Slowdown in the West will eventually affect region, they warn

ASIA is expected to face a rough year ahead, as it confronts the twin problems of slowing economic growth and high inflation, said analysts yesterday.

The slowdown in the world’s advanced economies will eventually affect Asia, putting to rest the notion that Asia is immuneto the woes in the West.

The International Monetary Fund has just slashed growth forecasts for both the United States and Europe, although it said that both regions are likely to avoid a double-dip recession.

But unlike the recession that followed the financial crisis in 2009, there is no strong fiscal support from the governments to boost economic growth in Asia, Credit Suisse economists wrote in a research note yesterday.

‘Now that the Western world is teetering on the brink of recession we believe the outlook has dimmed further,’ said Credit Suisse.

‘Unfortunately there is little to suggest that large parts of Asia remain anything other than highly susceptible to growth developments in the US and Europe.’

The bank has trimmed its 2011 full-year growth forecasts for several Asian nations, including China, India and Korea.

Credit Suisse is also slashing its economic growth predictions for Asian countries for next year, noting that the economic malaise in the West will not be short-lived.

Singapore, for instance, is expected to grow by 4.5 per cent next year, down from the earlier forecast of 4.8 per cent.

‘The downturn may not prove to be all that severe, certainly compared with that during the great financial crisis, but, equally, any improvement next year looks set to be muted,’ said Credit Suisse.

Bank of America Merrill Lynch economist Chua Hak Bin offered an equally pessimistic take on Singapore’s growth prospects for the rest of the year.

He has upgraded the probability of Singapore falling into a technical recession this year, defined by two consecutive quarters of contraction.

Based on economic and financial indicators, there is now a 59 per cent chance of a recession here, up from the 41 per cent chance he had previously calculated.

Another report by HSBC suggested global manufacturing is set for a sharp deceleration for the rest of the year.

Purchasing manufacturing indexes, which are lead indicators for factory output, point to a sharp slowdown for the rest of the year, said HSBC.

‘Trade, especially, will be hard hit, which poses a major challenge to Asia’s smaller, more export-dependent economies like Taiwan, Korea, Singapore and Malaysia,’ said the bank.

But the presence of high inflation in the region also means that Asian central banks are not able to move so quickly or freely to shore up slowing growth, it said.

Central banks look to cut interest rates in order to boost growth – but low rates can fuel inflation.

‘What’s equally worrying is the sudden recurrence of price pressures. This may prevent central banks from easing swiftly to shore up growth, and could weigh on household spending just at the wrong time.’

Singapore-based electronics manufacturer Hisaka Holdings said demand for its products has dropped in recent months but is viewing the slowdown as a chance to restock its inventory.

‘This slowing down could be a good breather for the company after 10 months of mad demand rush, provided that its duration is limited,’ said Hisaka chief executive Jackie Cheng.

He added that the company is attempting to counter the ‘industrial fluctuations and uncertainties’ by diversifying its business beyond electronics.

Source: Straits Times, 3rd Sept 2011

AT FIRST glance, the modest downgrade of Singapore’s economic growth forecast this year – by just 1 percentage point – looks benign compared with the recent turmoil in global markets.

The data released by the Ministry of Trade and Industry (MTI) yesterday showed that the slowdown in the second quarter was also not as bad as previously thought. The Singapore economy expanded by 0.9 per cent in the April to June period, up from the previous flash estimate of 0.5 per cent, as the financial services and tourism sectors performed strongly.

Even a performance at the lower range of the forecast of 5 per cent to 6 per cent would be envied by most other developed economies, especially as it would come on the back of last year’s 14.5 per cent clip.

Despite the positive figures, however, even a gentle revision should not be taken too lightly. Nor should the challenges in the near term be understated.

To put it baldly, Singapore’s economy is in for a rough ride for the next six to 12 months, and possibly even longer.

Just look at the quarter-on-quarter growth momentum, which is always one indicator of where the economy is headed. Yesterday’s data showed the pace has moderated – even sharply in certain sectors – and looks set to slow even further.

Quarter-on-quarter, manufacturing was down almost 24 per cent, and wholesale and retail trade down 8.4 per cent – all sharp reversals from the first quarter.

