Economic Outlook Data Tables

T1: Real economic growth and increase in consumer prices for PECC economies, 2007-2010 (%)

*Statistics from provided by UniversidD de Chile complements the update from the Central Bank of Chile.
Note: National currency based. The weighted average is based on the respective economies’ 2004-2007 Nominal GDP (see T9).

Source: SOTR forecasters

T2: Real export and import growth for PECC economies, 2007-2010 (%)

*Statistics from provided by Universidad de Chile complements the update from the Central Bank of Chile.
Note: Export/Imports of goods and services. National currency based. The weighted average is based on the respective economies’ 2004-2007 total trade merchandise (see T8).

Source: SOTR forecasters.

T3: Current account of the balance of payments for the PECC economies, 2007-2010 (US$B and % of GDP)

*Statistics from provided by Universidad de Chile complements the update from the Central Bank of Chile.

Source: SOTR forecasters.

T4: Forecast of contributions to real GDP/GNP growth rate for PECC economies, 2009-2010 (% per year)

*Statistics from provided by Universidad de Chile complements the update from the Central Bank of Chile.
Note: National currency based. Components of GDP/GNP do not add up to overall growth rates for some economies, due to statistical discrepancies.

Source: SOTR forecasters.

T5: Actual and forecast levels of short-term, long-term interest rates for PECC economies, 2007-2010 (%)

*Statistics from provided by Universidad de Chile complements the update from the Central Bank of Chile.

Source: SOTR forecasters.

T6: Exchange Rates, 2007-2010 (Local Currency Per US$)

*Statistics from provided by Universidad de Chile complements the update from the Central Bank of Chile.

Source: SOTR forecasters.

T7: GDP Deflator Growth, 2007-2010 (%)

Note: Base year = 100 unless otherwise noted.
* Australian financial year, covering Q3-Q4 of 2003 and Q1-Q2 of 2004.
**Statistics from provided by Universidad de Chile complements the update from the Central Bank of Chile.

Source: SOTR forecasters

T8: Trade Weights, 2004-2007 average (%)

Source: Compiled from WTO Statistics. Trade Weights is the total merchandise (imports and exports) of each country over the total trade merchandise of PEO economies.

T9: GDP Weights, 2004-2007 average (%)

Source: Compiled from IMF Statistics. GDP Weights are the nominal GDP of each country over the total nominal GDP of PEO economies.

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A Composite Index of Economic Integration in the Asia Pacific

As the Asia Pacific Economic Cooperation (APEC) forum approaches its 20th anniversary in 2009, there will be renewed discussion on the accomplishments of the organization over the last two decades. From inception, APEC has focused on economic issues, with particular emphasis on the Trade and Investment Liberalization and Facilitation (TILF) agenda. The celebrated 1994 Bogor target of “free and open trade” by 2010 for developed member economies (2020 for developing members) has long served as a raison d’etre for APEC. Eschewing formal negotiations and binding agreements, APEC’s approach to trade and investment liberalization has been based on “concerted unilateral liberalization” – the belief that member economies acting on self interest would reduce border barriers unilaterally, and that APEC peer pressure would result in even more ambitious acts of “concerted” liberalization. APEC’s vision of trade liberalization has also been premised on “open regionalism” – the idea that while members would liberalize trade and investment within the region, these market-opening measures would not be at the expense of non-members.

“Concerted unilateral liberalization” and “open regionalism” have turned out largely to be empty slogans. There has been limited progress on Asia Pacific-wide liberalization measures that go beyond the Uruguay Round commitments. Likewise, the proliferation of preferential trade agreements in the region suggests that while APEC members are interested in greater market access, they are selective in their choice of trade and investment partners, and quite ready to exercise discrimination against fellow APEC members as well as non-APEC members. As a result, the evolution of trade and investment integration in the region has been complicated, with trade and investment flows influenced both by “natural” comparative advantage as well as by “distortions” of domestic policy and by bilateral/regional economic agreements.
One of the tensions in APEC is the trans-Pacific nature of the organization. The creation of APEC was in large part motivated by a desire to not “draw a line down the Pacific”. Since 1998, however, there has been growing interest in Asia-only free trade agreements as well as East Asia and Asia-wide institutions that explicitly leave out the other side of the Pacific. The North and South American members of APEC have also pursued ideas of hemispheric integration, particularly the idea of a FreeTrade Area of the Americas, albeit with little success. It is not clear that Asia-only agreements are in fact diverting trade and investment away from North and South American members of APEC or indeed that future trade agreements will place less emphasis on trans-Pacific access to North America as they currently place on intra-Asia trade. In any case, the APEC “project” is predicated on the idea of increasing economic integration across the region – covering both sides of the Pacific. Any measure of the organization’s success, therefore, would require an assessment of whether the region has in fact become more integrated.

