Peoples Republic o China;Hong Kong, China; India; Indonesia; Republic o Korea;Malaysia; Pakistan; Philippines; Singapore; Taipei,China;and Thailand.
Sources: CEIC Data Company Ltd.; International MonetaryFund, International Financial Statistics online database; bothdownloaded 10 September 2007.
Click here or fgure data
1.1.7 Average interregional business cycle
correlations
-1.0
-0.5
0.0
0.5
1.0
Asia excluding PRC-G3Asia-G3
Q2
07
Q1
06
Q1
04
Q1
02
Q1
2000
Q1
98
Q1
96
Q1
94
Q1
92
Q1
1990
Correlation
Note: Asia comprises Peoples Republic o China; HongKong, China; Indonesia; Republic o Korea; Malaysia;Philippines; Singapore; Taipei,China; and Thailand. G3comprises United States, Japan, and euro zone.
Source: Oxord Economics, Quarterly Model, August 2007.
Click here or fgure data
1.1.6 GDP growth and US recessions
-5
0
5
10
15
20
AsiaUnited States
05200095908580751970
%
Note: Quarterly periods o US recessions, as dened bythe National Bureau o Economic Research (NBER), areidentied by the shaded areas. Annual growth rates arecentered across the x-axis labels. Asia comprises PeoplesRepublic o China; Hong Kong, China; Indonesia; Republico Korea; Malaysia; Philippines; Singapore; Taipei,China;and Thailand.
Sources: World Bank, World Development Indicators onlinedatabase; Directorate-General o Budget, Accounting andStatistics, available: eng.stat.gov.tw; NBER, Business CycleExpansions and Contractions, available: www.nber.org; alldownloaded 10 September 2007.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-8.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-7.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-6.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-6.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-7.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-8.xls8/14/2019 Banco Asiatico de Desarrollo
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Developing Asia and the world Developing Asia
or more data to be brought to bear on the analysis. But the striking
dierences in apparent spillovers over these phases caution against
drawing simple inerences. Looking or regularities in the time series data
or the US and developing Asia, IMF (2007) concludes that disturbances
to US growth have had signicant eects on the newly industrializedeconomies and the ASEAN-4; but also that impacts have been
comparatively short-lived. Dees and Vansteenkiste (2007) conclude that
the US and Asian business cycles are largelyindependent o one another.Given the presence o the PRC in their sample, and its uninterrupted
growth over the past 25 years, as well as the violent eects o the Asian
crisis on regional growth in the second hal o the 1990s, this nding is
perhaps not so surprising. But i spillovers really do behave dierently
between upturns and downturns, and are particularly potent during
recessions, it is not clear what can be inerred rom averages culled rom
expansions, contractions, and tranquil periods.
Asian Development Outlook 2007(in the chapter, Uncoupling Asia:
Myth and reality), provides another perspective on business-cyclesynchronization. It observes that the early 1990s presents strong evidence
o detachment o developing Asia rom the G3 (US, Japan, and euro zone).
But there is also evidence o a pronounced structural break ollowing
on the heels o the Asian crisis. Since the crisis, it would seem that there
has been much closer synchronization o the Asian and G3 business
cycles (Figure 1.1.7). Correlations between PRC and G3 business cycles
are weaker. Te postcrisis data conrm that the G3 business cycle leads
movements in output in developing Asia at intervals o 1 to 3 years. Lying
behind these ndings might be the strong dependence on export-led
growth in the postcrisis period, deepening nancial market integration,
and indeed, improved policies that have helped promote greater stability.
However, intriguing as these ndings may be, they do not provide a basisor robust prediction.
Another way o trying to understand how growth in developing Asia
might respond to shocks in the US is to apply simulation techniques
using models o the global economy. IMF (2007) reports exercises using
its global economic model. It nds impacts that are not very dierent
rom the numbers calibrated rom event studies. In a recent ADB study,
Park (2007) uses Oxord Economics global economic model to examine
scenarios in which there is a hypothetical US slowdown, and traces
possible impacts on developing Asia. (Tese scenarios are illustrative and
should not be regarded as orecasts.)
Tree hypothetical situations are considered in the ADB study. It is
assumed, rst, that a contraction in US demand leads to a 1 percentage
point all in US output growth and that this downturn endures or
2 years. Tis lowers output growth in developing Asia by 0.45 percentage
points in the rst year and by 0.75 percentage points in the second.
Second, a 10% depreciation o the US dollar (against all currencies other
than the Hong Kong dollar, which is linked to the US dollar) is assumed
to occur in tandem with the assumed deceleration in US growth. Now
growth in developing Asia slows by close to 2% in each year. In such
an event, a depreciation o the US dollar might be needed to stimulate
growth in a context o weaker domestic demand in the US. Tird, the
hypothetical shock to US growth occurs together with an assumed 10%
1.1.11 Real equity prices
0
100
200
300
0
200
400
600
Taipei,China
Korea, Rep. of
Singapore
Hong Kong, China
0604022000989694921990
Index, 1990 = 100Index, 1990 = 100
0
100
200
300
Thailand
Philippines
Malaysia
Indonesia
0604022000989694921990
Index, 1990 = 100
Sources: CEIC Data Company Ltd.; International MonetaryFund, International Financial Statistics online database;both downloaded 8 September 2007.