Financial services and business services are just a shade below zero now, down from 27.6 per cent and 7 per cent respectively last quarter.

The economy as a whole was 6.5 per cent down this quarter compared with the last.

If the economy continues to contract next quarter, Singapore will be in a technical recession – defined as two consecutive quarters of contraction in quarter-on-quarter terms.

Will this happen?

Well, the outlook in the months ahead is not all that rosy. Various surveys already indicate a fall in confidence. The Business Times-UniSIM Business Climate Survey said the economy could slow to 2.5 per cent year-on-year in the July to September period. Firms polled were bracing themselves for falling profits, sliding sales and weaker orders, as business optimism fell for a fifth straight quarter.

Citigroup economist Kit Wei Zheng has also noted that the MTI’s composite leading index, a barometer of upcoming economic growth, had fallen for two straight quarters. The index tracks indicators such as the money supply, number of new firms formed, business expectations for manufacturing and Singapore stock exchange indexes. It usually leads actual economic data by one quarter.

If a technical recession indeed occurs, it will be Singapore’s second in three years. This reflects an economy that is rapidly slowing amid a volatile global environment.

The uncertain global outlook translates into a challenging environment for businesses. Some economists predict a slowing market for jobs and lower asset prices as early as the end of this year.

Adding a further layer of complexity is the spectre of the United States slipping into another full-blown recession this year, which is looking increasingly possible.

United Overseas Bank senior economist Alvin Liew has raised the likelihood of a double-dip recession in the US from 15 per cent at the start of the year to 35 per cent now.

If the US slips into recession, chances are that things could be a lot worse than the last one triggered by the 2008 financial crisis. At that time, the US had unemployment levels of about 4.5 per cent, the stock markets were booming and corporate profits were high.

Today, corporate profits are still high, but the country’s unemployment rate is more than double, at 9.2 per cent. Consumer spending is already falling, and the government is saddled with crippling levels of public debt. All this will stifle spending and drag the economy down further.

Likewise, the pall hanging over the European and Japanese economies is also unlikely to disappear soon.

Singapore, as an open economy, will be hit by all these slowdowns, which are happening at the same time.

While Singapore is less dependent on the American and European markets than in the past, they still soak up 25 per cent of the country’s exports.

Even if the world avoids another US-led recession, there is a high chance global growth will be sluggish next year, as public debt will continue to weigh down on growth prospects in the major economies.

What does this all mean for Singapore and Singaporeans?

One piece of good news is that inflation may subside. The prices of commodities like oil and wheat are already falling from expectations of a global slowdown that will curb demand.

On the other hand, the rating downgrade of US debt and the Federal Reserve’s decision this week to keep interest rates low may both lead to a flood of liquidity chasing up asset prices in Asia, which would fuel inflation.

Overall, Singaporeans will need to prepare for, and adapt to, a markedly slower pace of economic growth again.

Growth is unlikely to return to the golden period before the financial crisis, when Singapore grew by about 8.5 per cent a year from 2004 to 2008. It will certainly not be at the fast clip of last year.

‘There is going to be slower growth overall and higher volatility for the next two to three years,’ said Bank of America Merrill Lynch economist Chua Hak Bin. ‘We will probably end up recording 4 per cent rates every year.’

Businesses will also find the next few years challenging. If demand falls and sales drop, they will have to keep a rein on costs to stay profitable.

This means potentially fewer jobs created, smaller pay packets and a period of belt-tightening for individuals. They will also have to find ways to raise productivity, especially as the Government is unlikely to loosen the tap on the flow of foreign workers in a slowdown.

In the long term, Singapore is definitely poised to benefit from Asia’s growth, given its status as an advanced business and financial centre at the heart of the dynamic region.

But in the shorter term, it is best to buckle down for another bumpy ride ahead.

Source: Straits Times, 11th Aug 2011

OFFICIAL figures on Singapore’s economic performance in the second quarter contained some good news amid the current turbulence in global markets.

The economy grew a modest 0.9 per cent from April to June, nearly twice as fast as an earlier estimate of 0.5 per cent.

The better figure was thanks to a good showing in June. The earlier advance estimate had been mainly based on April and May data.

And even though the manufacturing sector contracted, the figures showed that Singapore’s services industries – which make up two-thirds of the economy – continued to grow.