In this context, the Pacific Economic Cooperation Council (PECC) has developed a set of indicators to measure the extent of economic integration in the Asia Pacific region. Using data from 17 member economies of APEC, the composite index provides a measure of economic integration for the region as a whole, as well as for individual economies, from 1990 to 2005. This index will be launched as part of PECC’s 2008 State of the Region Report to be released at the APEC Leaders’ Meeting in Lima in November 2008.

Major findings of the Composite Index of Asia Pacific Economic Integration 2008 include:

• The Asia Pacific region as a whole is more integrated at the end of 2005 than it was in 1990. There was a steady upward trend in the economic integration of the region from 1991 through 2000. Following the bursting of the IT bubble in 2001, regional integration declined or was flat for the next three years but picked up again in 2004 and 2005.
• Hong Kong is the economy most highly integrated with the Asia Pacific region, followed by Singapore and Chinese Taipei. These three economies have held the top positions for most of the period covered by the index.
• The least integrated economy in 2005 was Indonesia, followed by China and the United States. The US index was volatile over the period, with the 2005 figure only slightly higher than in 1990. The US ranking has fallen by three places since 1997.
• The economies which increased their integration with the Asia Pacific by the greatest amount between 1990 and 2005 were Hong Kong, New Zealand, Vietnam, Canada, and Australia.
• Five economies were less integrated with the Asia Pacific region in 2005 than in 1990: Chile, Chinese Taipei, Indonesia, Mexico, and Singapore.

The composite index of economic integration is based on a combination of measures that on the one hand looks at the extent to which the reference economies are becoming more alike in their economic characteristics (so-called “convergence” measures) and on the other hand at the relative importance of trade, investment and human flows within the region compared to economic relations with the rest of the world. The convergence measures are premised on the notion that integration will lead to greater uniformity among the economies. Accordingly, more trade and investment among regional partners may not translate into a higher score on the integration index if at the same time the partners are diverging in terms of income, education, life expectancy, urbanization, and economic structure. Furthermore, since the trade, investment, and tourism measures are calculated relative to global transactions, the index will rise for a given economy only if that economy’s share of trade/ investment is growing relative to total trade and investment.

An important feature of the index is that it excludes trade and investment flows among geographically contiguous subregional trade agreements, namely NAFTA, the ASEAN free trade agreement, and Australia-New Zealand Closer Economic Relations. It also excludes flows within “Greater China” -- the People’s Republic, Hong Kong, and Chinese Taipei. This is to control for the effect that sub-regional flows may have on the index, whereby a very high degree of integration among say NAFTA economies could result in a falsely high measure of integration with the Asia Pacific region as a whole. In the case of Greater China, the exclusion of intraregional flows did not affect the positions of Hong Kong and Chinese Taipei at the top rankings of the index. On the other hand, the People’s Republic of China’s much lower ranking suggests that a large share of its trade and investment flows with Asia Pacific partners is with Hong Kong and Chinese Taipei, and that its share of trade and investment with countries outside of the Asia Pacific is larger than that of other economies in the region.

Caution should be exercised in the interpretation of these findings. The measures chosen for inclusion in the composite index are imperfect indicators of “convergence” and trade/investment integration. The rankings in turn should not be read normatively as “league tables” in the sense that a higher ranking is superior to a lower ranking. Indeed, a low ranking may simply indicate that an economy is more oriented globally than regionally, as is likely the case for China and the United States. Nevertheless, the change in index value for a given economy over time can be read as a measure of its changing economic orientation. The index value for the region as a whole can also be seen as a measure of closer economic ties among Asia Pacific economies and as one indicator of APEC’s success. Given that the index shows growing economic integration in the region, the very least that one can say is that the APEC project -- in its broadest ambition -- has not been in vain.