Click here or fgure data
1.1.10 Growth in private sector bank credit
-10
0
10
20
-15
0
15
30
Thailand
Singapore
Philippines
Malaysia
Korea, Rep. of
Indonesia
AprJan
07
OctJulAprJan
06
OctJulAprJan
2005
% %
Sources: CEIC Data Company Ltd.; International MonetaryFund, International Financial Statistics online database;both downloaded 8 September 2007.
Click here or fgure data
1.1.9 Nonperorming loan ratio
0
5
10
15
20
25
Thailand
Philippines
Pakistan
Malaysia
Korea, Rep. of
Indonesia
0605040302012000
%
Sources: CEIC Data Company Ltd.; Bank Negara Malaysia,available: www.bnm.gov.my; State Bank o Pakistan,available: www.sbp.org.pk; all downloaded 8 September2007.
Click here or fgure data
http://adbweb/Documents/Books/ADO/2007/part010500.asphttp://adbweb/Documents/Books/ADO/2007/part010500.asphttp://adbweb/Documents/Books/ADO/2007/part010500.asphttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-11.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-10.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-9.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-9.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-10.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-11.xlshttp://adbweb/Documents/Books/ADO/2007/part010500.asphttp://adbweb/Documents/Books/ADO/2007/part010500.asp8/14/2019 Banco Asiatico de Desarrollo
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10 Asian Development Outlook 2007Update
decline in investment in the PRC. With deteriorating prospects or
growth and trade, there could be cuts in investment spending in the
PRC both by domestic and by oreign investors. In the remainder o
developing Asia, GDP growth now slows by 0.8 percentage points in year
one and by 0.9 percentage points in year two.
Downside risks
ogether the evidence rom past slowdowns, available statistical ndings,
and the results o modeling simulation exercises suggests that developing
Asia would certainly eel the tremors rom a US recession, though these
are likely to be modest and short-lived. Even i the worst experiences o the
past 35 years were replayed, the attrition o growth is unlikely to be severe.
I a recession o recent median depth and duration occurred in the
USan event that has a low but rising probabilitya deceleration o
growth in developing Asia by 2 percentage points would be at the upper
end o plausible estimates or eects o the spillover, with a central
prediction closer to 1 percentage point. Depending on timing, this couldpossibly prune growth to a range o 67% rom the baseline prediction o
8.2% in 2008.
o the extent that past events provide a reliable guide, they suggest that
the magnitude and speed o impacts will be critically aected by exchange
rate adjustments (as illustrated in Parks [2007] simulations), by impacts on
primary commodity prices, and by any spillovers rom the US to the wider
global economy. I evidence o a synchronized and sharp slowdown across
the G3 were to appearagain, something considered unlikelythis could
make a signicant dent on growth in developing Asia.
Country-level impacts
At a country level, susceptibility to spillovers rom a sharp US downturnwould depend on a variety o actors. Te buildup o reserves that has
occurred across the region certainly provides a strong buer against
external shocks (see Box 1.1.2, Developing Asias oreign exchange reserves
and the United States merchandise trade decit). However, those economies
that have built reserves through current account surpluses are in a
stronger position than those that have experienced reserve growth through
capital inows. Any capital ight could deplete reserves as investors
leave or saer havens. Fortunately, or most economies in developing
Asia, current account surpluses have been the primary driver o reserves,
though or India (where cover is still ample), and periodically or some
other economies, capital inows have been important (Figure 1.1.8).
Likewise, vulnerabilities have retreated with improved health o
domestic nancial systems. Te quality o banks assets and their capital
strength have been boosted (Figure 1.1.9). Te corporate sector too has
reduced its exposure to debt (Figure 1.1.10).
Asset valuations generally are in line with undamentals. It is true
that equity prices in developing Asia have enjoyed strong growth since
2004, but this should be seen in the context o quite modest perormance
over a longer stretch o time (Figure 1.1.11). Property markets are also
making a comeback, but valuations have not soared as in some industrial
countries, nor have credit risks become elevated in the way that they have
in the US (Figure 1.1.12).
1.1.13 Public sector debt
30
40
50
60
20
24
28
32
ThailandMalaysia
India
Bangladesh
0605040302012000
% of GDP % of GDP
40
55
70
85
PhilippinesPakistanIndonesia
0605040302012000
% of GDP
Sources: Bangladesh Bank, available www.bangladesh-bank.org; Government o India, Ministry o Finance,available: nmin.nic.in; Bank Indonesia, available:www.bi.go.id/web/en; Government o Indonesia, DebtManagement Oce, available: dmo.or.id; SingaporeMinistry o Trade and Industry, available: app.miti.gov.sg/; Bank o Thailand, available: www.bot.or.th; CEIC DataCompany Ltd; International Monetary Fund, Pakistan: 2006
Article IV Consultation, Sta Report, available: w ww.im.org;all downloaded 10 September 2007.
