Oil and weather, risks to Pacific economies

Oil and weather, risks to Pacific economies

Agence France-Presse, Singapore

Oil, weather and assessing the value of holding U.S. dollar assets posed key risks to Pacific economies, a major international think-tank said Tuesday as fears over the economic impact of the Sept. 11 terrorist strikes dissipated.

With the notable exception of Japan, all other economies in the region would show signs of recovery this year, the Pacific Economic Cooperation Council (PECC) said in its latest "Pacific Economic Outlook" report.

"There is less uncertainty about the key elements of the short-term outlook than six months ago," it said.

Economic growth in the region "is expected to accelerate in 2002, but still remain below three percent. It will push towards four percent in 2003," PECC said.

But the report outlined potential pitfalls ahead and questioned "what makes the holding of United States dollar assets relatively more attractive? Will it continue?"

According to PECC projections, the U.S. current account deficit would swell from US$390 billion in 2001 to $560 billion in 2003, higher than the total deficit for the Pacific economies of $480 billion.

Behind the change is a strong growth in imports which is a critical contributor to growth in the rest of the Pacific.

"This position implies a substantial draw on funds from the rest of the world," the report said.

"The Europeans and the Middle East economies become more important 'savers' for the United States in this scenario ... but can the capital markets sustain this level of deficit?"

PECC forecasters noted that oil prices were currently around $25-25 per barrell, which is above the long-term expectation of $18-20, and there was a risk of a price spike if supplies from Iraq were cut off.

On the weather front, the odds of a new El Nino weather pattern were put at 50 percent, with the main effect expected in mid-2003.

The consequences included drier conditions in the western Pacific with "significant implications" for countries with large agriculture sectors, while heavier rain in the east put the United States at greater risk of storm damage and posed "substantial risks" to fishing for Peru.

Asia-Pacific economies are recovering from a devastating performance in 2001 when the weighted average output grew just 1.2 percent.

It was the second worst performance since internationally- oriented growth in East Asia was established in 1950, with output growing 0.9 percent in 1998 at the height of the Asian financial crisis.

Of the major economies in the region, PECC saw growth of 2.5 percent in the United States this year, China would remain above 7.5 percent but Japan would stay in negative territory because of low-level domestic demand.

Latin American economies, headed by the recovery in Mexico and expected strong growth in Peru would grow a bit slower than East Asia in 2002, and about the same rate next year.

Last October, PECC expressed concern at the potential crippling effect of the Sept. 11 terrorist attacks in the United States, but in its latest report it says the effect on consumer and investor confidence appears to have been short lived.

Aggressive monetary policy reactions also appear to have been effective, and while there were mixed signals on the cost of transactions for trade and travel "the effects are not significant in the context of the outlook for this year and next."

The PECC assessment of the economic outlook in the Asia- Pacific region was drawn from Australia, Canada, Chile, China, Colombia, Ecuador, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Peru, the Philippines, Singapore, Taiwan, Thailand, the United States and Vietnam.