He revealed that low-income workers have enjoyed a significant boost in their pay over the last five years, while the typical worker in Singapore has seen a bigger jump in salary than those in developed countries.

Opposition parties, including the Workers’ Party, Singapore Democratic Party and Reform Party, have accused the Government of not doing enough to help those on the bottom rungs of the economic ladder, saying the wages of the lowest-income households have remained stagnant in recent years.

But that is not so, Mr Tharman said, giving figures to refute their statements.

He disclosed that the average income of a family in a three-room HDB flat rose 28 per cent between 2005 and last year.

Even after adjusting for inflation, real wages would have jumped 14 per cent, he said at the People’s Action Party’s (PAP) lunchtime rally. This is before taking into account Workfare top-ups or any special transfers by the Government.

For other Singaporeans, the median income grew 25 per cent over the last five years, or 10 per cent after inflation.

This was better than in Hong Kong, where real wages rose 4 per cent in the same period; South Korea, which had a 2 per cent increase; or Taiwan, where real incomes fell 3 per cent.

Still, the 10 per cent rise in Singapore ‘is not good enough, and in the next 10 years, we want 10 per cent to become 30 per cent’, Mr Tharman said.

He attributed the increase in salaries to two factors: more jobs being created and wages as a whole moving up.

But he also acknowledged that ‘there are those who have not seen a wage increase’ and others whose wages have fallen, and that the Government must find the best way to help people ‘for whom day-to-day living is a real challenge’.

This can be achieved through ‘strategies that really grow our economy and keep it diversified’, said Mr Tharman.

The Government will help workers attain a ‘massive upgrade in skills in the next 10 years’, as well as keep redistributing resources to help the poor and middle-income groups more, he added.

‘We’ve got a sound revenue base, we’ve avoided debts and we’ve kept our reserves growing for the long term… That is how we must continue to run our economy and our policies for the next 10 years,’ Mr Tharman said.

‘Nothing is cast in stone, nothing perfect, but let’s keep centring our policies on raising living standards for all. And whatever we do, let’s avoid spending without the resources to sustain it, avoid spending that will lead to higher taxes.’

At yesterday’s rally in UOB Plaza, Mr Tharman also warned of the ‘very real risk of a setback in the global economy’.

‘Basically, the problems that led to the crisis are not over,’ he said.

‘The problems of excessive household debt, the problems of governments that have over-borrowed and the problems of banks that are themselves in a very fragile state are not over, and these problems will be with us for several years to come.’

New challenges – mainly of inflation and rising oil and commodity prices – have also emerged after the financial crisis, noted Mr Tharman.

‘No one can rule out a significant increase in oil and other commodity prices in the next year or two,’ he said.

‘And when you add that new risk to the old risks that are still with us, you have a world economy that is, as (World Bank president) Robert Zoellick said, one shock away from another major crisis.’

To top it all off, a new ‘fundamental challenge’ is emerging as China muscles its way into middle- and higher-value activities in manufacturing and services.

This means that it is not just the blue-collar manufacturing worker who is at risk, but also workers in white-collar jobs, Mr Tharman said.

‘China is progressing and behind China, you’ve got India, Brazil, some of the Eastern European economies are also catching up.

‘We can’t change that reality. We have to cope with it, adjust to it and find a way to thrive and prosper even with this challenge,’ he added.

Source: Straits Times, 4th May 2011

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

DAVOS (SWITZERLAND): World economic growth is expected to be healthy this year, with two out of the three major regions registering growth, said Government of Singapore Investment Corporation (GIC) deputy chairman Tony Tan.

Both the United States and Asia are expected to grow and although Europe has its sovereign debt problems, the euro zone debt crisis is unlikely to affect global growth if properly contained, said Dr Tan, who is also GIC’s executive director.

‘This year, people are confident and many definitely see the world economy recovering,’ he said.

