Regional Economic Prospects East Asia and Pacific

GDP in the East Asia and Pacific Region is estimated to have increased by almost 8 percent in 2004 (for a second year). The strongest performance since the 1997—98 financial crisis. The regional boom has been led by extremely strong domestic demand and trade growth in China.

Chinese GDP is estimated to have increased by 8.8 percent. Somewhat slower than in 2003. This slowdown reflects China’s efforts to stave off an overheating of the economy and prevent an inflationary spiral that could derail longterm growth if recent hikes in food prices are passed through to wages and other consumer prices. Administrative controls on investments and restrictions placed on the issuance of new credits appear to be bringing expansion down to a more sustainable level. Investment growth slowed from over 40 percent to still high 20-30 percent rates between the first and third quarters. In addition, the recent moderation in freight rates and the precipitous fall in October of the prices of copper, nickel, Zinc, lead, and other commodities that are the buiding blocks of the Chinese boom appear to reflect perceptions that Chinese demand has been slowing (increase in Chinese demand represented 90 percent of the growth in global steel demand during 2003 and 66 percent of the increased demand for iron ore).

However, the effectiveness of these measures in slowing overall demand is less clear. Investment levels continue to exceed 50 percent of GDP, and retail sales volumes and the dollar value of imports are still expanding very rapidly.
Elsewhere in the region, GDP in 2004 is estimated to have increased by about 7 percent in Malaysia, by between 5.5 and 6.5 percent in the Philippines and Thailand , and by somewhat less than 5 percent in Indonesia. Buoyant consumer spending continues to make an important contribution in all these economies, while fixed investment spending which has been subdued in the years since the financial crisis. Has mounted a substantial recovery since late 2003.

Output in the region is expected to slow through 2006, when it is projected to increase by 6.6 percent. By then Chinese GDP growth is forecast to ease to a more manageable 7 percent pace. It is assumed that administrative controls on investment and credit restrictions are calming the torrid pace of investment . As a result the overall contribution of investment to GDP growth is projected to decline by more than 3 percentage points, with slower consumer demand also making a contribution as the pace of economic activity moderates.

Excluding China, GDP growth in the region is projected to remain robust, easing somewhat to around 5.5 percent by 2006. This mainly reflects the slowing in economic activity among the region’s major trading partners (China, Japan, and the United States) and, at the sectoral level, a weakening in world demand for high-tech products (G-3 orders for semiconductors feel 8.5 percent in the three months ending August 2004, as compared with the still robust growth of the second quarter).

Europe and Central Asia
Real GDP in Europe and Central Asia is estimated to have increased by 7 percent in 2004, a sharp acceleration from the 5.9 percent outturn in 2003. This strong performance outstrips the 2000 peak in growth of 6.7 percent . It marks a new record since the beginning of the transition period, with the commonwealth of independent states (CIS) showing the most rapid growth . The acceleration reflects several factors. Domestic consumption and investment in Russia and other CIS oil exporters were boosted by a surge in oil revenues. While the accession of a number of the region’s countries to the European Union (EU) provided a further boost to investment demand and foreign direct investment inflows . Industrial production for the region as a whole was up an estimated 8.4 percent. Strong domestic demand in Russia spurred increased imports from neighboring countries mainly in the CIS, and the new EU members continued to increase their share of EU trade, reflecting past foreign direct investment from the EU. Overall, the region increased market share, and its exports grew almost 35 percent faster than world trade.

Notwithstanding rapidly expanding production, Fisccal deficits remain unsustainably high in a number of countries in central Europe. These deficits along with strong private- sector demand and higher oil prices have contributed to rising current account deficits and inflation. A notable exception to increasing inflationary pressures is Turkey, where fiscal consolidation, and a tightening of monetary policy has helped bring inflation down from 68 percent in 2001(18 percent in 2003) to only 9 percent in the fall of 2004. While it is still too early to tell, this may herald a new beginning for Turkey whereby economic decision making and growth are no longer constrained by price uncertainty.
Regional growth is forecast to moderate over the near – term, with output rising by 5.6 and 5 percent in 2005 and 2006 , respectively...
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