Click here or fgure data
1.1.12 Selected residential propert y prices
50
100
150
200
United States
Hong Kong, China
Korea, Rep. of
Malaysia Singapore
Thailand
Q1
07
Q1
06
Q1
05
Q1
04
Q1
03
Q1
02
Q1
01
Q1
2000
Index, 2000 = 100
Source: CEIC Data Company Ltd., downloaded 8 September2007; www.realtor.org/Research.ns/Pages/MetroPrice,downloaded 15 September 2007.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-13.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-12.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-12.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-13.xls8/14/2019 Banco Asiatico de Desarrollo
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Developing Asia and the world Developing Asia 11
Developing Asias oreign exchange reserves rose by about billionin the rst hal o to . trillion, according to preliminary
data (box table). Tis advance was about two-thirds larger than the billion increase in the same period o the previous year.
Tis continues a pattern o large gains made by the region since (Box gure ), and developments through June suggest that will see the largest increase to date. All but one o the economies in theregion made reserve gains, with the Peoples Republic o China (PRC)accounting or about o the rise as its current account surplusstrengthened. India accounted or about o the increase, reectingits larger capital account surplus.
With ,. billion as o end-June , the PRC holds about o developing Asias oreign exchange reserves. Te next ve largestholders (in descending order, aipei,China; Republic o Korea; India;Singapore; and Hong Kong, China) together hold ,. billion, or
about o the regional total.Box gure indicates that developing Asias share in the United
States (US) merchandise trade decit (census basis, not seasonallyadjusted), which had been essentially stable since , increased at
a aster pace in the rsthal o . Te US tradedecit with developing Asiaamounted to . billion,or . o the US total(. billion), up by. percentage points romthe rst hal o .
Te US trade decit withthe PRC widened by about in JanuaryJune rom the prior-year period,to . billion, whileother developing Asianeconomies trade surpluswith the US ell by . to. billion.
Te PRC has expandedits share o the regionalsurplus over the years(about in versus
in ), reectingboth its emergence asa low-cost producer omanuactured goods, andthe growth o intraregionaltrade (the latter eaturesexports o components andsupplies to the PRC orassembly into goods orexport, including to the US).
.. Developing Asias oreign exchange reserves and the United States merchandise trade decit
2 Developing Asias share in the US
merchandise trade decit
0
15
30
45
60
South AsiaSoutheast AsiaEast Asia
H1
07
06H1
06
0503200199971995
%
Note: Shares o Central Asia and the Pacic are negligible.
Source: US Census Bureau, available: www.census.gov,downloaded 3 September 2007.
Click here or fgure data
Developing Asias oreign exchange reserves
($ billion)
StockJune
Change in rst halo year
Central Asia . . .
Armenia . . .
Azerbaijan . . .
Kazakhstan .9 . .
Kyrgyz Republic .9 . .
Tajikistan . . .
East Asia ,9. . .
China, People's Rep. o ,. . .
Hong Kong, China . . .
Korea, Rep. o . . .Mongolia . . .
Taipei,China . -. .
South Asia . . .
Bangladesh . . .
Bhutan . . .
India . .9 .
Maldives . . .
Nepal . . .
Pakistan . . .
Sri Lanka . . .
Southeast Asia 9. . .9
Cambodia . . .Indonesia 9. . .
Lao People's Dem. Rep. . . .
Malaysia 9. 9. .
Myanmar . . .
Philippines . . .
Singapore . . .
Thailand . . .
Viet Nam . . .
The Pacic . . .
Fiji Islands . . -.
Micronesia, Fed. States o . . .
Papua New Guinea . . .
Samoa . . .Solomon Islands . . .
Tonga . . .
Vanuatu . . .
Developing Asia ,9. . .
Sources: International Monetary Fund, International FinancialStatistics online database; www.cbc.gov.tw; Bank o Korea,available: www.bok.or.kr; all downloaded 3 September 2007.
1 Developing Asias oreign exchange
reserves
-150
0
150
300
450
1996 98 2000 02 04 06 07a
Annual change, $ billion
-1
0
1
2
3
Stock, $ trillion
Stock, end of period
China, Peoples Rep. of
Rest of developing Asia
a First hal.
Sources: International Monetary Fund, InternationalFinancial Statistics online database; ww w.cbc.gov.tw;Bank o Korea, available: www.bok.or.kr; all downloaded3 September 2007.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/boxf1-1-2.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/boxf1-1-1.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/boxf1-1-1.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/boxf1-1-2.xls8/14/2019 Banco Asiatico de Desarrollo
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12 Asian Development Outlook 2007Update
Responses
Public sector debt levels remain high in some countries, but have been
coming down (Figure 1.1.13). Te costs o servicing debt are likely to rise
as increased volatility eeds through to the repricing o risks. Indeed
this is already happening. During July and August, spreads on Asiansovereigns increased across the board (Figure 1.1.14) though in some
cases a reassessment o domestic circumstances also played a part. Rising
costs o debt servicing will hurt most where debts are already substantial.
Tose countries where debt levels are low and decits are small have
greater latitude to use scal measures to counteract any weakness coming
through other channels. However, long lags in spending could mean
that support kicks in just as economies are healing naturally. And i an
economic slowdown led to US dollar weakening, this would ease scal
pressures as the size o US dollar-denominated debts would shrink in
local currency terms.
