According to ABARE’s Economic Review for the December quarter, world economic growth is assumed to increase from 3.2% in 2003 to 3.8% in 2004, compared with 2.7% in 2002.
A significant rebound of economic growth in China has provided support in many Asian countries, such as the Republic of Korea and Singapore. Higher economic growth in the United States is also expected to provide support for activity in Western Europe and Asia.
Economic growth in Australia strengthened in mid-2003, whilst in the remainder of 2003-04 growth is expected to remain robust. Escalation in consumer spending is likely to continue and business investment expenditure is expected to increase.
ABARE’s short term outlook for the Australian exchange rate was it is likely to continue to be influenced by the strength of the US dollar. “There are concerns in financial markets that large trade and current account deficits, together with historical low interest rates, in the United States will continue to place downward pressure on the US dollar,” it said.
If this was to occur, the US dollar could remain weak against other international currencies in the
short term, leading to the Australian dollar being above the US70c level.
“However, the significant weakening in the US dollar appears to be in contrast to the outlook for
stronger economic growth, and hence improved company profits, in that country. If the outlook
for US economic growth continues to improve and the likelihood of a significant increase in US
interest rates emerges, then there is a probability that capital inflows could increase in that
economy and result in an appreciation of the US dollar against international currencies. Under this
scenario, the Australian dollar could gradually depreciate against the US dollar, moving to a
level below US70c,” ABARE said.
The pace of economic recovery in the United States has increased markedly since mid-2003, primarily reflecting increases in government spending and increased consumer spending. ABARE said partial indicators point towards the pace of economic growth remaining strong in the short term.
Depreciation of the U.S. dollar against other major world countries also had a positive effect on exports. This depreciation has a major influence for the outlook in other parts of the world. Since early last year, the U.S. dollar has depreciated significantly against other major world currencies.
Economic activity in Japan has increased significantly since late 2002. ABARE said indicators point to continued improvements in the manufacturing and export sectors. However, despite stronger economic activity since late 2002, considerable uncertainty remains in the economic
outlook for Japan.
“There are a number of factors that could significantly influence Japan’s economic performance.
Internally, the downside risks mainly stem from weakness in the financial sector, slow structural
reform and continued price deflation. While recent economic surveys indicate a significant
improvement in consumer sentiment and business confidence, Japan’s economic growth in the
short term remains dependent on its export performance,” the report said.
The strength of Japan’s economy largely rides on the United States as the consumer of the majority of Japanese exports. Increased economic growth in the U.S., which has been predicted, is likely to provide support for Japan.
Republic of Korea
Compared to growth in 2002, economic performance in the Republic of Korea weakened significantly in 2003. The main culprit being private consumption spending which has contracted significantly.
ABARE said the main contributor to economic growth has been an increase in exports, which has prevented the economy slipping into a recession. Strong growth was recorded in exports to the United States, China, India and the Russian Federation.
Growth in exports is expected to remain a key driver for economic growth in 2004, said ABARE. This growth is at risk however, from factors such as consumer spending which could remain weak if political uncertainty, corporate scandals and labor unrest continue in the short term.
Economic conditions in Western Europe remain relatively weak, however indicators have shown economic activity is likely to recover. Trade performance has remained weak mainly due to the appreciation of the euro against the U.S. dollar.
The largest regional economy, Germany, has shown signs of gradual recovery after a recession in the first half of 2003. France is also showing signs of recovery after the slow down in mid-2003. In the short term, economic recovery in France and Germany is expected to be gradual.
In the United Kingdom, the economy is increasing steadily and growth is expected to be stronger than other major regional economies, ABARE said.
Economic growth in China strengthened markedly in late 2003 with manufacturing and consumer spending star performers.
“The significant increase in economic activity has fuelled growing concerns that growth in some
sectors of the economy may have become unsustainable. In response, China’s government has
taken steps to absorb excess liquidity (by issuing commercial bills) and rein in lending growth in
the financial sector (by increasing the deposit ratio requirement for commercial banks),” ABARE said.
The agency went on to say if these measures proved successful, they were expected to lead to a
gradual easing of strong economic growth to a more sustainable pace.
Another factor that could have a major impact on the economy is talk over a possible revaluation
of China’s currency. ABARE said from China’s perspective, a significant increase in the value of
its currency will lead to a loss in export competitiveness as well as the risk of higher unemployment. There are also concerns that a significant revaluation of China’s currency could lead to instability in its financial system.
East and South East Asia
In a recovery from SARS, the regions economic activity has strengthened considerably. While signs of strengthening domestic demand are emerging, export performance in this region has also improved in response to increased economic growth in the United States.
In the short term, economic growth in Indonesia is unlikely to strengthen significantly, largely as a result of the adverse effects on business investment spending of the recent terrorist attacks in Jakarta, ABARE said. In Thailand, the economy has performed strongly in 2003, with economic growth averaging around 5.8%.