The financial services sector surged 10 per cent year-on-year as domestic and offshore lending jumped, said the Ministry of Trade and Industry (MTI), releasing the figures yesterday.

Tourism-related sectors also did well, with a continued influx of visitors. The hotel and restaurants sector grew 6.4 per cent, while ‘other services’ – which include arts and entertainment, as well as the integrated resorts – rose 5 per cent.

Financial sectors and tourism are expected to continue growing in the second half of this year, when events such as the Formula 1 Grand Prix will be held.

This, together with a recovery in biomedical manufacturing, could help bolster the Singapore economy and help it avoid a technical recession.

The spectre of a technical recession – defined as two straight quarters of quarter-on-quarter contraction – has been raised by economists, given the dramatic slowdown in the global economy. The last time Singapore suffered such a recession was in 2008.

Even though the economy expanded 0.9 per cent when compared with the second quarter last year, it shrank 6.5 per cent when compared with the first quarter of this year.

But MTI also warned that ‘downside risks have increased’ for the economy, which could mean another contraction next quarter.

It pointed to a possible double-dip United States recession as well as fragile European Union market sentiment, amid fears the debt crisis would spread to bigger EU countries.

‘I think the possibility (of a technical recession) is there,’ conceded MTI deputy secretary for industry Kwek Mean Luck. ‘At this point in time, however, based on factors that we see, there are growth prospects, and therefore we are holding the growth forecast at 5 per cent to 6 per cent.’

Yesterday’s figures confirmed the current slump in manufacturing, which fell sharply by 23.7 per cent quarter-on-quarter, reversing the spectacular growth of 97.2 per cent in the first quarter.

Overseas demand for Singapore goods and services rose only 1.8 per cent, compared with 8.4 per cent in the first quarter.

Exports also did poorly in the second quarter, and trade agency IE Singapore cut its full-year export forecast from 8 per cent to 10 per cent, to 6 per cent to 7 per cent.

‘Our leading indexes point to further contractions in tech output in the coming months. Singapore, given its openness, remains sensitive to a global downturn,’ said Dr Chua Hak Bin, director of global research at Bank of America Merrill Lynch, who thinks a technical recession in the third quarter is likely.

The worry is not a technical recession itself, but if it leads to a more severe downturn, job losses, slower consumer spending and a property slump, he said.

Citigroup economist Kit Wei Zheng agreed, noting that the composite leading indicator, which looks at the economic activity three months ahead, fell a further 0.2 per cent quarter-on-quarter.

Others, like DBS economist Irvin Seah, were less pessimistic. He said a technical recession is not within his ‘central scenario’.

But he warned that even though growth momentum is still likely to pick up in the second half of the year, the impending uplift could be weaker than previously anticipated.

Source: Straits Times, 11th Aug 2011

THERE is a fear that what happens in Hong Kong’s financial markets occurs here as well, but local borrowers can probably breathe easier over the issue of rising mortgage rates.

Rates have risen in Hong Kong as the demand for bank loans outpaces the growth in their deposits.

And while there is a similar trend here, interest and mortgage rates are likely to be at most only slightly higher, said Bank of America Merrill Lynch economist Chua Hak Bin. This is because of a strong Singapore dollar and property cooling measures, which may dampen mortgage loan growth, he wrote in a report yesterday.

Interest rates in Hong Kong and Singapore have remained low since the United States Federal Reserve slashed rates to near zero.

The Hong Kong dollar is pegged to the greenback and so its rates tend to follow those of the US. The Singdollar trades against a trade-weighted basket of currencies of which the US dollar forms a significant part, so rates here also track the US rates.

But banks’ loan-to-deposit ratios also appear to be affecting interest rates. Dr Chua said this ratio has risen from about 71 per cent early last year to 82 per cent in Hong Kong, on the back of strong loan demand. Singapore’s loan-to-deposit ratio has risen from a low of about 71 per cent in March last year to about 77 per cent in April and is likely to hit 80 per cent by the fourth quarter, he said.

But the large difference in the ratios among the three local banks may reduce the chances of a Hong Kong-like outcome, said Dr Chua. In the first quarter, DBS’ loan-to-deposit ratio was 60 per cent, while OCBC and UOB had ratios of 82 per cent.