I unolding evidence suggests that there are threats to growth, the
scope or monetary policy adjustments will depend on circumstances. Ineconomies where real interest rates are already very low (Figure 1.1.15),
cuts may not have much impact. And in countries where there is
overheating, slower growth may help reduce ination risks. Monetary
easing would make most sense where growth may slip below potential
and where real interest rates are moderate. Easing would be consistent
with ination (and output) objectives provided that it is appropriately
calibrated on the deationary impulse coming rom weakening external
demand, and on any induced eects on domestic consumption and
investment that could occur through credit and wealth channels.
Growth prospectsGrowth o 8.3% is now expected in 2007, easing gently to 8.2% in 2008
(Figure 1.1.16 and able 1.1.1). Momentum in the PRC and India supports
ast growth at the regional level. I these two countries are removed rom
the averages, the other economies are expected to grow by more modest
averages o 5.7% in 2007 and 5.6% in 2008.
Te baseline orecasts or 2007 anticipate some modest slowing in the
global economy, and a mild recovery in the US through 2008. Stabilizing
monetary responses seem likely. But the downside risks to growth in 2008
are elevated, and much will depend on whether distress in credit markets
deepens and spills over into the wider nancial system and real economy
(see above).
In the rst hal o 2007, growth in East Asia quickened, lied by
ast expansion in the PRC. Growth in the rst hal in the PRC was
11.5%, trending up through the second quarter. Te now amiliar
pattern o vigorous investment spending and rapid expansion o exports
underpinned growth in the PRC. Eorts by the authorities to rein back
investment and export demand growth have, as yet, had limited impact.
Investment administered by local governments is again growing at a ast
clip, and the withdrawal in midyear o export-supportive measures may
have brought orward export deliveries. Private consumption demand,
as measured by retail sales, is also growing briskly, bolstered by rapidly
expanding incomes in rural as well as urban areas.
1.1.15 Real lending rate
0
2
4
6
8
Korea, Rep. of
Hong Kong, China
China, People's Rep. of
JulAprJan07OctJulAprJan06OctJulAprJan2005
%
-4
0
4
8
12
Thailand
Singapore
Philippines
Malaysia
Indonesia
JulAprJan
07
OctJulAprJan
06
OctJulAprJan
2005
%
3
5
7
9
11
IndiaBangladesh
JulAprJan
07
OctJulAprJan
06
OctJulAprJan
2005
%
Source: International Monetary Fund, International FinancialStatistics online database; downloaded 8 September 2007.
Click here or fgure data
1.1.14 S elected sovereign spreads
0
100
200
300
100
250
400
550
Viet Nam
Philippines
Pakistan
Malaysia
Indonesia
China, People's Rep. of
AugJulJunMayAprMarFebJan
2007
Basis points Basis points
Source: Bloomberg, downloaded 10 September 2007.
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Developing Asia and the world Developing Asia 13
Growth in Hong Kong, China continues to benet rom the bristling
economic activity in the PRC. In the rst hal, growth was 6.3% and
this Updates prediction is that growth in ull-year 2007 will be about
6%. Tough this is a little slower than recent outcomes, it is an upward
revision on the March orecast oADO 2007. In the Republic o Korea(hereaer Korea), underlying demand pressures have been building,
prompting the authorities to unexpectedly raise interest rates in July
and August. Reecting stronger than expected exports and a pickup
in consumption, estimated growth or Korea is revised up to 4.6%.
In aipei,China as well, the growth orecast is revised marginally up,
mainly on the back o an increase in investment in the rst hal o 2007.
Mongolia is beneting rom strong prices or copper and gold, warranting
an upward revision o the growth projection or 2007. It is now expected
that Mongolia will grow by 8%, capping 4 straight years o growth in
excess o 7%. East Asia is now projected to expand by 8.9% in 2007
(Figure 1.1.17).
South Asia continues to build on the progress o recent years. Growth
o 8.1% is expected in 2007 (Figure 1.1.18). Potential growth rates in
Bangladesh, India, and Pakistan, the subregions largest countries, all
appear to have risen and growth is also on a more stable trajectory. India
enjoyed its quickest expansion in 18 years in FY2006 (ended March 2007)
and industry is now spearheading growth. In the rst quarter o FY2007
(i.e., AprilJune 2007), growth showed little let-up despite higher interest
rates and a sharp appreciation o the rupee. Still, tighter monetary
conditions or the rest o FY2007 will lead to some soening. It is now
oreseen that India will grow by 8.5% in 2007, an upward revision to the
estimate o 8.0% made in March in ADO 2007.
.. Selected economic indicators, developing Asia,
ADO Update ADO Update
Gross domestic product (annual change)
Developing Asia . . . . .Central Asia . . . 9. .East Asia 9. . .9 . .South Asia . . . . .Southeast Asia . . . .9 .The Pacic . . . . .
Consumer price index (annual change)
Developing Asia . . . . .Central Asia .9 . 9. .9 9.East Asia . .9 . . .South Asia a .9 . . . .Southeast Asia . . . . .The Pacic . . . . .
Current account balance ( o GDP)
Developing Asia . . . . .Central Asia . . . . .East Asia . . . .9 .9South Asia -. -. -.9 -. -.Southeast Asia . . . . .The Pacic .9 -. . . .
a India reports on a wholesale price index basis.
