Global Economic Fluctuation and Implications for East Asian Investment Cooperation

1. Global Economic Fluctuation and Implications for East Asian Investment Cooperation FENG Xingyan China Foreign Affairs University May 2008

2. Crucial issues about the global economy in 2008 • Will the US economy slip into recession? • What are the risks for the rest of the world? • Can the robust growth of global economy be sustainable?

3. Worst housing market crisis in US history • Housing starts have fallen sharply (more than 40%), while new home sales falling even more (over 50%) • Thus prices already down 6% nominally or 10% (in real term) from peak • Home prices need to fall 20% to 30% before them bottom up

4. Risks of systemic financial crisis in US • Contagion from subprime to near prime and prime • Spreading to consumer credit, corporate credit markets • Broadening deterioration of credit in banks and other financial institutions • Total potential financial losses up to $945 billion

5. Why US recession? • Private consumption is over 70% of GDP • US consumers used houses as their ATM machine • While home prices falling sharply, US consumers/households are debt-burdened • Severe credit crunch in mortgages spreading to consumer credit • Faltering private consumption will trigger the economy into recession

6. Vicious cycle between US recession & financial crisis • The US will experience a mild recession (at least four quarters starting in Q1 of 2008) • The recession will sharply increase financial losses and lead to even more severe credit crunch • Risks of more severe credit crunch will in turn threaten economic growth

7. Channels of recoupling and globalinterdependence • International transmission of financial turbulence • Effects of weaker dollar on other countries’ competitiveness • Dollar depreciation and commodity prices: high prices of oil, energy and food

8. Which countries are most at risk? • Industrialized countries with inflated housing price relative to fundamentals: UK, Spain, Ireland, Italy, France • Main trade partner countries: Mexico, Canada, East Asia • Emerging markets with heavy debts and large external deficits • Developing countries, especially the poorest and primary exporters

9. Global economic prospect • The slowest pace of global growth since 2002 • Growth in industrial countries is being most affected by financial turbulence • Growth in emerging and developing countries is slowing down, while still above the trend

10. Implications for East Asian investment cooperation • Concerted actions to tackle the plunging oil and food prices • Measures to enhance inner-regional demand in order to reduce the reliance on external markets • Mechanisms to make full use of large amounts of international reserves

11. The trend of dollar exchange rate

12. Soaring oil and food prices

13. Global economic slowdown

14. Slowing-down economies

15. Resilient economies