Another difference is that investors in Hong Kong are moving their money out of Hong Kong dollar deposits into Chinese yuan. But with the Singdollar set to strengthen further, local investors are ‘quite happy to keep their funds in Singdollars’.

However, if there is a shift in Monetary Authority of Singapore policy in October to a more modest Singdollar appreciation, it could lead to a 10 to 15 basis point rise in short-term rates, Dr Chua added.

Loan growth may also be slowing after January’s property cooling measures. Ms Phang Lah Hwa, OCBC’s head of consumer secured lending, expects ‘a moderation in home loan growth’.

Ms Lui Su Kian, managing director and head of deposits and secured lending at DBS, said: ‘Market interest rates are expected to stay low.’

Source: Straits Times, 16th June 2011

Minister Mentor Lee Kuan Yew was interviewed by The Wall Street Journal on April 20. Below is an edited excerpt from the interview.

Asked about the downgrading of the US economy, MM Lee says his ‘impression is that presidents do not get re-elected if they give a hard dose of medicine to their people. So there is a tendency to procrastinate, to postpone unpopular policies in order to win elections’. — ST PHOTO: STEPHANIE YEOW

•The global economy is not doing particularly well. Singapore is in good shape.

MM: Well, we have got China and India rising rapidly, making very high rates of growth. China anywhere between 8 and 11 per cent a year, India 7 and 9 per cent. That lifts up the whole region. We are at the crossroads between the two giants. You’ve got to pass Singapore to go from the Indian Ocean into the Pacific.

•The concern more broadly, certainly in the United States, is inflation. How concerned are you about Singapore?

Well, world inflation is not a problem Singapore can control, except by increasing the value of our currency to keep the price of imports down. But at the same time we must keep the price of our goods and services competitive. So it is a fine balance. On the whole, we will do well.

The only negative factor is what has happened to Japan. Japan is one of our key trading and economic partners. The earthquake, tsunami and the breakdown of the nuclear power plant has been a setback which they will take some time to recover completely from. During that recovery time, their momentum will not quite be the same. That is a negative for the region.

•You probably notice the discussion about Singapore becoming a global centre for trade in the yuan.

No, Hong Kong will be the first. We may be a secondary centre. Hong Kong is part of China. Hong Kong is well connected to the international financial markets. So China will use Hong Kong. The overflow may come to us.

•I guess as the yuan becomes what you might call normal currency, around the world there will be a couple of centres that have more liquidity.

It will be some time before they make their currency convertible. They have very strong internal reasons to make sure that once they open up, they will not be destabilised.

•Did you ever imagine that you would see the US economy put on negative watch by a ratings agency?

No, but what to do. It has been gradually coming. Budget deficits, debts, high unemployment figures – and these lingered on over several administrations. My impression is that presidents do not get re-elected if they give a hard dose of medicine to their people. So there is a tendency to procrastinate, to postpone unpopular policies in order to win elections.

I do not know what President Barack Obama will do. He knows he has got this responsibility but he has got to tussle with the Republicans. I believe if he tackles this problem, it will improve his chances of re-election. There must be enough reasonable and thinking Americans who know that this is the only way forward to recover their competitiveness.

•When you look ahead for Singapore in this very unstable world (what do you see)?

It is an unstable world and an unstable region. We have got problems in the Philippines; Thailand is a divided country between the Red Shirts and Yellow Shirts. Indonesia is relatively quiet with Dr Susilo Bambang Yudhoyono as President, making progress, so that is a plus. Malaysia is doing economically well but they have communal problems. Malays go to National or Malay schools; the Chinese do not want their children to learn mainly Malay, so they go to Chinese schools where they learn Chinese and English; and the Indians go to Indian schools learning Indian and English. So the population is segregated. The Prime Minister now calls for 1Malaysia to bring them together. It would have been better if they had started 1Malaysia from the beginning.

•Like ‘One Singapore’?

We give everybody equal opportunities, our great advantage was we chose a working language that did not belong to any of us – English – so no race had an advantage. English also linked us up to the world.

•The Middle East has changed remarkably. Did you ever imagine that so much change would happen so quickly?