Speaking to The Straits Times on the sidelines of the World Economic Forum over the weekend, Dr Tan said the US is expected to grow between 3.5 per cent and 4 per cent, a rate which will lower the unemployment rate in the world’s biggest economy.

‘The US is still the single largest economy in the world, accounting for a third of world output. So if the US economy grows, it’s good for the rest of the world, Asia and Singapore,’ he pointed out.

Likewise, signs for Asia are positive, although the risk of asset bubbles forming and rising inflation are key concerns.

He noted that Singapore grew at a phenomenal rate of almost 15 per cent last year and is expected to continue expanding, although at a slower pace.

Worries that the surge of capital from advanced countries may cause asset bubbles have led some countries to implement capital controls, a move which is bad news for economic growth, said Dr Tan.

‘When you have capital controls, you impede free flow of capital from where it is available to where it is needed,’ he said.

‘It is only one step away from putting controls on trade flows and that will be very detrimental for world growth and on Singapore.’

Europe, on the other hand, faces a serious sovereign debt crisis, which, if left to spread to the rest of the world, could spell trouble.

But Dr Tan noted that recent moves made to raise money by selling euro zone bonds have been well received by the markets, indicating that embattled European countries will have access to funds if they require them.

‘I think Europe requires very careful attention and GIC is watching developments there very closely.’

While GIC is looking to slowly rebalance its portfolio towards the emerging markets, Dr Tan said that the developed world still holds many opportunities, especially since prices of assets there have come down significantly.

According to GIC’s annual report last year, the US and Europe still form about 66 per cent of its total portfolio.

He added that he is happy with the performance of Global Logistic Properties (GLP), which was listed on the Singapore Exchange last year. GIC is GLP’s largest shareholder, holding 51 per cent of the company.

GLP’s $3.9 billion initial public offering (IPO) was the second largest in Singapore after SingTel’s IPO.

Its share price is trading at nearly 10 per cent above its $1.96 IPO price, giving it a market value of some $10 billion, noted Dr Tan.

While the decision to list GLP was partly taken to monetise GIC’s investment of $2 billion after buying GLP from its parent company ProLogis, GIC is open to listing some of its other assets in the future.

‘GIC owns a number of assets which are viable candidates for listing, should the need arise,’ he added, declining to elaborate which these assets are.

While GIC will regularly review its overall investment strategy, Dr Tan said GIC will continue to rely on the same investment approach it has been using since it was formed in 1981: using risk assessment to guide its investments.

‘It has served GIC well for the past 30 years and I think we have fulfilled the mandate given by the Singapore Government to maintain the purchasing power of the reserves, and in fact done more by producing a real rate of return.’

GIC’s annualised rate of return, after taking inflation into account, was 3.8 per cent a year over 20 years, according to its report last year.

Source: Straits Times, 31 Jan 2011

What does the evidence suggest so far? Certainly, there are grounds for concern. US unemployment is stubbornly stuck at close to 10 per cent. The effects of the 2009 economic stimulus programme are now waning. The housing market – a key forward-looking indicator – has yet to turn around.

In a recent speech to a banking conference, US Federal Reserve chairman Ben Bernanke served a sobering reminder. Despite the fact that the economy is expanding, ‘we have a considerable way to go to achieve a full recovery’, he said. The most recent estimates of retail sales and consumer confidence have also not been good. Tellingly, the pace of the recovery has slowed from an annualised rate of 3.7 per cent in the first quarter to 2.4 per cent in the second quarter.

Over in Europe, there has been much bad news this year, particularly relating to the sovereign debt crisis in the eurozone. This has led to austerity programmes being put in place in several countries, the effects of which we have yet to see.

However, the picture is not all dire. Some of the latest data out of the US, from the Institute of Supply Management, suggests that manufacturing activity expanded for the 12th consecutive month in July. Second-quarter GDP rose 2.4 per cent quarter-on-quarter, beating many analysts’ expectations. And on the corporate front, more than 75 per cent of the over 300 companies in the S&P 500 have reported results that have also beaten the average estimates of analysts.

