Economic activity continued to recover in the non-member Asian region throughout most of 2002, led by double-digit growth in exports. The expansion gained further momentum during the second half in China, but decelerated in Dynamic Asia in response to the renewed weakness in the United States and other OECD countries. Growth in Dynamic Asia should rebound in 2003 if OECD markets recover, but is subject to significant risks from geopolitical tensions, along with structural problems and the potential fallout from the outbreak of disease in several economies. China is less exposed to external risks, but further progress on structural reforms to achieve more balanced growth in the domestic economy are likely to be needed to sustain rapid growth in real GDP beyond the near-term.

Economic growth in Russia and other Newly Independent and South-East European States slowed to below 5 per cent in 2002. In a weak global environment, growth was mainly driven by strongly expanding internal demand, boosted in many countries by sizeable increases in wages and social benefits. Growth is expected to remain robust in 2003 at around 4 to 5 per cent, both for Russia and the region, but may slow further in 2004. In some countries, including Russia, higher growth in commodities and basic manufactures, compared to more complex manufactured goods, may increase the future vulnerability of these economies to external shocks.

South-America is slowly recovering from the regional recession of 2002. The new administration in Brazil has reassured markets in pursuing prudent macroeconomic policies and promising to undertake further structural reforms. In Argentina, the real economy is showing signs of recovery, despite the political impasse. Other countries in the region display mixed performances, with growth picking up in Chile whereas Venezuela is facing a severe recession. In addition to the restoration of confidence in the region, a demand push from abroad, notably from OECD countries, would be important to strengthen the incipient economic recovery.