1.2 World economic performance in the third quarter of 2007
Global economy in the third quarter exhibited a stronger growth than the second quarter. Growth improved in all major economies including the US, Japan, Euro zone and Asian economies and exceeded earlier expectations. Nevertheless, in the first nine months of 2007, overall global economy slowed down from 2006 as a result of prolonged financial market turbulence following the sub-prime crisis in the US. Concurrently, recent surge in oil prices has also put upward pressure on consumer prices.
- The US economy expanded by 2.6 percent (or 3.9 percent, qoq, annualized rate on its advanced estimates), speeding up from 1.5 and 1.9 percent in the first two quarters. This was due mainly to stronger exports and a pickup in personal consumption as well as favourable investment in non-residential construction and machinery and equipments. However, investment in residential construction continued to fall following a housing market slump due to sub-prime problems. This led to overall investment contraction. Despite continual declines in housing starts since the second quarter of 2006, housing inventory continued at high level as a result of sharp decline in existing home sales of about 8.3 percent this quarter. Home prices, therefore, fell continuously. On stability front, inflation declined to 2.4 percent against the backdrop of slowing growth in shelter cost.
Nevertheless, inflationary pressures have increased during September and October following rising oil prices, up to 2.7 and 3.5 percent respectively.
- Euro Zone economy grew by 3.0 percent, slightly improved from 2.9 percent in the second quarter (or 0.7, qoq, sa, up from 0.3 percent in the second quarter). This was contributed by to stronger growth of the major economies —primarily Germany, France, Italy and the Netherlands following a recovery in investment. Private consumption also remained buoyant due to better employment condition and increasing consumer confidence. However, export growth somewhat softened in line with a slowdown in world demand and a strong Euro currency. Inflation increased in September and October to 2.1 and 2.5 percent respectively.
- Japanese economy grew by 2.1 percent, up from 1.5 percent in the previous quarter. Strong exports remained key driving forces and recovered private consumption was the key driver of the economy which help offset a sharp drop in residential investment as a result of the implementation of the revised building standards law, causing a bottlenecks in the approval process. Consumer price index dropped by 0.2 percent in September.
- Chinese economy remained strong with 11.5 percent growth, compared with 11.9 percent in the previous quarter. The economy still showed a double digit growth despite continued government policies to cool down the economy. Underlying drivers of the economy included strong fixed asset investment bolstered by rising profitability and expanded credits in the private sector, and favourable private consumption and strong exports. Export and import value expanded by 26.2 and 20.7 percents, resulting in trade surplus of 73.2 billion US dollars. Meanwhile, inflation persistently accelerated to 6.1 percent in the third quarter, from 2.7 and 3.6 percent in the first and second quarters, mainly caused by food price increases. In the first ten months, inflation was averaged at 4.4 percent, exceeding the 3.0 percent target set by the central bank for 2007.
- Asian economy performed well, based primarily on their stronger domestic demand in tandem with accommodative monetary and fiscal policies. This helped compensate the impact of export slowdown. However, exports were cushioned by a rise in trade with non-US markets, particularly China and India and uptrend of world commodity prices. In all, current account surpluses remained high. Inflationary pressures subsided more than expected, owing in part to currency appreciation.
- In the first nine months of 2007, world economy slowed down from 2006 owing to a more pronounced US economic slowdown as being overshadowed by the sub-prime mortgage crisis which triggered housing sector slump and global financial market turbulence. Japanese economy also experienced a moderate growth owing to softened domestic investment and declining export in automobile industry. Nevertheless, major economies
showed a better-than-expected growth, namely Euro Zone and Asian economy in particular China and India. Strong domestic demand and growing intraregional trade led economic expansion
2. Economic Prospects for Q4/2007
- In the last quarter of 2007, it is likely that positive factors will be more pronounced than risk factors. Positive factors included certain political situation and clarity about the upcoming election, low interest rate, raise in government and state agency officers’ salaries, improving confidence of manufacturing sector and businesses, and target achievement of 22.5 percent government budget disbursement (the target disbursement totalled 373,500 million baht).