Even Europe has shown some upside surprises. Thanks partly to the weaker euro, the German economy is enjoying an export-led revival. The country’s central bank, the Bundesbank, expects 1.9 per cent growth this year, which again is better than earlier anticipated. Germany’s growth will vitally help at least cushion the downturn in the eurozone.

The brightest spot of the global economy is Asia, particularly China and India, where growth forecasts remain rosy for this year: close to 10 per cent for China and 8.5 per cent for India.

For the global economy as a whole, last month the International Monetary Fund (IMF) revised up its growth forecast to 4.6 per cent in 2010 from 4.2 per cent in April – although it did note that ‘downside risks have risen sharply amid renewed financial turbulence’.

Given what we have witnessed over the last two years, it would be imprudent to rule out unpleasant surprises, including a double-dip recession. But on the weight of the evidence, and with loose monetary policies still in place, this looks unlikely – at least for now.

Source: Business Times, 4 Aug 2010

In many countries, fears have arisen of a prolonged period of slow and occasionally negative growth or, worse, of a Japanese- style ‘lost decade’ with multiple recessions, or, even worse, of a depression.

But are multiple downturns so unusual in periods of severe economic distress?

The global recession was severe, probably unmatched since World War II. From the start of the crisis in December 2007 to its apparent end last year, the decline in

real gross domestic product (GDP) in the United States was 3.8 per cent.

All the other G-7 economies (Japan, Germany, Italy, France, Canada and Britain) also saw severe recessions in this period. Major middle-income trading economies like Brazil, Singapore, South Korea and Taiwan saw brief but even sharper declines. The downturn was so severe, and for so long, that some used the term ‘depression’, before settling on ‘Great Recession’.

How is a recession defined? Different national statistical agencies define, and thus date, such episodes differently. In the US, recessions are officially dated by a non-partisan, non-profit, private research institution, thus depoliticising the measurement.

The point at which the economy stops growing is called the ‘peak’, and the ‘trough’ is when it stops contracting. The period from when the economy starts to grow again until the point at which it reaches the previous peak is the ‘recovery’. Growth thereafter is an ‘expansion’.

For economists, a recession ends when the economy starts to grow. The economy falls to the bottom of a well, and then, as soon as it begins to climb out of it, the recession is declared ‘over’, even though it may be a long climb back to the top.

Little wonder, then, that ordinary citizens consider a recession over only when the economy has returned to ‘normal’, which means that incomes are rising and jobs are no longer desperately scarce.

A common rule of thumb is that two consecutive quarters of falling real GDP constitute a recession. But sometimes recessions don’t satisfy this rule. Neither the 2001 nor the 1974-75 US recessions met that criterion. Besides real GDP, employment, income and sales are considered, as are the depth, duration and diffusion of the downturn.

Dating a recession is, at times, a judgment call. America had a brief, sharp recession in 1980, followed by a long and severe one in 1981-82. Many economists believe it was one major episode, and that is probably appropriate, in a broader context.

But the economy did indeed grow in the interim – just barely enough to consider them distinct recessions. And, since they were separated by a transition from president Jimmy Carter to president Ronald Reagan, it was politically consequential that two recessions were identified. Likewise, the recent recession was dated as starting in December 2007, but it could equally well have been dated as starting in mid-2008 because, in the interim, the economy grew.

Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by recovery, and then quickly followed by a second recession, the 1980-82 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-75 period, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.

These are not rare occurrences: About the same time, Germany saw this type of double dip and the UK a quadruple dip. In the early 1980s, Britain, Japan, Italy and Germany all had double dips. America’s 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the start of 2008, some growth, another long, deep dip, then renewed growth. If the economy declines again – a highly plausible prospect – the US would have a triple dip, although perhaps not an outright second recession.

So history suggests that economies seldom grow out of recessions continuously, without an occasional subsequent decline. Dips – double, triple and quadruple – have been America’s recessionary experience since World War II.

