The Hindu Business Line : Marginally lower growth forecast

UNESCAP, in its recent report, Key Economic Developments and Prospects in The Asia-Pacific Region 2007, the second publication in an annual series, forecasts that the Asia-Pacific region is poised for an impressive economic growth in 2007.

The growth rate is projected at 6.9 per cent, marginally lower than the 7.1 per cent estimated for 2006. A slowdown of the US economy, a moderate decline in global electronics demand and a less accommodative policy stance, already reflected in high domestic interest rates and a limited role for fiscal policies in many Asian economies, are expected to contribute to the slight drop in growth prospects for 2007 compared to 2006.

The report notes that the growth momentum in the Asia-Pacific region in 2007 is to come from strong growth of the economies of China and India.

In China, the GDP growth is expected to be about 9.9 per cent in 2007, slightly less than 10.2 per cent estimated for 2006. India is expected to grow at 8.1 per cent in 2007, virtually unchanged from 2006.

The marginal easing of growth in China in 2007, it is felt, will be the result of tightening of domestic policies that have already started having its effects, though in a limited way, on the Chinese economy from the second half of 2006.

Growth engine

In India, according to the UNESCAP report, the service sector is expected to be the key engine for growth, while industrial production will also rise. The Government is set to follow the recommendations of the Committee on Pricing and Taxation of Petroleum Products. These recommendations include removing subsidies on petroleum products, except items that are used by the poor. This will lead to increase in the retail prices of petrol and diesel, reflecting the trend in international prices. Reserve Bank of India is likely to continue to nudge interest rates up over the next 12 months and the programme of fiscal consolidation, now under way, will continue. Despite the buoyant projection for 2007, UNESCAP warns against increasing risks. "The region cannot afford to ignore the perils for growth from a disorderly adjustment in global imbalances or a supply-side oil shock", according to UNESCAP Executive Secretary, Mr Kim Hak-Su, in his comments in the report.

"The fall of the dollar in recent weeks has revived fears in the region of a turbulent adjustment in global imbalances", he has said, adding, "a disorderly unwinding of global imbalances with a sharp fall in the dollar would result in global recession with severe negative impacts on the Asia-Pacific countries". An oil shock through even a moderate disruption in production capacity can raise fuel prices, the report has cautioned.

Chinese economy

Another key area of concern has been the possible overheating of the Chinese economy. UNESCAP analysis shows that China is currently witnessing sectoral rather than general overheating. Nevertheless, measures taken by China to cool the economy may significantly affect the Asia-Pacific as the economies of the region are inextricably tied up with fortunes of the Chinese economy, mostly through trade and investment and partly through a web of macroeconomic linkages. The most affected would be Taiwan, Hong Kong, Singapore and Republic of Korea. India is expected to be much less affected as its share of exports to China is not significant.

Volatility of market

Financial market volatility risks pose no less danger. In mid-2006, the Asia-Pacific financial markets experienced their greatest volatility since 2004. All countries in the region were affected. Only recently, the Thai market tumbled. The volatility reversed a sustained period of increase in financial asset values.

UNESCAP does not rule out more turbulence in coming months and the effects of downside shock may be multiplied by investor overreaction and by contagion from portfolio outflows in other countries. This behaviour is commonly observed in financial crises and is difficult to stop once it is in motion.

In recent years, the risk has been heightened by the increase in hedge funds and credit-financed investment in the region. All these may reduce the appetite of investors for Asian financial assets.

An estimated 7.1 per cent growth in the Asia-Pacific region in 2006, the report states, was largely fuelled by the economic growth in China and India and also to some extent by Japan, which is coming out of its decade-old economic slump, with GDP having grown by 2.8 per cent in 2006 compared to two per cent in 2005. Japan's revival, it is felt, will help the region to counter the effects of a slowing US economy. In 2006, these three countries together accounted for 62 per cent of GDP of the region and 44 per cent of imports, thus throwing up opportunities for their trading partners.

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