"2003 APEC Economic Outlook" Forecasts Rebound, Warns of Potential Concerns and Estimates Costs of SARS

The '2003 APEC Economic Outlook' Report forecasts that a rebound in the United States' economy "should provide enough sparks to boost economic growth in the APEC region."

However, despite projections of expected economic growth of 2.5 percent in 2003 and 3.5 percent in 2004, the report notes that a number of factors remain that will restrain brisk recovery.

This year's Economic Outlook Report, which is the ninth in the series produced by the APEC Economic Committee (APEC EC) also features information on the economic impact of SARS on the APEC region.

The report will now be presented to APEC Ministers on October 18 in Bangkok.

On its assessment of the economic outlook of the regional and global economy, the report forecasts that "a stronger recovery will finally get underway before the end of 2003 and then shift into a higher speed with sustainable strength next year."

With the SARS outbreak being brought under control and as the military situation in Iraq stabilizes, the report forecasts that the global economy will regain its strength gradually.

"The rapid end of the war in Iraq has already significantly improved the economic prospects of the United States, the Middle East and the rest of the world and has discouraged OPEC from pushing up oil prices.

"It is worth noting that the 25.0 percent post-Iraq decline in global oil prices by itself is a major boost to consumer discretionary income and business profits. The favorable outcome of the Iraq war has also reduced the geopolitical uncertainties that have been depressing consumer and business confidence for the past two years."

The report also notes that disinflation is likely to continue in the near future.

"Inflation is generally low or decreasing in core terms. Although US inflation has tended to pick up a little, reflecting rising energy prices and stronger import prices resulting from a weaker dollar, it will remain moderate.

"As higher energy prices unwind, inflation should slow, consistent with the negative output gap prevailing over the entire projection period."

While the 2003 Economic Outlook Report forecasts a US-led rebound over this year and the next, momentum will depend on how far major economies alleviate a series of potential problems.

These include a major cyclical risk that private consumption could wane before investment recovers with the report stating that "As consumers in many economies are saddled with heavy debts, business spending in this cycle is not expected to grow as briskly as in the previous business cycles."

The report also warns that already-swollen fiscal deficits in major economies will result in "little room for maneuver left to increase discretionary public expenditure to stimulate domestic economies."

Diverging external imbalances and the exchange-rate adjustment process for major economies is another concern noted in the APEC EC Report.

In particular the report notes "the large current account deficit in the United States continues to rise and is set to widen to 5.5 percent of GDP by 2004. In contrast, Japan's current account surplus is expected to widen to 3.9 percent of GDP in 2004 from 2.1 percent in 2001."

Finally, the report notes that geopolitical tension remains a latent source of major risk to future economic recovery.

"Although the military conflict in Iraq has largely abated, the international community may face new regional uncertainties from the Arab-Israeli conflict and the North Korean nuclear crisis.

"In particular, the deterioration of the nuclear issue and geopolitical instability in the Northeast Asia might have a negative effect on the international financial flows and external trade of the economies in the region."

The SARS epidemic is cited by the report as having "had a serious, but not overwhelming, economic impact on the APEC region.

"The economic cost has been estimated to be in the range 0.5 percent to 1.0 percent of annual GDP growth for many of the economies of the APEC region."

The report breaks down the economic consequences of SARS into the "direct impacts" that are yet to be well documented and "indirect impacts" on areas such as tourism and hospitality.

"The direct impacts include lost output and productive time of the stricken, as well as the health care and crisis management costs.

"The indirect effects include those that resulted from public behavioral changes resulting from the outbreak and the public's perception of it."

The "2003 APEC Economic Outlook" report will be posted on the APEC Secretariat Website after it has been officially presented to APEC Ministers on October 18.