Recent developments

Amid a sharp slowdown in global demand and a sudden stop in capital flows, growth in developing East Asia and Pacific slowed to 8 percent in 2008 from a record high 11.4 percent in 2007.
The steep drop occurred despite policy easing and other measures taken by the authorities in most countries to support activity.

With exports sharply down, companies moved to cut production and investment, while households have curbed consumption amid rising layoffs and economic uncertainty.
Countries more dependent on exports, especially on single products or single markets, have seen activity fall faster and, in general, harder.

Growth began slowing in most countries in the second quarter of 2008 and weakened sharply by the fourth, when all newly industrialized economies (NIEs) including Hong Kong, China; the Republic of Korea; Singapore; and Taiwan, China, were in recession and output was contracting in Malaysia, the Philippines, and Thailand, measured in seasonally adjusted annual growth terms (saar).
The pace of economic expansion slumped further during the first quarter of 2009, with GDP in several NIEs falling at double-digit rates, and growth in the developing region slumping to 3.5 percent (saar).

Still, high-frequency indicators, such as manufacturing production, suggested that the pace of decline was beginning to moderate.

China remains a brighter spot within the region and the global economy, amid signs that the fall off in economic activity may be reaching a bottom there.
The country is weathering the financial and economic crisis better than many others because it does not rely on external financing, East Asia and Pacific production dropped sharply but shows signs of bottoming out Industrial production, percent change (saar) banks have been largely unscathed by the international financial turmoil, and it has the fiscal and macroeconomic space to implement forceful stimulus measures.

A large government investment program, equivalent to 12 percent of 2008 GDP, was announced in late 2008.
And combined with monetary easing and other measures, domestic demand appears to be bottoming out, partly offsetting weak external demand and the effects of earlier efforts to combat overheating.

Real GDP growth eased to a 10-year low 6.1 percent in the first quarter of 2009 (year-on-year) from 9 percent for 2008 as a whole and a record 13 percent in 2007.

Indonesia’s slowdown came relatively late and, so far, has been more moderate than that of many other countries in the region.
Though the expansion of all components of GDP slowed in late 2008, growth for the year amounted to 6.1 percent, a pace little changed from 2007.

But further decline in exports and slower consumption and investment spending caused growth to fade to 4.4 percent in the first quarter of 2009 (year-on-year).
In Thailand, contracting foreign demand combined with the impact of political uncertainty weighed heavily on economic activity, transforming the slow expansion of early 2008 into contraction by the fourth quarter at a sharp 22 percent pace (saar), while output continued to decline at a 7.3 percent annualized pace during the first quarter of 2009.

Cambodia experienced the sharpest growth slowdown in developing East Asia and Pacific.
Exports, most of which are garments shipped to the United States, have suffered badly, as has construction after a sharp downward correction in housing prices, as well as lending and tourism.

Real GDP growth slowed to 6.7 percent in 2008 following 10.2 percent gains in 2007.
In contrast, Vietnam’s growth slowed by much less in 2008 as the government tackled the threat of an overheating domestic economy decisively starting in late 2007.

In response to the first shock of the current crisis, the authorities shifted emphasis from growth to stabilization in March 2008.
By November 2008, they shifted once more to supporting economic activity through large interest rate reductions, injections of liquidity, and a fiscal stimulus package.

The slowdown in growth was limited to 6.2 percent in 2008 from 8.5 percent in 2007.

Facilitated by declining inflation (consumer prices have eased substantially across East Asia as the food and fuel hikes of 2007–08 had more-than fully unwound by mid-2009), and in response to weakening economic activity and the impacts of the international financial crisis, monetary authorities in many countries have cut key policy interest rates and employed other measures to help sustain domestic liquidity and the availability of credit.
Against a background of sound banking systems in most countries, these measures have ensured that liquidity in local currency has remained broadly adequate, and interbank rates have declined or remained stable.

Policy actions included reductions in key central bank policy rates in all middle-income countries and Vietnam, cuts in rates for minimum required reserves (China, Indonesia for dollar deposits, Malaysia, the Philippines, and Vietnam), increases in rates paid on required reserves (Indonesia and Vietnam), and extensions of the coverage and maturity of central bank obligations.
The central bank of China also added to liquidity by redeeming local-currency assets earlier. Several countries also extended their deposit guarantee schemes to cover most or all deposits.

The middle-income countries of East Asia are actively using fiscal policy to boost domestic demand.
The stimulus packages in aggregate are equivalent to 3.6 percent of regional GDP, with the measures to be implemented in 2009 amounting to another 1.7 percent of GDP and most of the remainder to be delivered in 2010.

The role of automatic stabilizers is smaller in East Asia than in other regions, leaving the deterioration of fiscal balances broadly in line with that of the more developed countries.
Nonetheless, the developing countries of East Asia have been more forceful than other groups in delivering support to economic activity.

All middle-income countries have introduced discretionary fiscal stimulus packages.
The low-income countries, typically with limited or no fiscal space and weak or limited absorptive and administrative capacity, have been working to obtain a boost in external aid to create room for additional outlays.

Discretionary cuts in tax rates and increases in spending have combined with lower revenues in line with weaker growth and declining commodity prices to increase fiscal deficits throughout the region.

The largest increases have been in China and Thailand, countries considered to have the largest available fiscal space.
There are substantial variations across fiscal packages, notably in the size, in the share of tax cuts versus expenditure increases or other measures, and in whether the proposals target just 2009 or 2009–2010.

The packages in China and the Philippines incorporate measures to be financed by both the public and private sectors. In contrast, the package in Malaysia includes sizable credit guarantees and equity investments that do not add to the public sector deficit.