Economic expansion keeps accelerating in Pacific

By Lawrence B. Krause

SANDIEGO, California, U.S.A. (JP): The economic expansion that has been in place in the Pacific region for the last several years shows signs of accelerating. The weighted average growth rate of output for 18 economies of the Pacific Economic Cooperation Council (PECC) is forecast to be 4.4 percent in 1994. This compares to 3.8 percent actually recorded in 1993.

The expansion is now reaching the high growth levels last seen in 1988-1989. It is noteworthy that both the developed and the developing countries in the region are sharing in the better economic performance in 1994. However, for the developing countries, excluding the United States and Japan, the growth rate is forecast to reach 6.4 percent.

The momentum for rapid growth in the region is forecast to continue into 1995, when a 4.2 percent weighted average growth rate is expected. This implies some moderation from the torrid pace of 1994, but still a very strong performance. Further moderation is seen in the preliminary forecast for 1996.

The concern expressed in our earlier forecast over the outlook for inflation is, if anything, more strongly felt now. The almost perfect recovery, displaying rapid growth without inflation, is now giving way to a more usual pattern of rising signs of inflation as growth accelerates. More than half of the economies forecast rising inflation in 1994 and even more in 1995.

As was true in the past, inflation does tend to rise as growth accelerates, but one should not confuse the current recovery with the experience in 1988-1989. In that earlier expansion, inflation became so serious that the recovery had to be halted in order to come to grips with the problem. The situation at present calls for the moderation of growth, not a new recession.

The fastest growing economy in the region is again China, and it is expected to grow by 11.7 percent. This is somewhat less than in 1993, but more than desired by the authorities. As a result, inflation is accelerating rather than cooling and is expected to reach 18.7 percent in 1994. The ASEAN countries and the Newly Industrialized Economies are all forecast to have excellent growth experience in both 1994 and 1995.

Singapore has produced surprisingly rapid growth beginning in 1993, and is forecast to grow by 8.8 percent in 1994 and only somewhat less in 1995 and 1996. Malaysia and Thailand are also forecast to grow by more than 8 percent. Korea is forecast to be in this high growth group as 8.1 percent growth is anticipated in 1994. Indonesia is expected to grow nearly 7 percent, which represents an acceleration for that country. Inflation has become more worrisome in Indonesia in part because of weather-related agricultural problems and shortages of cement. Inflation is expected to moderate somewhat after 1994, but remain above 7.5 percent per year.

Chinese Taipei and Hong Kong are expecting to grow around 6 percent per year over the forecast period. The Philippines, as has been the pattern in recent years, is forecast to grow less than the others at 4.2 percent in 1994, but is clearly entering a period of more robust growth than it has been experiencing in the recent past. Its 1995 growth is forecast to reach 5.5 percent.

Japan continues to follow a different cyclical path from the other four developed countries, indeed all other countries in the region. The Japanese economy is still struggling to adjust to the collapse of the financial bubble and the rise in the value of the yen, but faster growth is expected by the end of 1995. The robust economic expansion in the United States is now being reined by a combination of fiscal and monetary restraint. This will usher in a period of slow real growth from late 1994 and most of 1995. However, growth should pick up thereafter helped by strong exports. The Canadian economy is performing even better than the strong performance forecast earlier, although growth is expected to moderate slightly in 1995-96 as the government begins to tackle its high budget deficit.

The economic performance and outlook for both Australia and New Zealand are the best in recent memory. Output growth has accelerated and is forecast to reach 4.5 percent or more in both countries in 1994. Some moderation is anticipated in 1995-96, but it remains above trend. New Zealand may well have the most balanced expansion in the region and is clearly benefiting from the many years of painful economic reform through which it endured.

Domestic demand has been the backbone of the economic expansion that began in the region in 1990-1991. However, the acceleration of growth that is taking place in 1994-1995 is due to the rapid expansion of international trade. What is most notable in this region is that the same countries that enjoy rapid growth of exports also experience rapidly growing imports. Thus markets are mutually created and integration increases.

This process is not quite as smooth as this suggests. Trade and balance-of-payments imbalances do occur. As was noted in our earlier forecast, some anxiety exists over the balance-of- payments deficits of several countries in the region either because they are high in relation to Gross National Product or because they are increasing. No balance-of-payments crisis is anticipated as financing is readily available. However, interest rates have passed their nadir in this recovery and are now rising in world capital markets. This makes financing more expensive and is enough to raise anxieties.

One anxiety remains and that is over possible instability in the economy of China. China has become a locomotive for growth in the region, but there is fear that it could pull the train off the track with too rapid expansion and uncontrolled inflation. The Chinese authorities are experimenting with new instruments and new approaches to restrain growth within sustainable limits. The entire region will benefit if they are successful.

The economic dynamism, the political stability, the continuation of reforms, and the institutional evolution of the Pacific region have all been sources of attraction to other countries. The APEC meeting in Indonesia this month is another step in this development. The informal heads of government meeting called by President Soeharto of Indonesia will have representatives from all APEC members in attendance.

Even Europe is beginning to take more notice of the APEC region. This is a good development because together they can lead the world toward an era of peace and prosperity.