2.3 Key Assumptions for 2007 Projection: Global economic growth is estimated to be 4.3 percent.
Dubai oil price is expected to be 60 — 64 US dollars per barrel
(1) The world economy in 2007 is likely to grow by 4.3 percent, slightly increases from the
assumption of 4.2 percent in the previous projection. Japan and Euro area economies are revised upward, from
1.9 and 2.1 percent to 2.3 and 2.5 percent respectively, which substitute a slowdown of the US economy that
is revised downward from 2.7 to 2.2 percent. However, world economic growth for 2007 is expected to decrease
from 4.9 percent in 2006 and 4.4 percent in 2005. This due to the slowing economic growth of key economies
such as the US, Euro area, China, Japan and Asia, as a result of tightening monetary and fiscal policies in
China, Japan and Euro area. In addition, the US economy is slowing down in response to decreasing in
investment of residential construction and real estate sectors. Moreover, a decrease of investment in US,
Euro area, Japan and China and slowdown in electronics cycle led to a slowdown in Asian economies such as,
Korea, Taiwan, Malaysia and Singapore. Besides there was an impact from high oil prices since the latter
half of 2005. Moreover, Euro area, China and the US still face risks of high inflation due to increasing oil
price in this year.
The foreseen continual structural changes of the world economy essentially features a more
balanced growth distribution over diverse countries, offsetting the US economic deceleration and undergoing
adjustments towards a more stable global growth. Most notably in 2007, China, India, Japan, other Asian
countries and Europe foresee a fair expansion path owing to the benefits reaped from intraregional trade,
thus mitigating the dampening effect from the US deceleration. The projected changes and risk factors
impending on the global economies during the course of this year are accounted as follows:
(1.1) The US economy tends to expand at a rate below its potential capacity. Private
consumption continued its role as the main factor in support of economic growth going forward, due to low
unemployment rate of 4.5 percent, increasing non-farm payroll, the depreciation of US dollar, and the
economic expansion of major trading partners in favor of export growth this year. However, there are
downside risks associated with the US economic outlook as follows:
(i) The slowdown in the real estate sector has yet to fade and will impose
negative influence economy-wide, while the requirement for housing loan approval has increasingly been
stringent. Moreover, sub-prime mortgage would lead to property foreclosure in the long term, thus causing
more excess inventories of housing stocks.
(ii) Inflation risk still prevails, particularly costpush inflationary
pressure as prices of oil and consumer goods are likely to increase. In addition, tightness in the labor
market would pose upward pressures on wages. A slowdown in labor productivity caused wages per labor unit to
increase by 1.5 percent in the first quarter, making it impossible for business to maintain its grip on
cost. Therefore, the risks to inflation remain and it is expected that the Federal Reserve would maintain
the policy rate at 5.25 percent throughout the remainder of year 2007.
(1.2)The Japanese economy in 2007 will experience growth that is driven by a
considerable exports growth figure, a recovery of consumption expenditure and a fading deflationary
pressure. Land prices are starting to rise while inflation rate begins to stabilize and excess productive
capacity has receded. Nevertheless, once taking into account the observed surplus in technological goods
stock along with a low level of orders made for the purchases of machineries, private investment is still
expected to slow down further over the course of this year, thus posing limitation on overall economic
expansion. Load credits also grow at a slow pace where wages remain stagnant, allowing room for further
expansion in household consumption later this year. Hence, shortterm uncertainties that befall on the
Japanese economy will originate from interest rates that rise too quickly, placing its economic recovery
process under a tight position.
(1.3)The Eurozone economy still exhibits favourable prospects for growth, recording an
improved rate of growth in investment, compared with 2006 — an observation which partly owes its cause to
the recovery of the German construction sector. Underlying factors for investment growth will include an
increase the exploited production capacity utilization level.
(1.4)The Chinese economy still faces favorable prospects for growth supported by
expansion in investment and exports. In the first quarter, fixed capital investment grew by 23.7 percent
while exports grew by 27.9 percent. Once the quantity of domestic retail sale growth of 14.9 percent is
taken into account, the economy exhibits a more balanced growth. The figure reflects a gradually increasing
role of the private consumption on the overall economy. There exist however short-term concerns regarding
the sizeable surplus in trade balance as well as in the current account which may reach 9 — 10 percent of
GDP, generating upward pressure on the RMB and, consequentially, triggering trade conflicts between China
and the US. The US in turn is under consideration to undertake a more serious retaliatory trade action.
Throughout the period of attempts to counter the upward pressure on the RMB and keep it within the targeted
range, the Chinese economy saw a huge surge in foreign reserves to 1.2 trillion US dollars. In order to
relieve the upward pressure on the RMB and prevent an overheating of the economy, the Chinese authority has
implemented several measures to control the economic situation in the coming phases, such as:
(i) Granting permission for Qualified Domestic institutional Investors (QDII)
to invest in foreign stock markets.
(ii) Imposing tariffs on the exports of chemical fertilizers at 10 — 20
percent, effective from 1 June 2007 and planning to impose tariffs on 142 other export items at 5 — 10
percent while reducing the tariffs on 209 import items, effective from 5 June this year.
(iii) Increasing the reserve requirement to 11.5 percent of the total deposit —
a measure designed to prevent an economic overheating and stock market bubble. (iv) Expanding the daily
exchange rate trading range from +/- 0.3 to +/- 0.5
(2) Dubai crude oil price is expected to be around 60 — 64 US dollars per barrel, slightly
increased from 61.52 US dollars per barrel in 2006. This assumption is revised upward from 55 — 60 US
dollars per barrel assumed in the projection in March 6, 2007. However, this assumption is very close with
the previous projection and the average price in 2007 would likely to be in the neighborhood of 60 US
dollars per barrel.
(3) Export and import prices slowdown. It is expected that commodities’ prices in the global
market remain on an upward trend, but apparently with a decelerating rate, as a result of increasing
manufactured goods prices in 2006, which were pushed by increasing oil and raw materials prices. It can be
seen that prices of steel, gold computer parts and electrical appliances were already at peak and started to
cool down in the late of 2006. In addition, a slowdown in world demand would create intense price
competition. Despites the continuing increase in demand for agricultural products continue to increase,
export prices of rice, rubber, cassava and corn, are expected to slowdown as well. Meanwhile, oil palm price
has increased thanks to the rundown stock in Malaysia. Average export price, in US dollar term, is assumed
to increase by 4.55 percent higher than 4.0 percent assumption of previous projection, but declining from
5.2 percent growth in 2006. Import prices are expected to increase by 4.5 percent, revised up from 3.06
percent assumed previously due to the change in crude oil prices, but slowdown from 6.5 percent in 2006.
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