While the baseline forecast seems to be slow global growth, history suggests that another decline would hardly be surprising before sustained stronger growth emerges.

The writer is professor of economics at Stanford University. He was chairman of President George H. W. Bush’s Council of Economic Advisers from 1989-1993.

PROJECT SYNDICATE

Source: Straits Times, 30 Jul 2010

PEOPLE wondering whether the economy is out of the woods still have reason to seek refuge in the trees.

Experts on the third NUS Business School-The Business Times CEO Luncheon Panel yesterday warned that the recovery of developed nations’ economies was slated to lose momentum after the fiscal stimulus runs out.

‘The best part of the recovery is over. Fiscal stimulus is going to turn into fiscal drag for most of the developed economies by the end of this year,’ said Manu Bhaskaran, director and chief executive officer of Centennial Asia Advisors, at the luncheon.

Mr Bhaskaran pointed out that in the United States, housebuilders’ confidence levels have plunged.

In July, the National Association of Home Builders/ Wells Fargo Housing Market Index (HMI) fell to its lowest level since April last year, as the federal home buyer tax credit programme expired.

Fixed mortgage rates in the US also declined to all-time record lows while housing starts in June fell to 5 per cent.

The outlook, while not abysmal, is turning out to be a cautious one, according to Mr Bhaskaran.

‘Going forward, the cost of capital is going to be higher and fiscal tightening is going to be here to stay for many years to come,’ he said.

On a more controversial note, Duan Jin-Chuan, director of NUS’s Risk Management Institute, recommended during his talk yesterday that Greece default on its enormous debt.

‘Greece can stay in the eurozone and massively deflate its economy or leave the eurozone to regain control of its monetary policy,’ said Professor Duan.

Neither would be likely, which meant that defaulting on its debt would be the most probable outcome.

‘Greece should consider the third option, which is to exercise its sovereign immunity, default on its debt and stay in the eurozone,’ said Prof Duan.

‘Default is a legitimate option, morally and legally, and should be exercised from time to time. Otherwise, why did the issuer pay the premium in the first place?’

He stressed, however, that he was not advocating a disorderly default of Greece’s debt, but rather one involving negotiations and coming to reasonable terms like coupon payments after the declaration of default.

The euro, however, should continue to shuffle along for a while, according to him.

‘The statistics give me no reason to think that the euro can’t survive another 10 years or more, even if it may not look pretty.’

Source: Business Times, 28 Jul 2010

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

A FRAGILE economic recovery could see the world tip back into recession ‘sooner than expected’, says Tony Tan, deputy chairman of the Government of Singapore Investment Corp (GIC).

Dr Tan, also GIC’s executive director and chairman of Singapore Press Holdings (SPH), told delegates at the Swiss Re Forum here yesterday that downside risks to the global economy have increased, highlighting three in particular: the debt turmoil in Europe, deleveraging in the United States, and protectionist pressures around the world.

‘It will take a long time for the developed world to fully heal from this crisis,’ Dr Tan said. ‘The economic recovery, while real, is fragile and there is a risk that negative shocks could push the global economy towards a recession sooner than expected.’

Meanwhile, the developing economies will gain in economic importance and will expect more say on world affairs. ‘The shift in economic power to the emerging world will likely increase geopolitical risks,’ he said. ‘Conflicts could also arise over access to natural resources.’

Investors, meanwhile, will have to place a larger proportion of their assets in emerging markets. ‘Far from being a risky and perhaps optional part of their portfolios, emerging markets will become a core and unavoidable asset class in global portfolios,’ he said.

But one major risk investors face is that the global recovery has so far been supported by extraordinarily benign government policies. ‘Changes in policies or mistakes will thus have a significant impact on the global economic and financial environment,’ Dr Tan said. ‘A key challenge for policymakers is to properly time the withdrawal of unprecedented monetary and fiscal policies.’