Sources: Asian Development Outlookdatabase; sta estimates.
1.1.17 GDP growth, East Asia
0
2
4
6
8
10
080706050403022001
%5-year moving average
Forecast
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.16 GDP growth, developing Asia
0
2
4
6
8
10
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
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1 Asian Development Outlook 2007Update
In Bangladesh, political developments continue to dominate, though
on the economic ront, there has been little change. Te textile industry
is doing well in the post-quota world and private remittances provide an
important source o support or consumption and investment. However,
recent measures against corruption and hoarding have added to businesssector uncertainty. In Pakistan, growth is put at 6.5% in FY2008 (ending
June 2008), but any adverse developments on the political and security
ront could have a crucial bearing on the economy. Growth o 7.0% in
FY2007 (ended June 2007) was largely underpinned by expansion in
large-scale manuacturing industry and in services. Remittances rom
Pakistans oreign-based workers continue to provide substantial support
to domestic demand.
Hopes or improvement in Nepals economic circumstances and
perormance have so ar not been met. Indeed, this Update revises down
the estimate or growth in FY2007 (ended 15 July 2007), to 2.5%. In Sri
Lanka, real economic growth is expected to hold its course, though the
macroeconomic situation continues to give cause or concern. In theMaldives, economic rhythm will return to a more settled pace ollowing
the spike in 2006 that reected tsunami-related reconstruction activities.
Te completion o a large hydro-project will give a boost to the income
growth o Bhutans small economy. In Aghanistan, growth has been
revised up due to a stronger than expected recovery in agriculture.
Growth in Indonesia continues to edge up and the outcome in 2007
is now expected to exceed 6%. In the rst hal, growth o 6.1% added to
the evidence o a strengthening economy, with growth accelerating in the
second quarter to 6.3%. As ination has come down, private consumption
and investment have led the way, and strength should build in the
second hal o the year. In the Philippines, rst-hal growth o 7.3% was
the highest in almost 20 years. Growth was propelled by net exports,consumption spending, and by higher levels o government expenditure.
On the supply side o the economy, services activity is enjoying vigorous
growth but manuacturing growth and investment spending continue
to lag. Tere has been brisk expansion in the mining sector, but rom a
low base. For 2007, this Update revises up its projection to 6.6%, on the
assumption that growth in the second hal will moderate rom the ast
pace o the rst 6 months.
In Malaysia, domestic demand is supporting growth. Private
consumption has grown vigorously and public sector investments in
inrastructure projects added to growth in the rst hal o 2007. Te
contribution o net exports to growth in Malaysia is ebbing, and is
expected to be negative this year. Viet Nams private sector shows ever-
increasing dynamism. Improvements in the business investment climate
and World rade Organization (WO) entry have added to condence.
On the supply side, growth was almost entirely attributable to industry
and services. Tis Updates orecast or growth o 8.3% in 2007 is
unchanged romADO 2007.
In Tailand, political uncertainty continues to sap consumer and
private investment condence. Still, in the rst hal o 2007 better
than expected net export perormance helped support growth, as did
government investment spending. It is expected that Tailands growth in
2007 will stay unchanged rom the original ADO 2007projection o 4%.
1.1.18 GDP growth, South Asia
02
4
6
8
105-year moving average
080706050403022001
%
Forecast
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.19 GDP growth, Southeast Asia
0
2
4
6
8
080706050403022001
%5-year moving average
Forecast
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-18.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-19.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-19.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-18.xls8/14/2019 Banco Asiatico de Desarrollo
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Developing Asia and the world Developing Asia 1
Cambodia sees a marginal downward revision to its growth orecast, but
the Lao Peoples Democratic Republic registers no change. For Southeast
Asia as a whole, this Update uprates the projection o growth rom 5.6%
to 6.1% or 2007 (Figure 1.1.19).
Growth in Central Asia has again been underpinned by high pricesor oil and mineral exports. Higher production and exports are adding
directly to growth, but earnings are supporting domestic demand and
the expansion o services. Tis Update revises up its projection or GDP
growth in 2007 to 11.1% (Figure 1.1.20).
Azerbaijan and Kazakhstan are now set to grow more quickly as
a consequence o larger than expected increases in oil production and
exports, and stronger domestic demand. In urkmenistan, growth is
supported by larger exports o natural gas. Economic perormance in
Uzbekistan is improving, with higher investment and exports, and
growth has steadily climbed. In the rst hal, it grew at 9.7% and ull-
year 2007 growth should be 8.0%, a signicant upward revision rom
the estimate inADO 2007. Growth in both the Kyrgyz Republic and inajikistan was strong in the rst hal o 2007. In the Kyrgyz Republic,
the industry sector has bounced back rom the disruptions o 2006 and
2005, and investment- and remittance-uelled consumption has supported
strong expansion in ajikistan.
For the Pacic Islands, this Update downgrades the projection o
growth or 2007 rom 4.5% inADO 2007to 3.5% (Figure 1.1.21). In large
measure, this is because an expected rebound in imor-Leste has not
been as strong as had been anticipated. Te economic allout in the Fiji
Islands rom political events has also been more accentuated than was
earlier oreseen. However, Papua New Guinea, the largest economy in the
Pacic, is expected to do better.
