Global Economic Trends

Bert HofmanWorld Bank Office Manila

Implications of the ASEAN Charter for East Asian IntegrationMarch 12, 2008

Developing Countries GDP Growth

A Good Decade Thus Far

Forecasts for 2008 GDP growth have been revised downwards

Jan 07Feb 07

Mar 07

Apr 07May 07

Jun 07Jul07

Aug 07Sep 07

Oct 07Nov 07

Dec 07Jan 08

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

percent

US

Japan

Euro area

Date of projection for 2008

Projection

Region/country 2007 2008

WB Consensus Forecasts Feb 2008

IMF WEO

Update

Oxford Econ

High income OECD USA Euro-zone Japan

Developing

2.52.22.72.1

7.4

1.81.61.71.5

6.7

..1.61.61.4

..

1.81.51.61.5

6.9

..1.81.71.5

..

Sizable slowdown in industrial country GDP growth is now expected

Private capital flows are also expected to ease

$ billions

0

200

400

600

800

1000

0

2

4

6

8

Net private capital flows to developing countriesNet private capital flows to developing countries

Percent of GDP (right

axis)

Percent

Projected Projected 2008-092008-09

$998 billion in 2007 (7.3% of

GDP)

5.25%3.5% of GDP

average 1990-02

Source: World Bank, DECPG

But so far the impact on East Asia has been has been limited limited

East Asia - Quarterly GDP Growth (% Change Year Ago. 1999 Q1 - 2007 Q4)

-6.0

-3.0

0.0

3.0

6.0

9.0

12.0

Q1

1999

Q3

1999

Q1

2000

Q3

2000

Q1

2001

Q3

2001

Q1

2002

Q3

2002

Q1

2003

Q3

2003

Q1

2004

Q3

2004

Q1

2005

Q3

2005

Q1

2006

Q3

2006

Q1

2007

Q3

2007

E. Asia NIEsSE Asia China

East Asia - Export Growth(Local Currency 3Mo. Mov. Averages - % Change

Year Ago)

-20

0

20

40

Jan-

2001

Jun-

2001

Nov

-200

1

Apr

-200

2

Sep

-200

2

Feb

-200

3

Jul-2

003

Dec

-200

3

May

-200

4

Oct

-200

4

Mar

-200

5

Aug

-200

5

Jan-

2006

Jun-

2006

Nov

-200

6

Apr

-200

7

Sep

-200

7

E. Asia SE AsiaChina NIEs

Source: World Bank

Several factors suggest East Asia is well placed is well placed to weather a US recessionto weather a US recession

• Current accounts are in surpluses.• Debt outstanding due within a year is below 10 percent of GDP in all

SE Asian economies.• Reserve levels are very high—at end January 2008 total reserves

for the nine largest economies in the region stood at US$ 2.74 trillion.

• Domestic conditions are much stronger: domestic demand is robust, corporate balance sheets are healthy, and capacity utilization is high, which could encourage investment.

• Fiscal positions are also relatively strong in most economies in the region—enabling them to undertake counter-cyclical policies to stimulate demand if needed.

Perceived riskiness of EM bonds, especially East Asian bonds, rose by much less than high-yield

corporate bonds

100

200

300

400

500

600

Source: Bloomberg, JPMorgan-Chase.

High-yield spreadHigh-income countries

EMBI spread

spreads, basis points

East Asia spreads

...and in historical perspective ...and in historical perspective

the present widening of spreads is modestthe present widening of spreads is modest

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1994M1 1995M9 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5

Bond spreads (basis points)

Emerging market bond spread (EMBIG)

Source: JPMorgan.

Developing countries have become key drivers

of global import growth

-5

0

5

10

1991M1 1993M1 1995M1 1997M1 1999M1 2001M1 2003M1 2005M1 2007M1

United States

Developing countries

Source: World Bank, DECPG.

Contribution to global nominal import growth in US$, y/y %-points

-1

0

1

2

3

4

5

6

7

8

9

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

Trend developing country growth has become decoupled from trend high-income growth

Developing countries

High-income countries

Developing and high-income growth and trend growth

Source: World Bank, DECPG.

But the cyclical component of developing and high-income country growth remains coupled

-4

-3

-2

-1

0

1

2

3

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

Deviation from trend GDP growth (percent)

Developing country cycle

High-income country cycle

Source: World Bank, DECPG.

Short Term Outlook

• Anticipated slowdown should help reduce some current global economic tensions: rising commodity prices, inflationary pressure, global imbalances.

• Difficult challenges remain for some developing countries, with vulnerability to the possibility of capital flow reversals or the impacts of increased food and energy prices. In East Asia the latter is likely to be of much greater concern.– Overall food prices in US$ have increased by 75 percent in 2000 due to

high energy and fertilizer prices, increased use of food crops for bio-fuels and world grain carryover stocks at record low levels

– Food prices are expected to remain elevated although some decline in real terms may be expected. Demand for bio-fuels will probably increase, energy and fertilizer prices expected to remain high and pasture lands will take years before it can be cropped.

Short Term Outlook cont’d

• Overall outlook remains relatively strong for the East Asia region

• But a severe recession in the US and other developed countries would clearly impact the region.

• East Asia is the region that participates most actively in the global and regional production networks associated with MNCs. Many EA countries are involved in the assembly process at different stages, leading to product parts and components crossing borders repeatedly before they are incorporated into the final product. The final products however, are still destined primarily for the US and European Union.

Long Term Outlook

• More prudent macroeconomic management and technological progress have contributed to an increase in total factor productivity (TFP) and real income growth over the past 15 years.

• Over the next 10 years, these same factors are expected to enable developing countries to achieve annual per capita income gains of 3.9 percent, and perhaps as much as 3.4 percent in the decade following the next. These projections imply per capita income growth that is more than twice as fast as that in high-income countries.

• Growth of such magnitude would reduce the number of people living on less than a dollar a day from 1.2 billion in 1990 and 970 million in 2004 to 624 million by 2015.

• Such aggregate outcomes are not guaranteed, of course, and performance across individual countries is likely to be diverse.