Growth in Emerging East Asia is expected to exceed 8 percent in 2007 for a second year in succession and to moderate only slightly in 2008. Downside risks to the outlook have also increased, but the region’s ability to weather near term global volatility allows countries to remain focused on advancing long term development goals.

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East Asian growth accelerated in 2007, led by domestic demand. The outbreak of the US sub-prime crisis has had little adverse impact on East Asia so far, and its impact on the region through slower import growth in the developed countries should be modest. New highs for oil prices, which are likely to remain elevated and volatile over 2008-09, will test the solidity of the East Asian and global economic expansions in the next year.

While downside risks to the outlook have clearly increased, if a US recession were to materialize it would likely be accompanied by a significant but not severe decline in East Asian growth. And a poverty milestone: the number of people living below $2 a day in East Asia is estimated to have fallen below 500 million in 2007.

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Developed world growth has already slowed and could slow further. Hefty adjustments in growth reflect the depressing effects of the sub-prime crisis and the associated tightening of credit markets that began in August, the unexpectedly deep recession in the US housing market and the impact of higher than previously forecast oil prices. Yet China’s growth is expected to remain strong.

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Foreign exchange reserves in Emerging East Asia are likely to increase by a record amount in 2007, and economies face difficult policy tradeoffs in managing balance of payments inflows on this scale.

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