Value of Composite Economic Integration Index and Ranking of Asia Pacific Economies, 1990 and 2005

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State of the Region 2008

Survey undertaken in cooperation with the Asian Development Bank Office of Regional Economic Integration

Section 1: Profile of Respondents

Number of Respondents: 483

Regional Breakdown

Sectoral Breakdown

Section 2: Regional Economic Outlook

Question 2: What are your expectations for economic growth over the next 12 months compared with the past year?

Responses were overwhelmingly negative indicating that the economic outlook of the Asia Pacific region has changed in the past year, contrasting sharply with the 2007 State of the Region Survey.

Ninety-three percent of respondents expect the global economy to be much weaker or somewhat weaker over the next 12 months. Over 95 percent expect the US economy to be much or somewhat weaker, of which 78 percent answered much weaker. In 2007 only one percent of survey respondents answered that the North American economic outlook to be much weaker and 38 percent answered somewhat weaker. Less than one percent of respondents expect economic growth in any of the regions to be much stronger.

Question 3: How do you rate the following risks to growth for the Asia Pacific over the next 12 months?

Consistent with the negative regional economic outlook, the risks associated with the global financial crisis are viewed as the most serious. The US recession (83 percent), banking or financial sector crisis (78 percent), and sharp fall in asset prices (69 percent) are considered the top three very serious and serious risks, with mean scores of 4.28, 4.14 and 3.81 respectively.

The results above are considered the top three risks across the five regions, although respondents of Australia and New Zealand viewed a banking sector crisis as the number one risk (85%). In North America, 89% of respondents viewed the US Recession as the top very serious and serious risk, slightly higher than the rest of the regions and the overall.

Deterioration in Cross-Strait relations and US-China relations as well as a health pandemic are considered the lowest risk to the Asia Pacific regional outlook.

Section 3: Regional Economic Integration

Question 4: What do you think is the impact of deeper regional economic integration on the following issues?

Respondents generally held a positive view of the impact of deeper regional economic integration citing its positive impact on accesses to markets within the region as one of its most important consequences (85%) followed by the positive impact on economic growth (77%).

Of greatest concern was the impact on income inequality with 34% viewing the impact as negative followed by the independence and flexibility for domestic economic policy (28%).

Between the sub-regions there was generally little variance in opinion on the impact of deeper regional economic integration. Respondents from Northeast Asia, however, were much more concerned than the rest of the region on the negative impact on local culture and identity. Thirty-four (34%) of respondents from Northeast Asia rated the impact of deeper regional economic integration as negative on local culture and identity compared to the region as a whole – 21%. Northeast Asia was also the least positive on the impact on economic growth (69%) while respondents from Australia and New Zealand where by far the most positive at 92%.

Question 5: Please rate the relative importance of the following liberalization measures for the Asia Pacific region:

The highest priority for the liberalization of trade in the region was given to harmonizing rules of origin under overlapping bilateral and regional FTAs (73%) followed by the liberalization of cross-border FDI. Respondents from South America where the most concerned about rule of origin while North Americans were the least concerned.

There was considerable divergence between sub-regions in their priorities for liberalization, especially views on the importance of the elimination of barriers to trade in services. Respondents from North America and Australia and New Zealand tended to prioritize liberalization of trade in other services while respondents from East Asia placed a much lower priority on this item.

Question 6: How would you rate the suitability of the following groups of economies for the creation of a free trade and investment area?

Respondents favored ASEAN and ASEAN Plus Three when asked what economies would be most suitable for the creation of a free trade and investment area (63% and 58% of respondents thought they were suitable to very suitable for the creation of a free trade area respectively). 

How would you rate the suitability of the following groups of economies for the creation of a free trade and investment area? (% respondents by sub-region who thought the following groupings were suitable to very suitable for the creation of a free trade and investment area)

The five regions represented in the survey have similar perspectives of regional economic integration, rating ASEAN as the best suited grouping for a free trade and investment area. However, there was variation as to the next best suited grouping, with most sub-regions ranking ASEAN+3 second with the exception of South Americans who ranked APEC second. Interestingly North American respondents did not share this view with a significant proportion who thought that the ASEAN+3 grouping was better suited to a creation of a free trade area and still ranked the East Asia Summit membership better suited than APEC’s membership.

