Introduction

The year 2002 started on an optimistic note as growth in the United States picked up in late 2001 and the first quarter of 2002. This gave rise to the hope that the American economy was on the way towards recovering from the turmoil of the previous year and the recovery will in turn lead to beneficial effects for Southeast Asia due to the extensive trade and investment links between the two. However, by the middle of the year, the sustainability of the recovery in the United States started to appear questionable as the seemingly strong pace of growth in the gross domestic product (GDP) in the first quarter of 2002 actually reflected an inventory rebound rather than an upturn in corporate expenditures.

This seemed to be confirmed by the slowdown in the economic growth of the United States in the second quarter of 2002 and the downward revision of the first quarter growth. The growth for 2001 was also subsequently revised downwards based on data revisions. Thus while the recovery of the American economy is projected to continue, its pace is expected to be much more subdued than earlier thought, at 2.2 per cent for the year 2002 as a whole and at 2.6 per cent for 2003.

At the same time the sluggish pace of recovery in Europe also led the International Monetary Fund to revise downwards the projected growth rate of this region for both 2002 and 2003 by 0.5 per cent lower than its April forecast. Concurrently Japan's economy continues to languish as the recession in 2001 is expected to continue into 2002 although a modest rebound is forecast for the year 2003. Amid the uncertainty of the recovery in the United States, Europe, and Japan, the Bali blast in October 2002 as well as the prospect of war between the United States and Iraq only served to heighten the fragility of the recovery in the global economy and its attendant impact on the ASEAN economies.