Asian Economic Outlook

Japanese recovery and strong expansion of intra- regional trade present optimistic scenario


The economic outlook for Asia for the current year has considerably brightened. There are signs that Japanís economy has finally recovered from a decade long recession. In the last quarter of 2003, it grew by 7 per cent, the fastest quarterly growth in more than a decade. Overall Japanís economy grew by 2.7 per cent in 2003. The projected growth rate of Japanese economy in 2004/05 has been constantly revised upwards. While the cabinet office expects it to grow by 3.5 per cent, the private forecasters are more bullish and the Consensus Forecasts has put the mean growth rate for the year 2004 at 4.2 per cent. Various surveys conducted by the Ministry of Finance and other organizations have corroborated the news of recovery. The Bank of Japanís Tankan survey of business sentiments showed a rise in the level of confidence of manufacturers in Japan from 12 points in March to 22 points in June, which is much above the expected level of about 17. It is also the highest level of confidence displayed since August 1991.

Chinese economy, on the other hand, has been growing at the rates that are too high to be sustainable. China has reported a growth rate of 9.9 per cent in the last quarter of 2003. Pressure has been building on China to slow down the economy to avoid overheating. China is also under pressure to float yuan which has been pegged to the dollar at a rate fixed a decade ago. However, this has to be done in a manner to avoid a hard landing which can be highly disruptive and damaging for the whole region. The government took steps to moderate growth including control of credit among others. These measures are paying off in the form of taming the runaway investment growth. The GDP growth in the second quarter of 2004 was 9.6 per cent compared to 9.8 per cent in the first quarter suggesting that the growth has begun to moderate and achieve a soft landing.

India, another large economy in the region, reported a robust growth rate of 8.1 per cent for the financial year 2003/04 on the back of a strong agricultural recovery of 9.1 per cent from the drought-affected previous year but also due to acceleration in industry and services. The growth momentum generated in 2003/04 is likely to continue in 2004/05 with the new UPA government trying to give a fillip to the agriculture and rural sector as a part of its common minimum programme although below normal monsoon in certain parts of the country may adversely affect the growth.

Other economies in the region have been doing well generally. South Korea reported a 5.3 per cent growth in the first quarter of 2004, although the country is currently facing some uncertainty due to domestic political problems. Among the ASEAN countries, Indonesiaís economy grew at 4.5 per cent in 2004, Malaysiaís at 7.6 per cent, Philippines at 6.4 per cent and Thailand at 6.5 per cent. Singaporeís economy seems to be heating up with a hefty 11.7 per cent growth in the second quarter of 2004, much stronger than the 7.4 per cent growth recorded in April 2003-March 2004. With all the major economies in Asia-Pacific generally doing better, the outlook for the region in 2004 has brightened. The Consensus Forecasts has projected Asia-Pacific growth rate for 2004 at 5.1 per cent compared to 3.7 per cent recorded in 2003. The downside risks to the outlook stem from rising oil prices currently ruling at US$ 40 per barrel. Given a high dependence of major Asian economies on oil imports, high oil prices have the potential to adversely affect their growth outlook. Oil prices are under pressure from uncertainty over the Russian oil supplies in the wake of the US$ 8 billion tax claim imposed on the oil major Yukos by the government.

To sum up, the Asian economic outlook in 2004 appears distinctly optimistic in view of recovery of Japanese economy. The Japanese recovery has been facilitated by the rising intra-regional trade in Asia. As much as 47 per cent of Japanís exports are now destined to other Asian countries with 13 per cent absorbed by China. Japanís recovery is a good news for Asia and is likely to spillover to other parts of the continent as 46 per cent of Japanís imports are also sourced within Asia. Intra-regional trade is emerging as a major growth industry in Asia. The India-China trade, for instance, has grown by nearly 54 per cent in a year to cross US$ 7.5 billion in 2003 and is poised to cross the US$ 10 billion mark in 2004 given the strong expansion in the first half of the year. The same can be said of ASEAN-India trade as well as ASEAN-China trade. The ongoing attempts at regional economic integration are likely to give a further fillip to the intra-regional trade and investment in the region and serve as engines of growth.

ó Nagesh Kumar
Director-General , RIS