(Public Policy and Economic Research Group)

Executive Summary

Global economy maintains firm growth driven by high growth among BRICs and other emerging economies

A feature of the worldwide boom since 2004 has been the contribution made by high economic growth (especially vigorous growth infrastructure investment) among the BRICs and other emerging economies as the engine of growth, and as the price of primary commodities such as crude oil has risen, the global circulation of oil money and other funds from resource exporters has generated further demand. The U.S. economy will slow briefly due primarily to adjustment in housing investment, but this is projected to come to a close in the second half of 2007 when growth will again begin to accelerate against the backdrop of the healthy state of corporate earnings and the employment and income environment. In Europe, steady growth will continue led by growth in capital investment and personal consumption. Emerging economies such as the BRICs will also experience continued high growth as they manage to achieve soft landings. Global growth in real GDP will hold firm, despite declining slightly from 4.0% in 2006 to 3.4% in 2007, and will register continued firm growth of 3.7% in 2008.

Japanese economy to regain momentum and begin to grow from second half as personal consumption leads the way

Growth in capital investment, until now the engine of Japan’s economic growth, has entered a lull. Inventory adjustment in mining and manufacturing is expected to take around six months, with the electronic component and device sectors bearing the brunt, causing a lull in growth in the first half of fiscal 2007.

However, exports will show solid growth led by demand in the BRICs and other emerging economies. Personal consumption, which is expected to assume capital investment’s mantle as the engine of economic growth, is also projected to exhibit higher growth in fiscal 2007 propelled by growth in incomes (including bonuses) and improved consumer sentiment against the backdrop of healthy employment conditions, and Japan’s real GDP growth will accelerate from 1.9% in fiscal 2006 to 2.0% in fiscal 2007 and 2.8% in fiscal 2008 (including a boost of around 0.2% assuming a hike in the consumption tax rate from 5% to 8% in April 2009).

The decline in the GDP deflator is expected to come to a halt (recording zero growth) in fiscal 2007, and the economy’s emergence from deflation is likely to bring home to the general consumer that the economy is really growing again.

Overheating of Chinese economy poses risk to global economy

It is hoped that growth in exports to emerging economies including China and the other BRICs will shore up economic growth, preventing the slowdowns in the U.S. and Japan in the first half of 2007 from developing into recessions. However, there are concerns over the possible overheating of the Chinese economy. Although the Chinese government aims to achieve a soft landing by bringing growth down to around the potential growth rate of 9% ahead of the Beijing Olympics in 2008, whether the control necessary to achieving this can be effectively exercised will need to be watched closely.