Full Report - Subregional Office for East and North-East Asia - escap

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2013
Box 1.1. How has policy uncertainty in the euro zone and United States affected Asia and the Pacific?
In the past few years, the world economy has been characterized not only by lower growth but also by increased economic
uncertainty. Near-term economic prospects have become more unpredictable, with sharp upward and downward revisions in
growth projections. Policy uncertainty in developed economies is the main factor behind this environment. Examples of issues
that are triggering this unclear environment include divided negotiations on the fiscal cliff and debt ceiling in the United States,
a possible breakup in the euro zone, and the timing and size of monetary injections by various monetary authorities.
Uncertainty in advanced economies threatens global economic stability. Consumers delay their spending on durable goods and
housing due to heightened job insecurity. Businesses are reluctant to expand operations given less predictable demand. Financial
institutions also tighten lending standards as perceived default risks escalate. In addition, massive inflows and sudden reversals
of foreign capital, particularly in the form of short-term portfolio investments, add volatility to domestic financial markets.
The stalled growth in the United States in late 2012, underpinned by widespread concerns over the outcome of the fiscal cliff
negotiations, emphasized the significance of economic uncertainty. a
Economic uncertainty appears to have risen in Asia and the Pacific in recent years. The volatility b of daily stock market indices,
a high-frequency variable that is very sensitive to changes in market sentiments, surged in 2008-2009 relative to the pre-crisis
period (see figure A). This finding also remains generally true when measured over the longer period of 2008-2012, a period in
which episodes of macroeconomic upswings and downswings occurred. Similarly in the real sectors, export-oriented economies,
such as Malaysia, Republic of Korea, Thailand and Hong Kong, China registered more pronounced changes in inventories as a
share of GDP during the crisis years of 2008-2009. Rapid destocking and restocking of inventories often indicate large mismatches
between anticipated and actual shipment orders. Overall, fluctuations in the trade and domestic components of GDP have pushed
up volatility in output growth in most regional economies (see figure B).
Based on a counterfactual analysis, ESCAP finds that if advanced economies were exposed to lower policy uncertainty between
2008 and 2012 than actually observed, the annual output levels of Asia-Pacific economies would have been 3% higher on average
(see panel A in figure C). Here, it is assumed that a less volatile macroeconomic environment benefits growth performance through
35
30
25
20
15
10
Figure A. Movements in regional stock markets
have become more volatile
5
Malaysia
Coefficient of variation of daily stock market indices
Republic of Korea
Philippines
2008 - 2009
2008 - 2012
2000 - 2007
Singapore
Sri Lanka
Hong Kong, China
Taiwan
Province of China
Thailand
Turkey
Indonesia
India
China
Viet Nam
Russian Federation
Growth volatility during 2008-12
Figure B. Output growth volatility also rose or remained
high in many Asia-Pacific economies
120
100
80
60
40
Coefficient of variation of the absolute values of quarteron-quarter,
seasonally-adjusted GDP growth
THA
IND
KOR
MYS
PHL
SGP
TWN
TUR
HKG
RUS
IDN
20
20 40 60 80 100 120
Growth volatility during 2000-07
Source: ESCAP, based on data from CEIC Data Company Limited.
Available from http://ceicdata.com/ (accessed on 15 March 2013).
Source: ESCAP, based on data from CEIC Data Company Limited.
Available from http://ceicdata.com/ (accessed on 15 March 2013).
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