Asia Pacific: Costly Oil and a Limp U.S. Economy May Be Spoilers

The Asia Pacific region, excluding Japan, was a leader in global economic growth last year. Emerging-market nations from Southeast Asia to China and Korea grew, on average, 5.4% in 2002, three times the global growth rate. Will the region continue to outperform the world in 2003?

Most likely, yes, and that should be the case even if China's rapid growth rate is excluded. Emerging Asia's solid base for continued healthy growth starts with its global competitiveness and generally solid domestic demand, supported by stimulative policies. Plus, China is fast becoming a magnet for the region's exports. Korea and Taiwan are getting the biggest lift due to their proximity, but Southeast Asian exporters are benefiting as well.

The area had considerable momentum heading into 2003. Despite weakening global demand, industrial production in the final quarter of 2002 surged at an annual rate of more than 7% (table). China and Korea account for most of the recent strength, while Taiwan, Singapore, and Malaysia are being hurt by the U.S.-led tech slump.

The outlook particularly depends on oil prices and the pace of recovery in the U.S., both of which will be affected by how the situation in Iraq plays out. Oil prices are already high enough to slow regional growth in the first half of the year. The price of Brent crude, at nearly $34 per barrel, is at a 2 1/2-year high, up from an average of $25 last year. Because the region imports half of the oil it consumes, every additional dollar per barrel cuts economic growth by 0.1 to 0.2 percentage points, according to Morgan Stanley. Korea and Taiwan will suffer the most from higher prices, while China is more insulated.

But it is the U.S., not China, that is likely to determine the region's fortunes this year. Intra-regional trade still accounts for only 22% of total exports. And with electronics making up more than a third of emerging Asia's exports, an improvement in U.S. business spending on high-tech equipment is critical to the area's performance in 2003.

By James C. Cooper & Kathleen Madigan

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