Once it started, these monarchies and authoritarian governments, their peoples sense that this is not an immutable state of affairs – that they have the power to change the system. So it spread throughout the region. They call it the Jasmine Revolution. The contagion was immediate.

Libya is not settled yet, but looks messy. It is tribal. There are tribes who are against (Colonel Muammar) Gaddafi but there are tribes that he belongs to and has looked after who are loyal to him.

•One characteristic we have noticed in the case of Libya is that the US has been a little more reluctant to get involved. Are you worried that the US is changing…?

I do not want to comment on them. France has taken the initiative. France is well informed on Libya, more than the Americans. France has taken the lead but they do not have the equipment to settle the issue militarily. They do not have the A-10 planes that can knock out tanks and armoured vehicles on the road.

•For Asia and Singapore, how important is it that America stay engaged globally?

Well, the world has developed because of the stability America established. If that stability is rocked, we are going to have a different situation. The challenge may come gradually from China. But I do not think China wants to upset the apple cart. They need American markets, they need American investments, they need American technology, they want their students in large numbers to go to America to learn how to do things the American way. So while there will be keen competition, I do not see conflict.

•Can you imagine China and the US having enough of a consensus for them to both be rocks in the future?

I do not have a crystal ball but I would say for 10, 20, 30 years, it is not in the interests of China to have other than stable relations with America, growing exports to America, imports of American technology, investments from America and sending students to America to learn. Now Americans are going to send 100,000 students to China to learn Chinese and about China. Americans recognise that China is going to be a long-term player. Which means they would each have people in both countries who will eventually reach the top with a good understanding of the other side.

Why should America fear China? China and India by their sheer numbers are going back to the position they occupied, 250-300 years ago in (terms of their share of) total world GDP. They are going to get back to that level, just by sheer numbers.

But I believe the Americans will always have the advantage because of their all- embracing society. The English language that makes it easy to attract foreign talent: two to three million Indians, God knows how many million Koreans, Japanese, Chinese and others, besides the West Europeans and British. The American domestic talent pool includes over six million Jews.

•Well more if you count extended family.

High levels of bright people and they attract able professionals from all over the world. China cannot do that because of their difficult language. The English language is either the first or second language of most countries in the world. The Chinese language is one of the hardest to learn if you don’t start off speaking it as a child. It is monosyllabic and tonal.

•The US dollar is somewhat under pressure.

Yes, I have told you the reasons why. You can print dollars but in the end, you are going to reduce the value of the dollar. When other people borrow money, they have got to pay back in dollars. When Americans borrow money, they just print their dollars. But the cost comes with the lower value of the dollar and then inflation.

——————————————————————————–

I do not have a crystal ball but I would say for 10, 20, 30 years, it is not in the interests of China to have other than stable relations with America, growing exports to America, imports of American technology, investments from America and sending students to America to learn.

Source: Straits Times, 27th April 2011

Irish central banker points to Asia’s strong rebound and euro zone growth

ASIA’S strong economic recovery and better-than-expected euro zone growth should help the world dodge a double-dip recession, according to Irish central bank governor Patrick Honohan.

But governments will also need to focus on consolidating reserves after extensive spending on stimulus measures taken to tackle the financial crisis, he said.

Professor Honohan, who is also a member of the European Central Bank (ECB) governing council, was speaking yesterday at an event jointly hosted by the Irish Chamber of Commerce and the Association of Banks in Singapore at Marina Mandarin hotel.

He said while Europe has been slow to rebound, there has been ‘a lot of optimism’ about Germany, which he refers to as the ‘heart of Europe’.

Europe’s largest national economy grew by 2.2 per cent in the second quarter – the fastest pace in 23 years – driven by investment and exports, according to official data released yesterday.

‘The recovery has not been as strong as people had hoped, but I’m not too pessimistic about this recovery. I think it is slow and steady but it’s getting there,’ said Prof Honohan.

He added that the low interest rate environment – the ECB has kept its main interest rate at a record low of 1 per cent for the last one year – remains relevant to current economic conditions.

‘What we see is still quite a weak economic recovery, certainly in the euro zone area after the crisis, so I think the current interest rates, which are low by historical standards, are appropriate to maintaining the possibility of making sure the recovery happens,’ he said.