Looking ahead to 2008, this Update orecasts regionwide growth o8.2%, marginally lower than the revised orecast or 2007. Nevertheless,
the central orecast o 8.2% is a substantial upward revision o the
March orecast o 7.7% inADO 2007. Tough growth is revised up or
all subregions, most o the increase is due to the upward revision or
East Asia, with nearly all o that being attributed to a ull 1 percentage
point rise in the projection or the PRC. Tis Update now projects
growth o 10.8% or the PRC in 2008, up rom the 9.8% oADO 2007.
Te reassessment o prospects or the PRC recognizes that momentum
has continued to accelerate through 2007, and that it may be dicult to
reverse quickly. Tough measures taken to slow the economy have had
limited eect so ar, they should have greater purchase going orward.
Elsewhere in East Asia, growth in Korea is expected to accelerate in 2008
as private consumption strengthens.
In India, growth is expected to hold steady in 2008 at or about its
potential level. Tis projected so landing assumes that the authorities
successully contain ination pressures, without crimping either investment
or export demand. Te outlook or growth in Bangladesh, Pakistan, and Sri
Lanka through 2008 is also steady, though these economies ace ongoing
and signicant macroeconomic stabilization challenges.
In Southeast Asia, prospects may brighten or Tailand, provided that
new elections deliver a government that has a credible economic program.
Malaysias growth may pick up a little rom that seen in 2007, but i the
1.1.20 GDP growth, Central Asia
0
3
6
9
12
15
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.21 GDP growth, The Pacic
0
1
2
3
4
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-20.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-21.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-21.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-20.xls8/14/2019 Banco Asiatico de Desarrollo
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1 Asian Development Outlook 2007Update
electronics slump continues this will trim its prospects. I Indonesia can
continue to make headway on restoring investor and broader economic
condence, its growth could climb urther in 2008. For Southeast Asia
as a whole, growth o 6.1% is expected or 2008, a slight upward revision
rom the March orecast oADO 2007.Prices o oil and minerals are expected to moderate in 2008, shaving
growth a little in Central Asia. In 2008, growth o 10.1% is now expected.
Growth projections have been revised up or the Pacic Islands. By 2008,
the Fiji Islands should be expanding, i only slowly, and Papua New
Guinea is expected to grow at 4.5%, boosted by earlier investments in
high-grade mining activities.
As explained above, the outlook or 2008 is subject to an unusually
large degree o uncertainty, with the possibility that unavorable external
developments could cause growth to slide. For the PRC, the most
probable channel o transmission would be through the demand or its
exports. Slower export growth would then cascade back down through
regional supply chains, hitting other countries in East and Southeast Asia.Despite the limited degree o integration o the PRCs nancial markets
with the wider international economy, nancial market contagion cannot
be ruled out. Stresses might then leach into other parts o the economy.
In the PRC and in some other countries, scal positions would provide
room or stabilizing responses.
Domestic rather than external demand has been the main driving
orce behind Indias spurt in growth. Nevertheless, industrial exports
have been rising quickly and trade in services has been a mainstay o the
current account earnings or some years now. Both would be negatively
inuenced i the temperature o the global economy were to drop.
Finally, i a slowing global economy were to cause commodity prices
to soen, this would trim prospects in Central Asia, and would have aneect on other economies that have enjoyed the benets o high prices in
past years.
Ination prospectsInation in the PRC, which has or long been tame, picked up in the rst
hal and by August 2007 had risen to 6.5%. Much o the ination strain
is coming rom rises in ood prices. Tough some o these rises reect
temporary actors, ood is such a big component o the consumption
basket that there is a risk o rising prices spilling over into broader
cost pressures. Further interest rate rises look possible as do delays in
adjustments to controlled prices o uels and other commodities.
Te PRCs considerable current account surplus and strong capital
inows continue to seep into domestic liquidity, complicating monetary
policy. Eorts to contain the growth o liquidity and credit continue, but
so ar, have had only limited impact. Te PRCs equity markets surged
again in the rst hal o 2007, largely impervious to the spasms in global
markets. House prices also continued to make steady gains in many
cities. Credit demand in the PRC is driven partly by the expectation o
urther gains in asset markets. Forecast ination in the PRC is revised up
to 4.2% rom the March prediction o 1.8% made inADO 2007. In Korea,
concerns about rising ination expectations prompted the authorities to
1.1.23 Ination, South Asia
0
2
4
6
8
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.22 Ination, East Asia
-1
0
1
2
3
4
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.24 Ination, Southeast Asia
0
2
4
6
8
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-23.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-22.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-24.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-24.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-22.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-23.xls8/14/2019 Banco Asiatico de Desarrollo
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Developing Asia and the world Developing Asia 17
raise interest rates in the last couple o months. For East Asia as whole,
the ination orecast or 2007 is revised up to 3.5% (Figure 1.1.22), rom
the March orecast o 1.9%.
