Asia Pacific Economic Forecast Revised Downward; Inflation Expected to Rise Sharply

SINGAPORE (May 30) -- Inflation in the Asia Pacific is set to rise sharply this year in the face of increased oil and commodity prices, contributing to a substantial downward revision in the overall economic growth forecast for the region, according to a report released today by the Pacific Economic Cooperation Council (PECC).

The Council’s State of the Region Report forecasts that overall consumer prices in the region will increase this year by 3.6 percent, compared with a 2.7 percent increase in 2007. In addition, according to the report, those aggregate numbers mask much sharper price spikes in certain Asian economies. China, for example, is expected to see an increase in the Consumer Price Index of about 6 percent for 2008 as a whole, with year-on-year increases in the second half of the year in excess of 8 percent. In Indonesia, the consumer price index is expected to jump 11.7 percent. For Southeast Asia, CPI inflation is set to almost double, from 3.2 percent in 2007 to 6.2 percent in 2008.

PECC’s first quarter economic outlook update projects 3.7 percent real GDP growth for the Asia Pacific region in 2008, a substantial downward revision from the 4.9 percent forecast in November 2007, due to growing pessimism about the United States economy. However, the region is expected to bounce back in 2009 with growth at 4.4 percent.

PECC is an independent network of member committees composed of individuals and institutions dedicated to the promotion of cooperation and dialogue in the Asia Pacific. The first quarter update to the council’s economic outlook is based on the March 2008 inputs from PECC’s panel of 16 economies. The report can be downloaded from: www.pecc.org/sotr.

The U.S. Member Committee of PECC is the U.S. Asia Pacific Council (USAPC), which is hosted by the East-West Center. Dr. Saul Hymans of the University of Michigan contributed to PECC’s State of the Region Report under the auspices of the USAPC.

Slowdown highlights interdependence
“The across-the-board slowdown, although affecting some economies more than others, highlights the continued interdependence of the Asia Pacific and the importance of regional cooperation,” said Dr. Charles E. Morrison, chair of PECC and President of the East-West Center. “Trade and the freer flow of capital have been driving forces for high rates of growth in the Asia Pacific region. In a time of slowdown, it is critical that these drivers not be lost. Instead, we have seen the opposite, with policy actions such as the imposition of export restraints and financial protectionism.”

Morrison added that the situation presents the Asia Pacific Economic Cooperation intergovernmental forum, or APEC, with an opportunity to “prove its worth and show leadership to restore confidence in the system.”

Yuen Pau Woo, coordinator of PECC’s State of the Region Report and President of the Asia Pacific Foundation of Canada, said that “the period of strong growth with very low inflation has come to an end. Even with appreciating currencies, Asia Pacific economies are starting to feel the pinch of higher energy and commodity prices. The recent spike in food prices has not helped. Indeed, it has exacerbated the adverse impact on vulnerable groups who spend a high proportion of their incomes on rice and other staples.”

“In the context of rising inflation and an uncertain end to the U.S. credit crunch, policymakers around the region will have less policy space to reflate their economies,” Woo said.

The PECC report downgraded significantly the forecast for the U.S. economy for 2008, from 2.9 percent growth to just 1 percent. The forecast also notes that growth in the Asia Pacific region is coming mostly from developing economies, particularly China, which is expected to contribute almost half of the region’s growth this year.

PECC expects the external sector to be a drag on growth for many of the region’s economies, with the notable exceptions of Indonesia, Japan, Korea, Singapore, Chinese Taipei and the United States. However, export and import growth are expected to recover in 2009, as will overall growth in the region, with an expected recovery in the U.S. by late 2008.

“We expect the fiscal stimulus package to have a positive effect on the U.S. economy, even though it will taper off by late 2008,” said Woo. “If the fall in housing prices does not abate by the end of the year, or if there are other big surprises in financial sector write-downs, the risk of a further downward spiral becomes very real. The risks to our forecasts are higher than they have been for a decade.”

For further information:
Yuen Pau Woo, Report Coordinator, yuenpau.woo@asiapacific.ca
Eduardo Pedrosa, Secretary General, PECC International Secretariat, eduardo.pedrosa@pecc.org +65 978 578 14
Betty Ip, Media, PECC International Secretariat, betty.ip@pecc.org, +65 6737 9822, Ext. 17

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The PACIFIC ECONOMIC COOPERATION COUNCIL is an independent, non-government international organization committed to the promotion of cooperation and dialogue in the Asia Pacific. Founded in 1980 and based in Singapore, PECC is a network of member committees composed of individuals and institutions dedicated to this mission. The Council is one of the three official observers of the APEC process.

The EAST-WEST CENTER is an education and research organization established by the U.S. Congress in 1960 to strengthen relations and understanding among the peoples and nations of Asia, the Pacific, and the United States. The Center contributes to a peaceful, prosperous and just Asia Pacific community by serving as a vigorous hub for cooperative research, education and dialogue on critical issues of common concern to the Asia Pacific region and the United States. Funding for the Center comes from the U.S. government, with additional support provided by private agencies, individuals, foundations, corporations, and the governments of the region.