But the management of government debt will be key as most have come out of the crisis with much higher debt levels than before, which adds to their macroeconomic vulnerability, he explained.

‘They no longer have much headroom for additional fiscal interventions to deal with any issues that may arise,’ he said.

‘So persisting with the fiscal consolidation that most countries… are actually in the process of doing is absolutely key to ensure the policy tools will be available for any future problems.’

Looking back at the crisis, he said while there was a sharp downturn, the recovery was ‘surprisingly faster’ in many parts of the world, especially in Asia.

‘So to some extent we may not have learnt enough to avoid a downturn, but we definitely have learnt enough in terms of monetary and economic policy response to make sure the downturn was as short-lived as possible,’ said Prof Honohan, who departs for Malaysia today.

Source: Straits Times, 14 Aug 2010

(SINGAPORE) Consumers in Singapore remain among the most optimistic in the region – despite a drop in consumer confidence in the second quarter.

The Consumer Confidence Index of Singapore, as measured by InsightAsia, fell 12 points to 126 in Q2 after witnessing a strong upward trend since the lowest point of the recession. Singapore is still far above the neutral point of 100.

Consumers were thrilled when the economy emerged from the recession sooner than expected and are now becoming accustomed to positive economic circumstances.

InsightAsia, a market research group specialising in the Asia-Pacific region surveyed 10,800 people across six Asian markets.Although economic growth in Singapore continues to accelerate, consumers expressed lower confidence in economic circumstances. The downward correction of the Consumer Confidence Index is in line with other countries in the region that are also showing healthy growth figures. China, Malaysia and Vietnam also saw a decrease in consumer confidence – even though their economies are in good shape and have GDP growth forecasts of 5-10 per cent in 2010.

An unexpectedly swift recovery from the recession led to increasing consumer optimism, which then dropped slightly in Q2. Consumers in these countries remain confident, but their initial enthusiasm has waned somewhat.

Consumers in Singapore still feel that the economy is improving, though not as strongly as before. They have also moderated their expectations for future economic growth. Singaporeans maintain a high level of satisfaction with their financial well-being, but have moderated their optimism about the coming year.

Overall, Singaporean consumers still have a very positive view of economic circumstances, resulting in a Consumer Confidence Index of 126.

Singapore trails slightly behind Vietnam (128) but leads Malaysia (118), China (114), Indonesia (93) and Thailand (83); all countries that are recording positive growth figures.

Singapore’s recovery from the recession continued into Q2. A record year-on-year GDP growth of 19.3 per cent outstrips the 16.9 per cent growth recorded in Q1 and far exceeds growth figures of other economies in the region.

This very strong growth was driven by exports and tourism. Exports increased particularly through pharmaceuticals and electronics, while new attractions drew more tourists to the island state.

The year-on-year growth figures are calculated against a low base, as the beginning of 2009 was the low point of the recession. Growth in the remaining quarters of 2010 will be calculated against higher base figures. Therefore GDP growth is expected to decelerate in the second half of 2010 and full-year growth is expected to register at 13-15 per cent.

The robust economic growth of China has benefited many other economies in the region. The Chinese government is taking measures to reduce the risks of overheating the economy. Lower demand in China will reduce the exports of other countries in Southeast Asia.

Along with a debt crisis in the EU and the hesitant recovery of the US economy, this may slow growth in South-east Asia in the second half of 2010. However, analysts are positive about growth prospects in the region. The IMF estimates regional economic growth for 2010 and 2011 of around 6 per cent.

The writer is head of Consumer Confidence Index at InsightAsia Research Group

Source: Business Times, 26 Jul 2010

Turmoil in Europe, protectionist pressures may hurt world economy

ASIA is recovering well from the financial crisis but there are still risks to the world economy, including the turmoil in Europe and protectionist pressures in many countries, according to Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation (GIC).

Dr Tan told the Swiss Re Forum Singapore yesterday that the global recovery is likely to continue into the next year but at a more moderate pace.

But he cautioned that the rebound is ‘fragile’ and ‘negative shocks could push the global economy towards a recession sooner than expected’.

And while growth prospects are much better for Asia than for the developed world, Dr Tan does not see Asia ‘aggressively challenging’ the global order, which has benefited the region for decades.