Monthly wholesale price ination in India has come o the earlier
peaks seen in the rst 3 months o 2007, and since June has been withinthe Reserve Bank o Indias target range. A combination o higher policy
rates, targeted lending restrictions, appreciation o the rupee, some
easing o supply-side pressures on ood, and controls on the prices o
uels helped bring down wholesale price ination to 4.5% at end-July
2007. Elsewhere in South Asia, ination pressures are not ar rom the
surace. Tough central banks are taking tightening measures, ination
rates remain uncomortably high in Bangladesh, Pakistan, and Sri
Lanka. Credit expansion to nance government spending is making
the control o ination more dicult, particularly in Pakistan and Sri
Lanka. In Nepal, a poor harvest has added to ination. Tese have raised
South Asias ination orecast or 2007 to 5.7% rom 5.5% inADO 2007
(Figure 1.1.23).In Southeast Asia, ination is expected to moderate urther in 2007.
Aggregate ination is now seen coming down to 3.8% in 2007 rom over
7% in 2006 (Figure 1.1.24). Indonesia accounts or much o this reduction.
Te authorities there undertook aggressive monetary tightening in late
2005 and 2006 to combat ination pressures arising rom sharp uel
price increases. But the downward revision to the subregional ination
orecast (rom 4.2% inADO 2007) is primarily a result o ination alling
more quickly than anticipated in Malaysia, Philippines, Tailand, and
Singapore. Ination is expected to accelerate a little in Viet Nam relative
to the 2006 outcome. Buoyant demand in Viet Nam and high levels o
liquidity have contributed to high and rising ination.
Ination is now expected to accelerate more quickly in CentralAsia. TeADO 2007orecast o 8.6% or 2007 is revised up to 9.7%
(Figure 1.1.25). A major contributor to this pickup is Azerbaijan, where
oil revenues are boosting spending. However, a more general pattern o
modest upward revisions is discernible. Strong oreign exchange inows
and higher public spending are liing ination rates.
In the Pacic Islands, ination orecasts are revised up. Tis is
largely due to higher orecast ination or Papua New Guinea. Te local
currency, the kina, has depreciated and pass-through o earlier oil price
rises continues. Ination in the Pacic Islands is now expected to average
4.7% in 2007, up rom the orecast o 3.5% in ADO 2007(Figure 1.1.26).
Developing Asias prospects or ination (Figure 1.1.27) as well as or
output growth in 2008 are complicated by the uncertainty shrouding the
global economy. In the baseline, it is expected that ination will moderate
a little over 2007 levels. I growth turns out to be slower than anticipated,
ination could come down more quickly. On a subregional basis,
reductions in ination are expected in East Asia, South Asia, Central Asia,
and in the Pacic; but in Southeast Asia, ination will remain steady.
Balance-o-payments prospectsAs a percentage o GDP, developing Asias current account balance is
expected to show little change on 2006s outcome. Te revised estimate
1.1.27 Ination, developing Asia
0
1
2
3
4
5
080706050403022001
%
5-year moving average
Forecast
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.25 Ination, Central Asia
0
3
6
9
12
15
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.26 Ination, The Pacic
0
2
4
6
8
10
080706050403022001
%
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-27.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-25.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-26.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-26.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-25.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-27.xls8/14/2019 Banco Asiatico de Desarrollo
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1 Asian Development Outlook 2007Update
o this Update is that the current account surplus in 2007 will be 6.1% o
regional GDP, compared with 5.8% in 2006 (Figure 1.1.28).
In 2007, only South Asia is expected to have a current account decit
(Figure 1.1.29). Indias decit will probably be larger than in 2006, but has
been revised down rom the estimate in ADO2007s March orecast. Awidening decit in merchandise goods trade is being partially oset by
signicant earnings on the services account rom soware exports, back-
oce services, and remittance income.
Pakistans decit, which is now estimated to expand to 5.2% o GDP,
reects its widening trade gap, as exports rom its textiles and clothing
sector are pressured by more intense global competition. Tough
remittance income remains strong, it is insucient to oset Pakistans
trade decit. Growing remittances more than nance Bangladeshs trade
decit, and it is now estimated to post a current account surplus o 1.4%
o GDP in 2007. In Sri Lanka, the current account decit is expected to
narrow, ollowing the jump in 2006 as rapid growth in imports sparked
by tsunami reconstruction eorts have moderated.Te current account surplus in East Asia or 2007 is now projected
at 8.2% o GDP, an increase over the surplus in 2006 (Figure 1.1.30).
All economies in East Asia are in surplus. Te surplus in the PRC is
expected to widen to 10.9% o GDP in 2007 as exports continue to outrun
imports. Likewise, Hong Kong, China and aipei,China are also expected
to post large surpluses in 2007. In Hong Kong, China, strong services
perormance, linked to continued expansion in the PRC, underpins the
current account surplus. In aipei,China, export perormance has been
strong in the rst 6 months, validating theADO 2007projection. For
Korea, the narrow current account surplus predicted inADO 2007has been
revised up, reecting stronger exports. A small surplus o 0.6% o GDP is
now predicted. Mongolias expected surplus holds rm at 2% o GDP.Te consolidated current account surplus or Southeast Asia is
expected to come o its recent peak. Compared to a surplus o 7.8% o
GDP in 2006, the surplus in 2007 is now predicted at 7% (Figure 1.1.31).