However, governments will have to juggle exit policies with, in some cases, the pressing need to repair public finances. ‘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,’ Dr Tan said.

Asia meanwhile will have its own set of problems. ‘Asia will increasingly face labour, natural resource and commodity constraints to its high-growth strategy.’ As well, growth will have to depend on a more balanced economic model in that case, he said, which should boost Asian currencies and consumption. But policymakers will have to beware asset price bubbles, rising inflation and populist anger in the developed world that could lead to ‘excessive regulation and protectionism’, he warned.

Dr Tan said: ‘Asia is at the cusp of the next stage in its development. There will likely be bumps along the way – perhaps a few crises – but if we learn the right lessons from history, especially those of the recent Great Crisis, Asia will innovate and adapt

Source: Business Times, 24 Jul 2010

The International Monetary Fund (IMF) has just raised its 2010 growth forecast for Asia to 7.75 per cent, about 0.5 percentage point higher than it projected as recently as April. Private sector forecasts for the Singapore economy have also been progressively raised as the year has unfolded, with many economists now predicting double-digit growth. The Ministry of Trade and Industry might also raise the official growth forecast following the release of advance GDP estimates for the second quarter.

While all of this may sound like good news, there are reasons to be circumspect. As the IMF has cautioned, Asia is vulnerable to some significant downside risks.

The region’s torrid growth in 2010 so far has been driven both by exports and private domestic demand. Exports have been powered partly by the inventory rebuilding in the advanced economies following the recession of 2008/09, during which inventories were substantially depleted. Private demand has been boosted by massive fiscal stimulus programmes, which were launched across the region, most dramatically in China. However, going forward, both these drivers of growth will be less conspicuous: the inventory restocking process is close to ending, and the impact of fiscal stimulus programmes will also wane from the second half of this year. After that, Asia can no longer rely on temporary growth drivers; it will have to look to traditional sources of growth – namely, demand from the G-3 and, to a lesser extent, sustained domestic consumption.

Unfortunately, neither of these can be taken for granted. While the IMF predicts 3.25 per cent growth for the US economy in 2010, the dismal US unemployment figures suggest that growth will slow in the second half of this year. Ditto for Europe, which is embarking on continent-wide fiscal austerity. There will be negative feedback loops from these developments on Asia’s exports. Exports could suffer further as Asian currencies strengthen against the majors, which is very possible, especially if the Chinese yuan continues to rise. While Asian currency appreciation would have positive effects in boosting domestic consumption and helping to contain asset bubbles, in the short term it will lead to some loss of competitiveness.

Rapid growth also entails costs. In the Singapore context, these could include rising wage and business costs, further exacerbated by increases in foreign worker levies.

Thus, despite the glowing growth forecasts, there are grounds for caution in the months ahead. While Asia’s economies might be on a roll for now, many of them face both internal and external vulnerabilities. Most importantly, the global economy is nowhere near out of the woods. And as we have learnt in 2008 and 2009, that counts for a lot.

Source: Business Times, 14 Jul 2010

Last week, the IMF upgraded its 2010 global economic growth forecast to 4.6 per cent from 4.2 per cent due to robust expansion in Asia and renewed US private demand, but kept its 2011 outlook unchanged at 4.3 per cent.

‘We expect 2011 to be a little lower than the level of 2010. But all this is too far from any kind of double- dip,’ managing director Dominique Strauss-Kahn said.

South Korea’s Finance Minister Yoon Jeung Hyun, who attended the conference too, also voiced confidence in the global economy, saying the recent slowdown in the United States and China was temporary.

The world economy has been recovering this year from its worst downturn in decades, but signs of cooling growth in the world’s largest and third-biggest economies sparked worries that the global upswing could prove short-lived.

‘The recent weak economic data in the US and China is transitory with the end of governments’ stimulus packages. They will be normalised soon,’ Mr Yoon said. – Reuters

Source: Business Times, 14 Jul 2010