Question 7: Please rate the importance of strengthening regional cooperation in the Asia Pacific region on the following issues:

Given the financial market turmoil it should come as no surprise that the top area for strengthening regional cooperation was provision of liquidity support in the event of financial crises. Tariff barriers ranked second highest followed by the environment, then reducing the cost of doing business, with the top five issues rounded of by energy security and food security equally. Generally, this matches the results in question 12 on priorities for APEC Leaders with the exception of strengthening the APEC institution which does not appear in this list. 

Section 4: Regional Institutions

Question 8: How would you rate the importance of the following measures for enhancing regional cooperation?

Respondents strongly favored strengthening existing institutions rather than creating new ones to enhance regional cooperation. The most favored route for enhancing regional cooperation was to give existing additional staff resources to existing institutions such as APEC and ASEAN (62%). Opinion-leaders were largely skeptical about creating new institutions with less than 25% of respondents rating this as an important measure.

Question 9: Please indicate your agreement of disagreement with the following statements:.

Overall 72 percent of responses agreed or strongly agreed that Asian economies should create a region-wide institution to promote financial stability, 67 percent for economic policy coordination and cooperation, and 62 percent that a free trade area for Asian economies should be negotiated as soon as possible. Furthermore, 57 percent agree that India should be a member of APEC.

The three questions that are comparable across the three years of the survey show little difference in the responses, with slightly fewer respondents see the East Asian Summit as a threat to APEC.

Slight differences present themselves when viewing the role for regional institutions across regions. There was high support from South American respondents with 86 percent agreement that a free trade area for the Asia Pacific region should be negotiated, but only 63 percent of South American respondents agree that an FTA should be created for Asian economies. Of North American respondents, 55 percent strongly disagree or disagree with the statement that APEC is as important today as it was at its start in 1989, while 70 percent agree that Asian economies should create a region-wide institution to promote financial stability. In contrast, 52 percent of Australian and New Zealand respondents agree or strongly agree that APEC is as important today as it was at its start in 1989, while 44 percent think Asian economies should create a region wide institution to promote financial stability. Of Northeast Asia respondents, 51 percent disagree that the East Asian Summit will eventually overshadow APEC.

APEC is as important today as it was in 1989

A free trade area for the Asia-Pacific region should be negotiated as soon as possible

Question 10: When do you think the following regional institutions will be created?

There does not appear to be strong agreement on a timeframe for any of the institutions. A majority of respondents thought that an Asian institution to promote financial stability, a secretariat for economic policy cooperation and a pan-Asian free trade and investment area would be created by 2020 (75%, 76% and 68% respectively). However, respondents were much less sure about the creation of an Asian currency unit or an Asian common currency with 40 percent of total respondents indicated that a common Asian currency will never be created and 31 percent that an Asian currency unit will never be created.

Section 5: APEC

Question 11: What are the most important challenges facing APEC? 

When asked what the most important challenges facing APEC, 76 percent of survey respondents viewed a lack of commitment from key member economies as a very important or important challenge. Lack of focus on relevant issues and lack of relevance to issues facing ordinary citizens are also viewed as the top challenges.

Survey respondents do not consider excessive number of meetings, competition from Asia-only groupings or a weak international secretariat and limited central budget as important or very important challenges. Regional responses to the question were also similar, with each region considering a lack of commitment from key member economies as the most important challenges facing APEC. Over the past three years of survey data, the percentage of respondents citing “lack of commitment from key member economies” as an important or very important challenge for APEC has increased from 63 percent in 2006 to 67 percent in 2007 and 76 percent this year. 

Question 12: What do you think should be the top five priorities for APEC Leaders to discuss at their upcoming meeting in Lima? 

By far the top priority for the APEC Leaders’ meeting was the US Financial Crisis and its global impact, followed by the Free Trade Area of the Asia Pacific, the WTO DDA, energy security, and APEC reform. That the ongoing financial crisis should be top should come of no surprise, however, that the proposed FTAAP has now overtaken the WTO as priority area of discussion demonstrates increasing skepticism over the likelihood of a breakthrough in the global trade talks being reached. Moreover, only respondents from the nongovernment sector still ranked the WTO DDA negotiations as a higher priority than the FTAAP. Amongst the sub-regions only one, Australia-New Zealand ranked the WTO above the FTAAP.