‘Asian countries, including China, generally share the view that a multilateral, rules-based international order is critical to their long-term growth and development,’ said Dr Tan. ‘Asia’s rise therefore is not inevitably a zero-sum geopolitical game where the US and Europe must decline as Asian countries grow.’

Dr Tan flagged the turmoil in Europe, saying that growth there should be weaker at around 1 per cent.

According to some analysts, there are growing signs that Europe’s sovereign debt crisis is feeding through into the

euro-area economy in the form of a sharp rise in unemployment and a slowdown in manufacturing recovery.

Dr Tan warned that ‘protectionism also remains a risk despite the recovery, given high unemployment and what seems to be, for the first time in many years, increasing tensions between American and European businesses and the Chinese policy environment’.

Dr Tan’s comments come at a time when investors are increasingly upbeat about Asia’s growth outlook, but less bullish about the global economy.

Earlier this month, the Asian Development Bank raised its 2010 forecast for aggregate growth across Asia – embracing East Asia excluding Japan, South-east Asia, South and Central Asia as well as the Pacific island economies – from 7.5 per cent to 7.9 per cent.

Yet Citigroup forecast global growth to rise 3.7 per cent this year and 3.3 per cent next year, trimming its projections by 0.1 percentage points for each year.

Dr Tan said the post-crisis global economic and financial environment will be affected by three major trends.

The first is that the developed world will take a ‘long time’ to fully heal from the crisis.

The second is the increasing importance of the emerging economies, anchored by Brazil, Russia, India and China.

And the third major trend, as Dr Tan describes it, will be ‘increased vulnerability’ to negative events, and ‘extreme reliance’ on government policies for both support and far- reaching reforms over the next few years.

Dr Tan said: ‘The challenge for policymakers in many developed economies will be to convince markets that they have credible plans to ensure sustainable public finances over the medium to long term, while minimising the negative short-term impact on growth.’

In the emerging economies, policy-makers will have to deal with rising inflation and possible asset price bubbles, he said.

Source: Straits Times, 24 Jul 2010

First normalise monetary policy, then adjust fiscal policy, it suggests

NOW that Asia is squarely on a V-shaped recovery path, it should be withdrawing the policy stimulus put in place during the recession, said the Asian Development Bank (ADB).

The Manila-based institution has upgraded its growth forecasts for the region in its latest twice- yearly Asian Economic Monitor, which it launched at the Singapore Marriott Hotel yesterday.

Growth in ‘emerging East Asia’, which the ADB defines as Asean, South Korea, China, Taiwan and Hong Kong, is now expected to come in at 8.1 per cent, up from the 7.7 per cent projected in April.

‘The stronger-than-anticipated export rebound and much-improved consumer confidence have helped the region’s economies recover faster than we expected,’ said ADB’s chief economist Jong-Wha Lee.

With the improved economic outlook, ‘it is now time for the region to unwind the policy stimulus’, said the ADB.

It recommended that the monetary policy be normalised first – that is, interest rates and exchange rates be raised to ‘normal’ pre-crisis levels – before the fiscal policy is adjusted.

This will allow economies in the region to continue using targeted fiscal measures to support domestic demand until it is clear that the private sector can take over, said Mr Srinivasa Madhur, senior director of ADB’s office of regional economic integration, which produced the Monitor.

Economies such as Singapore, South Korea, Malaysia, Taiwan and Thailand have already begun tightening their monetary policy in recent months by raising their interest rates or, in Singapore’s case, letting the exchange rate appreciate.

As DBS head of economics and currency research David Carbon said, the tightening of policy in the fast-growing region is ‘bread and butter economics’.

‘Output in Asia is now back far above pre-crisis levels. Inflation is nearly back to average and it is sure to rise above average in the coming few months,’ he said in a recent report. ‘But interest rates remain far below average. Central banks have much work to do.’

Economies that have already begun to slowly unwind stimulus should continue in that direction, and those that have not may need to start soon, said the ADB.

China, however, should accelerate policy normalisation by letting the currency appreciate, among other things, it added.

Still, the pace of unwinding the stimulus must factor in risks facing the overall global economy, Mr Madhur said.

