While it can be argued that the now two-week old conflict in Iraq remains consistent with a short-war scenario, risk of a longer war could potentially delay a hoped-for second-half pickup in global growth. At the same time, the SARS outbreak that has sickened 1,700 people and killed 58 in Asia has raised the threat of a major epidemic. Even if the disease's spread is brought under control quickly, it's still likely to dampen tourism further, on top of the war's negative impact since tourism is a vital component of many Asian economies.
These twin factors have led MMS International to reduce its gross domestic product forecasts for three major economies in the region by half a point for the year. We have lowered our 2003 GDP projections for Singapore from 3.5% to 3%, for Malaysia from 5% to 4.5%, and for South Korea from 5.5% to 5%.
NOT SUCH A DRAG. The situation for Hong Kong, where authorities are desperately trying to stem the pathogen's spread, is a more difficult call. With the effectiveness of quarantine and other containment efforts difficult to assess, we will cut our growth projection for 2003 from 3% to either 2.7% or 1.9%, depending upon how the latest dramatic government measures play out over the near term.
For some perspective on the current situation, it's worth recalling the aftermath of the September 11 terrorist attacks. Most forecasters expected them to exert a notable drag upon the world economy, delaying recovery from the 2001 recession. Surprisingly, the global impact was largely limited to a sharp downturn in worldwide travel. Recovery from recession wasn't delayed in either the U.S. or Singapore, both resuming positive quarter-over-quarter growth during the fourth quarter of 2001 after contracting during prior quarters. A rebound in exports helped fuel a pickup in growth across Asia in the first half of 2002.
Though recent economic data from both the U.S. and Europe have displayed a softer tone, coinciding with the lead-up to hostilities in Iraq, it should be emphasized that so far this has been largely limited to sentiment-driven indicators like consumer confidence. Data available from Asia for January and February generally show exports and production holding up near fourth-quarter levels, after finishing 2002 near highs for the year.
WELL-BEHAVED OIL. This also applies to Japan, where GDP posted an unexpected fourth consecutive quarter-over-quarter increase during the October-December period, with available data trending sideways so far in 2003. The recent pattern across the region can be viewed as a pause -- as investors and businesses wait for the uncertainty regarding the Iraq conflict and the SARS outbreak to lift.
Regarding the war in Iraq, we note that oil prices remain well behaved to date, raising hope that the world economy will not slide into recession, with the outlook for growth to pick up during 2003's second half after the military conflict ends. An oil-price spike arising from the Iraq conflict was seen as a potential drag on the world economy (as happened during the run-up to Gulf War I in 1990-91). So far so good -- though the threat of disruption to Mideast oil supply still lingers.
Our projections are also based upon the assumptions that SARS will be controlled soon and, though exerting an ongoing drag on tourism this year, not spiral into a disastrous pandemic. Of course, given the unpredictable nature of disease outbreaks, huge uncertainties cloud the outlook.
Projected GDP growth in Asian economies
2003 Forecast -- Prior
2003 Forecast -- Revised
Singapore-based Cohen is an economic forecaster for MMS International