Climate change, such a big issue for the Sydney Summit last year still ranked highly but is down in the list of priorities. While it is still a top 5 issue for most of the sub-regions including Northeast Asia, North America and Australia-New Zealand, only Southeast Asia and South America did not have climate change as a top 5 priority issue. 

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Impact of the Global Financial Crisis on the Asia Pacific Region and Economic Outlook

The US sub-prime mortgage crisis has turned into an international financial crisis but it is not yet certain that the ensuing global downturn will result in a severe recession in Asia. Asian economies have been hit as hard as industrialized economies by a sharp decline in financial asset prices and by the credit crunch. However, economic growth in greater China and parts of Southeast Asia remains positive, and many Asian governments have fiscal and monetary tools at their disposal to mitigate any further deterioration in their economies. This is not to say that there has been a “decoupling” of Asia from western industrialized economies. Indeed, the export outlook has dimmed considerably for major Asian economies, and the effects of falling export demand have already led to sharp employment losses. But Asian economies have relatively strong banking systems and large foreign reserves, which puts them in a much better position than in the 1997- 98 financial crisis. Even so, downside risks weigh heavily in the current forecast, which is predicated on the positive impact of the US and other liquidity injections taking effect in the first half of 2009, resulting in a modest recovery.

The fall in energy and other commodity prices will sharply reduce the import bill of Asian economies, while the depreciation of their currencies relative to the US dollar will improve the competitiveness of manufacturing exports. If anything, the recession in the United States will accelerate the pace of demand switching in Asia and of deeper regional integration and cooperation. Looking out five years, one of the likely consequences of the current financial crisis is that Asia will sell relatively more of its goods and services within the region, and less to the US and EU.

In the near term, the focus for Asian governments will be to defend against further contagion effects of the US financial market and credit crisis. In addition to monetary measures aimed at providing liquidity to credit markets and guarantees for domestic financial institutions, there will also be a series of confidence measures to boost demand through government spending. The recent $600b fiscal stimulus package by China is an example of how worried Beijing has become, but it is also an example of the Chinese government’s ability to provide fiscal stimulus at a time when the economy is in dire need of it.

Looking beyond the immediate crisis, the spotlight will turn to surplus countries in Asia, where an estimate $4 trillion in foreign reserves is held, about half of which is in the People’s Republic of China. The global recycling of surpluses held by Asian and Gulf states will take on greater urgency as funds are needed to recapitalize the US banking sector and to finance the massive deficits of the US government. While the US dollar has risen sharply since the crisis (because of a flight to quality), the medium term outlook for the greenback is more gloomy. With the US dollar at current highs, the temptation for Asian central banks to diversify away from the US dollar in the year ahead will be greater than ever. As the credit crunch eases, interest rates in the US will have to rise in order to attract investment capital from the rest of the world.

Asian economies of course are not monolithic, and different parts of the region are responding differently to the financial crisis. Japan does not have a financial sector crisis (indeed Japanese banks have done well to pick up the assets of failed or troubled US and European investment houses). Even so, the Japanese economy has only recently come out of a prolonged deflation, and is again facing the prospect of falling prices as a result of the slowdown in global growth. Unlike other Asian economies, Japan has little flexibility in its monetary or fiscal policy, and is very likely to show negative growth for part of 2009. Real GDP growth for the year as a whole is expected to be 0.8 percent, rising to 1.8 percent in 2010.

In contrast, China will continue to show growth of 8-9 percent in 2008 and 2009 because of stronger domestic demand, led by government spending. However, a fall of just one or two percentage points in GDP growth is sufficient to result in massive job losses, particularly in export industries that are concentrated in the southern coastal areas. Rising unemployment in urban areas comes at a time when the authorities are already struggling to improve the livelihoods of rural residents. These internal pressures will do more to increase the importance of domestic consumption and investment in total output than any amount of hectoring from the west. There is a strong risk that the fall in exports will be more severe than expected and that the fiscal package will not be enough to compensate for falling external demand, especially in the areas where export processing is concentrated.

