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 global interdependence  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