Surpluses or Indonesia and Malaysia are both expected to shrink, and in
the case o Malaysia by more than 4 percentage points o GDP (though
rom a very high base). Nevertheless, there have been general upward
revisions to the orecasts made in ADO 2007in March. Tailands strong
export perormance is expected to li its surplus to 3% o GDP in 2007
and Singapores strong surplus is expected to continue its upward dri.
Viet Nams current account decit is expected to widen sharply in 2007
as a result o rapid growth in imports o raw materials, and intermediate
and capital goods, and a decline in oil exports.
Tere is little change in the projection o the current account
position o Central Asia. Tis Update projects a surplus o 3.5% o GDP
(Figure 1.1.32) as against 3.2% in the March estimate oADO 2007. It is
expected that a larger projected decit or ajikistan, reecting increased
spending on capital imports coupled with sluggish aluminum exports,
will be more than counterbalanced by a larger surplus or urkmenistan
driven by strong exports o gas.
For the Pacic, this Update incorporates an estimate or imor-Lestes
current account position in 2007. Te large surplus reects a surge in oil
and gas revenues as production rom existing elds increases. Compared
1.1.29 Current account balance, South Asia
-4
-2
0
2
4
080706050403022001
% of GDP
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.30 Current account balance, East Asia
0
2
4
6
8
10
080706050403022001
% of GDP
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.31 Current account balance, SoutheastAsia
0
2
4
6
8
080706050403022001
% of GDP
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.28 Current account balance, developing
Asia
0
2
4
6
8
080706050403022001
% of GDP
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-29.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-30.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-31.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-28.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-28.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-31.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-30.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-29.xls8/14/2019 Banco Asiatico de Desarrollo
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Developing Asia and the world Developing Asia 1
with 2006, the Pacics current account surplus is estimated to rise to
7.3% o GDP (Figure 1.1.33). Excluding imor-Leste, the orecast or the
Pacics current account decit is revised upward to 5.2% o GDP rom
1.2% inADO 2007, mainly resulting rom a larger projected decit or the
Fiji Islands, where political and security concerns are expected to reduceocial transers and tourism receipts.
Te outlook or the current account o the balance o payments
in 2008 is or an aggregate surplus o 5.7%. At a subregional level, the
surpluses in East Asia and Southeast Asia are projected to decline. Faster
economic growth and stronger demand should reduce the surplus in
Indonesia and Tailand. Malaysias surplus may track down i the price
o its primary commodity exports soen and the recovery in electronics
activity is slow. In East Asia, it is expected that the PRCs surplus will
decline slightly to 10.5% o GDP in 2008. Finally, i slower growth in the
global economy were to occur in tandem with an appreciation o regional
currencies, this would tend to erode the regions current account surplus
moving into 2008. Soer prices or oil and minerals would trim exportearnings, particularly in Central Asia but also in some other countries.
Reerences
Dees, S. and I. Vansteenkiste. . Te ransmission o US CyclicalDevelopments to the Rest o the World. European Central Bank WorkingPaper Series No. . Frankurt.
International Monetary Fund (IMF). . Decoupling the rain? Spilloversand Cycles in the Global Economy. Chapter in World Economic Outlook(April). Washington, DC.
Park, C.-Y. . Can East Asia Weather a US Slowdown? ERD WorkingPaper Series No. . Economics and Research Department. AsianDevelopment Bank. Manila.
1.1.32 Current account balance, Central Asia
-10
-5
0
5
080706050403022001
% of GDP
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
1.1.33 Current account balance, The Pacic
-6
-3
0
3
6
9
080706050403022001
% of GDP
Forecast
5-year moving average
Sources: Asian Development Outlookdatabase; staestimates.
Click here or fgure data
http://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-32.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-33.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-33.xlshttp://www.adb.org/Documents/Books/ADO/2007/update/figs/f1-1-32.xls8/14/2019 Banco Asiatico de Desarrollo
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World economy
United StatesBoosted by strong expansion in business investment, public spending,
and net exports, growth in the second quarter o 2007 accelerated to 4.0%
(quarter on quarter, seasonally adjusted annualized rate) rom a tepid
0.6% in the rst (Figure 1.2.1). But the persistent housing slump remains
a major risk to economic perormance. For the sixth consecutive quarter,
private residential investment contracted. On a 12-month moving average
basis, housing starts have been declining since April 2006 (Figure 1.2.2),
but the inventory o unsold homes is still high. With this overhang,
and rising deaults and oreclosures among subprime mortgage-holderscontinuing to depress the housing market, house prices are likely to drop
urther (Box 1.2.1).
Facing subprime mortgage anxieties, many US consumers have lost
condence: the August consumer condence reading dipped to its lowest
in a year. Personal consumption expenditures grew by only 1.4% in the
second quarter, slowing sharply rom 3.7% in the rst. Real disposable
personal income, too, barely increased in the second quarter, and a
pickup in gasoline and ood prices depressed spending on nondurable
goods. Consumers also ace increasing headwinds rom alling home
prices, rising interest burdens, and slowing employment opportunities. In
addition, recent weakness in equity markets associat