A marked pickup in real GDP growth in the Asian economies during the first half of 2002 was sparked by a recovery in manufacturing exports to the United States, reinforced by strengthening regional domestic demand. Trade within the region is also being boosted by the ongoing shift of regional production facilities to China. Despite the recovery in 2002, domestic demand in several economies is vulnerable to downside risks arising from continued internal financial strains and other structural problems. In China, these problems are likely to lead to a progressive weakening in domestic demand and real GDP growth in coming years unless further reforms beyond those now officially planned are undertaken.

Economic growth in South-East Europe and the Newly Independent States, whose trade is mainly linked to European countries, has benefited little from the recovery in the United States but continues to be underpinned by a strong expansion in internal demand. Real growth is expected to remain robust in 2002, at around 4 per cent both for Russia and for the region. For Russia, growth of this order may be sustainable in the medium-term, mainly as a result of better management of Russia’s large private enterprises and improved macroeconomic policies. However, a stable macroeconomic environment still depends critically on effective and prudent management of budgetary and foreign exchange windfalls stemming from current high oil prices, so that major current account and fiscal imbalances are avoided if oil prices weaken.

The problems of Argentina and Brazil, and their spillover to neighbouring economies, have led to a weak economic performance of South America in 2002. In Brazil, real GDP has been stagnant, due in part to the political uncertainty surrounding the October elections. Argentina’s crisis may be bottoming out, although the signs of recovery are fragile. Economic recovery is conditional on a smooth political transition and maintenance of prudent macroeconomic policies in Brazil and progress on reforms in Argentina.