- Private consumption and investment in the last quarter are on upward trends. Although export is likely to slow down in the last two months a robust export growth of 27.9 percent in October would lead export value in the last quarter to expand at a comparable rate as in the third quarter. Import growth will strengthen following investment recovery. Therefore, stronger domestic demand would offset the export slowdown in the last two months.
3. Economic Projection for 2007: expected GDP growth of at least 4.5 percent.
- Office of the National Economic and Social Development Board (NESDB) forecasts that the Thai
economy will expand at least than 4.5 percent in 2007. This based on the positive factors of high case
scenario on the previous press release in September, including world economic situation, government budget disbursement and private consumption and investment recovery. Despite higher-than-expected crude oil price, pressures on inflation have been moderate since oil consumption structure has improved and thus make adjustment process to be more resilient under higher oil prices. Baht appreciation also helped ease pressure on inflation.
- Stability remained in a good condition. Headline Inflation rate average at 2.3 percent in 2007 with 1.5 percent unemployment rate and 13,900 million baht of current account surplus or about 5.7 percent of GDP.
4. Economic Outlook for 2008
4.1 World economic outlook in 2008: The World economy is expected to grow at a rate of 4.5 percent, slightly down from 4.8 percent in 2006.
The World economy in 2008 is expected to grow at a moderate rate of 4.5 percent, slightly down from 4.8 percent in 2006. The slower pace of growth is attributable to weaker economic performances in the US, Japan, Euro zone and China. Nonetheless, there are remaining downside risks emanating from the lingering impacts of sub-prime crisis, appreciation pressures on major currencies, upward trend of oil prices since the latter half of 2007 that raise inflationary pressure and will render policy intervention difficult. The US economy is expected to grow at a rate of 1.9 percent, bellow its potential rate for the second consecutive year. Current account position is expected to improve gradually as a reduction in aggregate income reduces import demand but the real depreciation of the US currency will boosts her exports. Growth in Euro zone is expected to slow down from 2.8 percent in 2007 to 2.4 in 2008 as a result of dampening export effects from the US as well as the lagged impacts of currency appreciation and financial market correction. Japan’s economic growth is also likely to slow down due declining import demand from its major trading partners and sluggish domestic demand expansion.
Growth outlook for Asian developing countries remains robust. The strong expansion in domestic demand and intraregional trade is expected to partially offset import demand reduction in advanced economies.
Nevertheless, growth in China and India are expected to slow down slightly from 11.5 and 8.9 percent in 2007 to 10.6 and 8.4 percent in 2008 respectively, in an attempt to cool down their overheated economy and to suppress inflationary pressure that has risen since the second half of 2006. Therefore, Asia tends to slow down slightly in 2008.
Downside risk factors for the world economy in 2008 are including (i) high and volatile oil prices (ii) the correction of real estate sector in the US to sub-prime crisis and valuation losses in financial system both in the US and Europe (iii) risks emanating from international political tensions, in particular, the potential confrontation between Iran and the US over nuclear conflict.
Recent increase in oil and food prices put an upward pressure on inflation. However, as the impacts of financial turbulence persist, central banks in advanced countries are expected to be more cautious in their policy stances and stand ready for economic stimulation if adverse impacts on real activities heighten. Expansionary policy stance is expected in the US economy. Japan and Euro zone are likely to refrain from interest rate increases until inflation risks are increasingly intensified and concerns over the impacts of financial turbulence have eased. However, a number of developing countries are likely to apply further monetary policy tightening to slow down their overheated economy and to suppress inflationary pressure that has escalated since the second half of 2007.
Driven by economic slowdown in advanced economies, interest rate gap and US dollar depreciation, net large capital flow to developing countries is expected to continue in 2008. This situation puts an upward pressure on domestic currency appreciation for host countries with floating exchange rate system. Those countries with the fixed exchange rate regimes are likely to face with policy difficulties in their attempts to suppress overheated economy and inflation pressure as world inflation will be imported to their economies. In addition, lagged impacts of continued US currency appreciation increasingly affect world trade direction. The US economy is likely to experience a period of sluggish domestic demand and gradual net export expansion. Therefore, import demands in other countries are likely to become the main growth engine for the world economy.
