Economic Performance

Economic Performance in the First Half of 2007

* Economic growth in emerging East Asia was stronger than expected in the first half of 2007, buoyed by strong consumption and external demand.

* Inflation continued to fall in most ASEAN economies, but started to rise in PRC, Korea, and Singapore.

* Throughout the region, current account surpluses were sustained in the first half of 2007, while capital inflows remained strong.

* Financial markets gained across the region in the first half of the year despite some volatility, with several policy makers increasingly anxious about the risk of a possible equity market bubble.

* Monetary policy responses varied across emerging East Asia--with PRC; Korea; and Taipei,China tightening policy, Malaysia keeping policy rates unchanged, while policy rates in Indonesia, Philippines, and Thailand were lowered.

* Against a background of favorable economic conditions, financial sectors in the region have generally remained resilient, although signs of stress related to sharply higher asset prices and higher volatility in several markets are emerging.

Outlook, Risks, and Policy Issues

* The overall external environment for emerging East Asia remains generally supportive for 2007, with easing yet solid global growth and more volatile yet favorable financial conditions.

* Continued strong growth momentum in the PRC coupled with slightly moderating expansions in the NIEs and most ASEAN economies should lead to a slightly slower yet robust growth in emerging East Asia this year and in 2008.

* Notwithstanding the solid growth outlook, several risks remain: (i) greater than expected inflation; (ii) increased financial market volatility; (iii) a sharper US economic slowdown; (iv) a disorderly adjustment of global payments imbalances; and (v) noneconomic events, such as geopolitical disruptions or further outbreaks of avian flu.

* Monetary policies attuned to individual economic circumstances, measures to improve investment climates and deepen financial markets, and initiatives to encourage energy conservation are some of the key policy options authorities would need to consider.

GDP GrowthEconomic growth in emerging East Asia was likely stronger than expected in the first half of 2007, buoyed by strong consumption growth and external demand, and the rapid 11.5% growth in gross domestic product in the PRC. Combined gross domestic product (GDP) in the nine largest economies 1 grew by over 8.1% in the first quarter of 2007 (Q1), marginally lower than 8.2% in 2006, supported by strong consumption growth and external demand (Figure 1). 2 In the first half of 2007, the People's Republic of China's (PRC) economy grew by 11.5%. In the year to March 2007, GDP growth was 5.6% in the four middle-‑income countries of the Association of Southeast Asian Nations (ASEAN-‑4), above 2006 levels. However, the four newly industrialized economies (NIEs)--Hong Kong, China; Republic of Korea (Korea); Singapore; and Taipei,China--moderated in Q1, with GDP growth slowing to 4.5%, from 5.4% in 2006.Excluding the PRC, domestic demand in the region weakened slightly but remained solid in Q1 due to somewhat slower investment, while private consumption was stronger than in 2006, growing by 4.0% (Figure 2). The external sector continued to contribute strongly to the expansion as resilient consumption in the United States (US) and a strong recovery in Europe underpinned export demand.Early data suggest the region continued robust growth in the second quarter of 2007 (Q2), with industrial production in several economies looking strong (Figure 3). PRC industrial production grew faster in Q2 than the Q1 average, while industry in Korea and Indonesia maintained last year's strong momentum. Industrial growth in Thailand and Malaysia slowed, and the decline in the Philippines slowed in April. Second-‑quarter retail sales in the region also stayed healthy (Figure 4).

In the PRC, strong investment and solid consumption continued to support high growth as the investment boom regained force in 2007, having slowed in the second half of 2006. The Q2 growth rate of 11.9% was the highest in 12 years. Fixed-‑asset investment grew 26% (year-‑on-‑year) in the first 5 months of 2007, compared with 24% in 2006. Steady consumer spending growth saw retail sales trending upward through June, while externally, merchandise exports remained a key driver--the trade surplus in the first half of 2007 was $113 billion, almost double the amount in the first half of 2006. Domestic demand in the ASEAN-‑4 economies also remained solid, due to strong private consumption, as public sector salary hikes and higher overseas remittances propped up household income (Figures 5-6). In Thailand, however, consumption growth was recently at its weakest in 6 years as political uncertainty continued to weigh down private spending. Government spending--election-‑related expenditures in the Philippines and infrastructure program disbursements in Indonesia, Malaysia, and Thailand--also boosted total consumption and investment. While investment picked up slightly in Malaysia during the first quarter, it was generally weak among the ASEAN-‑4 economies (Box 1), contributing only about 1% of total growth of 5.6% (Figure 7). In Thailand, investment contracted for two consecutive quarters as the political environment remained somewhat uncertain. Steady exports continued to contribute to solid growth in ASEAN-‑4 (Figure 8), although performance varied: external demand was steady for most ASEAN-‑4 economies, but exports slowed markedly in Malaysia. In the Philippines, continuing currency appreciation--mainly due to recent strong overseas worker remittances--has bolstered private consumption but hurt manufacturing. However, this effect on industry appears to be less severe than a similarly adverse exchange-‑rate effect associated with natural-‑resource earnings--popularly known as "Dutch disease"--because recipients of remittance inflows are more widely distributed.Solid consumption has also fueled growth in some NIEs. In Hong Kong, China, rising income, strong employment, and buoyant equity markets underpinned an expansion in private consumption. In Korea, private consumption continued to recover steadily from the household debt-‑related contraction in 2003. In Singapore, however, private spending remained weak due to a slowdown in spending on motor vehicles, housing, and utilities. There was weak private consumption in Taipei,China as well, due to high credit card debt. Investment performance