These include a marked increase in capital flows, which can be destabilising, and uncertainty about the sustainability of recovery in the United States and Europe.

On the bright side, the threat of steeply rising inflation has yet to materialise in Asia, despite rapid growth.

This is partly due to the time lag between a rise in output and the subsequent spike in hiring and wage costs, said Mr Madhur.

‘Inflation is still manageable but don’t be complacent because that condition may not last long as labour markets tighten,’ he added.

‘Although we don’t see huge problems of inflationary pressures as of now, the signs are there… (It’s) time to unwind now rather than wait for that day to arrive and then get panicky.’

Source: Straits Times, 21 Jul 2010

Possible shocks from spillover of euro zone crisis and excessive capital flow

DAEJEON (SOUTH KOREA): Asia may be experiencing a sharp and quick rebound from the global financial crisis, but it has received a word of warning from the International Monetary Fund (IMF).

The region, said IMF chief Dominique Strauss-Kahn yesterday, should brace itself for possible further shocks, including being hit by a potential spillover from the euro zone crisis.

Or exuberant investors could pour so much capital into Asia that parts of the region could overheat, bringing about dangerous credit and asset bubbles.

The warning comes just after last week’s growth forecast by IMF for all of Asia – a buoyant 7.5 per cent this year, well above the average 4.6 per cent worldwide. But the IMF managing director also sought to soften the blow, stressing that a global double-dip recession was unlikely as recovery remains on track.

‘Asia’s time has come, no one can doubt that Asia’s economic performance will continue to grow in importance,’ he said yesterday at the opening of a high- level economic forum in the central South Korean city of Daejeon.

‘But downside risks – including the recent turmoil in Europe – mean that Asian policymakers need to remain attuned to negative shocks.’

The region also faces a real threat in the sharp rebound in capital flows that is likely to emerge as investors avoid Europe, the United States and Japan, where growth has been sluggish, for a burgeoning Asia. ‘Such huge inflow of capital can create instability,’ he warned.

To manage such a problem, Asian nations could consider measures such as currency revaluation and even temporary capital controls, he suggested.

Jointly organised by the IMF and South Korea, the two-day forum on Asia brings together senior policymakers and economists including Singapore’s Finance Minister Tharman Shanmugaratnam and his Thai counterpart Korn Chatikavanij. Both men are due to take part in a round-table discussion today.

Yesterday, South Korea’s Finance Minister Yoon Jeung Hyun echoed Mr Strauss-Kahn’s concern, noting that developing countries were not doing enough to withstand external shocks from the high volatility of capital flows.

According to media reports, Seoul and the IMF are looking at a possible global financial safety net that would give nations quick access to funds, helping them stave off crises and also discouraging emerging market nations from hoarding foreign reserves. Details are expected to be unveiled in November when South Korea hosts the G-20 summit.

The warnings for Asia come amid emerging signs that the global economic recovery may be losing steam. China’s economic growth appears to be slowing down, while the US has reported a stream of disappointing economic data.

Last week, an IMF report also warned that Europe’s credit woes could hit bank funding and corporate financing elsewhere, especially Asian economies that are more dependent on foreign currency financing.

As if that was not enough, the European Central Bank and the Bank of England also sounded an alarm bell on a looming credit crunch.

Institutions worldwide, including banks and cash-strapped governments, will have to repay or roll over trillions of dollars they owe under short-term loans in the next two years. As they compete for the bond market’s favour, it could squeeze the credit available for business and consumers, dampening economic growth.

Together, these risks pose a longer- term challenge for export-driven Asia, as Mr Strauss-Kahn and other speakers noted.

‘It is a trigger for change,’ he said.

Asia, he pointed out, needed to nurture a ‘second engine of growth’ by boosting domestic investment and consumption.

It is a strategy that some nations in the region are already pursuing, as they try to strengthen their social safety nets to boost private consumption, and introduce more flexible exchange rates.

China, for instance, recently raised the minimum wages of workers in the hope of revving up domestic consumption, a move hailed by Mr Victor Fung, honorary chairman of Hong Kong’s International Chamber of Commerce.

He said: ‘They are putting money into the hands of those who can actually spend.’

Source: Straits Times, 13 Jul 2010