(1) The US economy in 2008 is subjected to downside risks emanating from sub-prime crisis. In particular, to some extent the crisis will spill over to investment, household balance sheets and consumption
spending. The most recent indicators suggest that the economic correction has not yet bottomed out as consumer confidence and housing price indexes have continued to drop. Without additional report on valuation losses in financial system, the impacts of housing market correction are likely to be more sizable in fourth quarter of 2007 and in the first half 2008. Therefore, the US economy is expected to maintain only a moderate growth rate of 1.9 percent in 2008, due to the slowdown in investment and consumption spending. However, real depreciation of the US currency will contribute to the expansion of the net real export and partially offset the slowdown in investment and consumption spending. Current account deficit is expected to decline gradually from 6.2 percent of GDP in 2006 to 5.5 percent in 2008. The decline in home prices and
sluggish consumption demand are likely to help contain inflation pressure and accommodate expansionary policy stance that may be necessary for restoring economic conditions if the adverse impacts of housing market correction are stronger than previously expected.
(2) The economy in Euro zone in 2008 is expected to soften. It is expected that valuation losses in
financial sector are exposed only in some advanced economies while financial system is expected to
gradually return to normal conditions. However, trade spillover effects from the US and lagged effects of euro appreciation tend to have further dampening impacts on export growth. In addition, financial market correction that leads to cautious credit extension is likely to drag on investment and consumption spending. Overall, growth in Euro zone is expected to slow down from 2.0 percent in 2007 to 1.7 percent in 2008. Therefore, monetary policy stance is likely to be on hold until inflationary pressure escalates and concern over the impacts of financial turbulence subsides. Inflation is projected at 2.0 percent while the current account deficit is expected to increase from 0.2 percent of GDP in 2007 to 0.4 percent in 2008 due to the slowdown in the US economy and euro currency appreciation.
(3) Japanese economy is also expected to slow down. The export sector, the key driver of recent economic recovery, is facing with increasing demand uncertainties due to the slowdown in the US and
Europe. Domestic demand condition has yet to improve. Investment in both residential and nonresidential
construction decreased as a result of stricter building standards. The recovery in business sector has yet to bolster labor wage and hence stimulate domestic spending. As a result, deflationary pressure persists, although at a slower pace than in previous episodes. In overall, growth in Japan is expected to slow down from 2.0 percent in 2007 to 1.7 percent in 2008. Therefore, the current policy interest rate is expected to be on hold at least throughout the first half of 2008.
(4) Chinese economy remains robust. The solid growth is expected to hold steady at the rate of 10.6
percent in 2008. The robust growth outlook is attributable to strong investment and consumption expansion, whereby the latter is supported by an increase in employment and a better social insurance system. Trade surplus tends to decrease slightly due to an abolition of export tax rebate that raises export tax burden. On stability front, inflation pressure is expected to subside due to the lagged effects of previous policy tightening. However, inflation outlooks are subject to uncertainty in weather conditions that could potentially reduce crop production, as well as the possibility of utilities rates hike. In addition, driven by excess liquidity, the booming in stock and real estate markets over the past few years raises concerns over the ability of financial institutions to meet their obligations. This is because, in the situation of sharp stock price slump, it could adversely affect financial mechanism.
(5) Asian economy continues to expand at a solid pace. In particular, growth rates in Malaysia
Indonesia and Vietnam are expected to be higher than in 2007. Key driver of growth outlook in Asia is
strong domestic demand supporting by accommodative monetary and fiscal policies to stimulate the economy. In the mean time, export will remain buoyant following electronics cycle upturn as well as robust growth of China and India that could maintain strong trade volume within the region. However, exports will partly be offset by the expected decline in world non-fuel commodity prices. Import is expected to rise in line with
stronger domestic demand and domestic currencies appreciation. In all, current account surplus in most
countries will become smaller.
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