Vol 10, No 4 - Financial Planning Association of Malaysia

ECONOMY
October - December 2010
Developing Asia to Provide Growth Support
By Anthony Dass
Developing Asia has rebounded
strongly from the global economic
downturn, with growth projected
to expand by 8.2 percent in 2010, driven
by a rapid turnaround in exports, healthy
private demand, and positive effects of
the stimulus fiscal and monetary policy
measures.
In contrast, the developed economies like
U.S., eurozone and Japan who pick-up in
1Q2010 started losing steam in 2Q2010
onwards. Weakness in U.S. housing
markets, the specter of eurozone sovereign
debt default and risks of commodity price
spikes are clouding global prospects.
While a second contraction in the major
industrial economies remains unlikely, it
cannot be ruled out.
Looking ahead, while Developing Asia
continues to progress, we believe the
policymakers must turn their focus from
managing short-term macroeconomic
fluctuations to ensure strong and
sustained medium- and long-term
growth. This will require policies that
expand the region’s productive capacity
through both factor accumulation and
rising productivity. Trade, human capital,
infrastructure, and financial development
will be key focus of this growth.
Key issues on the global front that
could hold back near term growth
High uncertainty in the financial markets
Should there be a lack of strong, credible,
medium-term fiscal consolidation plan as
well as risk of sovereign debt and markets
flaring up, it will delay the recovery
process. Banks are expected to face a
‘wall’ of maturing debt due for refinancing
over the next 24 months, amounting to
about US$4 trillion. This can heighten
risk as: (1) competition escalates for
funding amongst these economies; (2)
turbulence in sovereign debt markets
continues; (3) real estate markets weaken
further; (4) regulatory uncertainty and
ill-conceived regulatory measures cut
the nascent recovery; and (5) downside
surprises affect economic activity. In view
of the complex linkages within and across
borders, these problems could quickly
become more widespread.
Real estate can turn out to be a drag
Should the upside to the real estate
market remain sticky, it will further reduce
the balance sheets of households and
banks. The drop in residential investment
is exceptionally steep compared with
past recessions, despite several parts of
the world’s real estate prices remaining
high. With the risk of the bubble bursting
brewing in these economies, compounded
with the enormous overhang of unsold
properties with ‘underwater’ mortgages
in U.S., it will put a lid on the upside
momentum on transactions. Inventories
may fall and depress prices.
Deleveraging by households
Household savings are expected to stay
high vis-à-vis pre-crisis level for a while
as they repair their balance sheets. With
household borrowings down sharply, as
per reflected by the debt ratios, corrections
will have some way to go especially in the
vulnerable eurozone. Hence, deleveraging
will not require significant additional hike
in household saving rates – implying rates
could stay low.
Slowing inventory accumulation
We do not expect strong inventory
building in the U.S. and several advanced
Asian economies after having built their
inventory level on a high note. As for
eurozone and Japan, we found inventory
the drawdown more limited, suggesting
a move to contain unemployment and
keep production up. We expect inventory
rebuilding unlikely to accelerate in these
areas. As such, we expect inventories to
turn from a ‘supportive’ role to ‘neutral’ in
the recovery.
Risk of ineffective policy
We expect monetary policy to remain
accommodative in the advance
economies in 2011. Any tightening by
them will depend much on how well
the financial markets have healed. On
the contrary, some of the Developing
Asia economies will continue to tighten
rates to combat inflation and prevent
the asset bubble bursting. Meanwhile,
fiscal tightening by most economies
will continue in 2011. Our fear is that
the simultaneous fiscal adjustments will
mute the export channels. With policy
rates expected to remain near zero for
many large advanced economies in 2011,
we believe the conventional monetary
policy can offer only limited short-term
help when demand weakens. Risk of
falling into the liquidity trap remains
high. And fiscal policies will eventually
become less stimulative and the mix of
macroeconomic policies across countries
will provide limited support to global
demand rebalancing. This is in contrast to
the past experience.
The drivers to global growth in the
near term
Continuous robust growth from many
emerging market economies
Global growth driver in 2011, in our
view, will come from many emerging
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