ADB Report Shows East Asia's Growth to Pick Up to 7.2% in 2006

Tokyo, Dec 19, 2005 AEST (ABN Newswire) - Emerging East Asia's economic growth is expected to pick up next year, helped by a turnaround in the global demand for IT products, a recovery in Japan's domestic demand, and continued strong growth in the People's Republic of China (PRC), according to an ADB report released today.

GDP growth in 2006 for emerging East Asia - defined as the 10 ASEAN member countries, the PRC, and the Republic of Korea - will average 7.2%, slightly up on estimates of 7.1% for 2005, according to the Asia Economic Monitor (AEM).

AEM, produced by ADB's Office of Regional Economic Integration (OREI), says economic performance in 2006 is expected to vary significantly across countries. Growth is forecast to ease to a shade below 9% in the PRC, compared with the estimated 9.3% growth in 2005. However, it will likely accelerate in most other major economies.

Excluding the PRC, emerging East Asia is expected to post average growth of 5.3% in 2006, higher than the 4.6% estimated for this year. Singapore's economy is projected to grow by 6.0%, up from 5.2% in 2005, while the Republic of Korea's economy will likely accelerate by 5.0%, up from 4.0%.

"With the PRC a major trading partner for many countries in emerging East Asia, increasing PRC imports should provide additional impetus for these economies," says the report.

The PRC's economic growth is likely to continue to be driven by strong growth in private consumption and slowing - but robust - investment growth. The October 2005 import figure for the PRC suggests that the country's imports, after remaining somewhat subdued in the earlier months in 2005, are again picking up.

According to AEM, these forecasts are subject to four major risks:

Disorderly adjustment of the growing global payments imbalance
A sharp upturn in the global interest rate cycle
Further increases in international oil prices
A possible avian flu pandemic.
AEM noted that continued tightening of monetary policy and fiscal consolidation are needed to sustain robust growth and at the same time keep inflation in check.

"Greater exchange rate flexibility could be utilized more to help contain inflation and at the same time rebalance the sources of growth away from exports to domestic demand," says Masahiro Kawai, OREI Head.

AEM welcomes the July 2005 shift by the PRC and Malaysia from a pegged exchange rate against the US dollar to a managed float against a basket of currencies. But it added that the yuan-dollar exchange rate has not varied much since the one-time revaluation of the yuan by 2.1% on 21 July. It notes that allowing greater exchange rate flexibility would lessen the need for accumulation of foreign exchange reserves by the central bank and thus help, at least partly, contribute to the orderly resolution of the global payments imbalance.

"Building on the 21 July policy shift, the PRC needs to adopt greater exchange rate flexibility. There is merit in loosening the yuan's tight link to the US dollar as it would foster greater exchange rate flexibility in Asia as a whole and provide a greater opportunity for collective rate movements vis-a-vis the US dollar," says the report.

AEM analyzes emerging East Asia's economic growth, financial and corporate sector restructuring, and emerging policy issues, including the threat posed by an avian flu pandemic. Forecasts for major emerging East Asian economies are based on ADB's own calculations. (Previously, forecasts were based on figures provided by Consensus Economics Inc.)

The latest AEM, as well as previous issues, are available on OREI's Asia Regional Information Center (ARIC) website.