The Pacific Economic Cooperation Council expects real GDP growth for the Asia Pacific region as a whole to be in the order of just 1.2 percent in 2009, compared to around 3.5 percent in 2007 and 2008. This sharp decline in output growth will be led by the United States, which is expected to experience an economic contraction in 2009 of around 0.5 percent. The U.S. economy has been on the cusp of recession for a year or more, as it absorbed the bursting of the housing bubble and the surge in oil prices. Until the late summer, it wasn't clear that the economy would actually slip into a classic recession in which the economic doldrums spread broadly through all the major macroeconomic indicators of employment, income, and production. The financial crisis—stemming from the housing bubble and the extraordinarily unwise overinvestment in mortgage backed securities and related derivatives—which hit the world’s major financial institutions in September has altered the balance of events in the U.S. economy.

With the freezing of credit markets, the US has now tipped into what will undoubtedly prove to be a significant economic recession. Our forecast has U.S. real GDP declining for three straight quarters, 2008q3 through 2009q1, followed by a modest economic recovery beginning in the spring quarter of 2009. A period of three straight quarters of declining real GDP has not occurred in the U.S. since 1974-75, and not even in the 1981-82 recession that is generally regarded as the most severe in the post-WWII era. However, the severity of the current recession doesn't compare with the recessions of 1981-82 and 1973-75. The forecast posts a total loss in real GDP of just 1.4 percent over the three quarters of decline, which is close to the magnitude of contraction that was seen in 1990-91. 

US unemployment is forecast to peak at about 7.5 percent in late 2009. The payroll job count is expected to improve by 1.2 million during 2010 (4th-Qtr-to-4th-Qtr), following losses of 1.1 million jobs in 2008 and 1.4 million in 2009.

T1: Real economic growth and increase in consumer prices for PECC economies, 2007-2010 (%)

*Statistics from provided by UniversidD de Chile complements the update from the Central Bank of Chile.
Note: National currency based. The weighted average is based on the respective economies’ 2004-2007 Nominal GDP (see T9).
Source: SOTR forecasters

The biggest uncertainty in this forecast is whether the worldwide array of policies aimed at thawing the credit freeze will have their intended effects and how long it will take for these measures to have effect. We have assumed that the size of the liquidity programs envisioned and the coordination of efforts now under way among the major economies and their central banks will result in sufficient improvement in the next few months to promote modest economic recovery in the U.S. beginning in the spring of next year.

East Asia is forecast to show real GDP growth of 3.4 percent in 2009, about half a percentage point lower than in 2008. Inflationary concerns which dominated the headlines in the first half of 2008 have largely abated, with consumer prices expected to increase by 2.3 percent in 2009 after an increase of 3.7 percent the previous year. With the exception of Chinese Taipei, all East Asian economies are expected to have slower growth in 2009 compared to 2008. Singapore is forecast to show negative growth in 2009, followed by a modest recovery in 2010.

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State of the Region 2008-2009

The US sub-prime mortgage crisis has turned into an international financial crisis but it is not yet certain that the ensuing global downturn will result in a severe recession in Asia. Asian economies have been hit as hard as industrialized economies by a sharp decline in financial asset prices and by the credit crunch. However, economic growth in greater China and parts of Southeast Asia remains positive, and many Asian governments have fiscal and monetary tools at their disposal to mitigate any further deterioration in their economies. This is not to say that there has been a “decoupling” of Asia from western industrialized economies. Indeed, the export outlook has dimmed considerably for major Asian economies, and the effects of falling export demand have already led to sharp employment losses. But Asian economies have relatively strong banking systems and large foreign reserves, which puts them in a much better position than in the 1997- 98 financial crisis. Even so, downside risks weigh heavily in the current forecast, which is predicated on the positive impact of the US and other liquidity injections taking effect in the first half of 2009, resulting in a modest recovery.

Contents

Impact of the Global Financial Crisis on the Asia Pacific Region and Economic Outlook

• T1: Real economic growth and increase in consumer prices for PECC economies, 2007-2010 (%)

State of the Region 2008

• Section 1: Profile of Respondents
• Section 2: Regional Economic Outlook
• Section 3: Regional Economic Integration
• Section 4: Regional Institutions 
• Section 5: APEC 

 A Composite Index of Economic Integration in the Asia Pacific

• Major findings of the Composite Index of Asia Pacific Economic Integration 2008
• Value of Composite Economic Integration Index and Ranking of Asia Pacific Economies, 1990 and 2005 
• Technical Note 

Economic Outlook Data Tables