Asia will see impact on growth as Americans save more, spend less
FORGET a quick recovery. Getting out of this global downturn is going to be 'a hard slog', cautioned Finance Minister Tharman Shanmugaratnam yesterday.
Mr Tharman told investors, fund managers and corporate executives at the Nomura Asia Equity forum that while the worst may be over, the global economy is not yet staging a firm recovery and that any pickup will be slower than in previous recessions.
Investors should also be prepared for a slower-growth world and expect unemployment to stay high for an extended period.
'The weight of evidence suggests this is going to be a hard slog. The recovery over the next two years is going to be slower than previous recoveries, and we cannot rule out setbacks from time to time,' he warned.
Moreover, the American consumer, after two decades of unsustainably high spending, is saving more, while China's rising consumption still cannot make up for the shortfall.
'Chinese consumption growth is not ready to compensate for US consumption growth. Even if they try their hardest, it's about one-sixth the size of US private consumption,' he said.
Mr Tharman's 40-minute address at the Shangri-La Hotel touched on a broad range of issues, from microeconomic reforms for long-term growth to the limits of fiscal and monetary policy measures - the key tools governments typically use to influence demand.
He acknowledged that with the debt-burdened American consumer on the ropes, there will be a significant contraction of real consumption, which will also have an impact on Asia's growth.
'Lower (growth) but not unacceptable, given the need to unwind the excesses we've seen in the global economy over the last five years,' Mr Tharman said.
Citing United States data, he said estimates are that if US household debt is brought down from the current 130 per cent of household income to a proportion of 100 per cent, it will require the household savings rate to rise from 4 per cent to 10 per cent over the next 10 years.
'It'll lower consumption growth of course... And it'll have an impact on Asia,' he said.
He added that gross domestic product expansion in Asia will likely fall to an average of 6.5 per cent over the next few years from 9 per cent during the 2002 to 2007 period.
The International Monetary Fund has forecast that developing economies will probably expand 1.6 per cent as a group this year and 4 per cent in 2010.
Developed nations will contract 3.8 per cent this year and have zero growth next year, the IMF forecast in its April World Economic Outlook report.
Mr Tharman said there are limits to what can be achieved by countries through fiscal and monetary policies.
Fiscal policy has already resulted in a substantial build-up of debt around the world, while most of Asia is on a US Federal Reserve-inspired monetary policy, he said.
'Interest rates already low, (they) can't go much lower. And in Asia, (they) can't go much lower without risking a loss of confidence in your currencies,' Mr Tharman said.
He urged regional governments to work on microeconomic and social reforms to increase long-term consumption growth, such as developing social security and health insurance policies that would free Asian consumers to spend more and save less.
China is 'very serious' about these sort of reforms, he said, pointing out that the country is planning to have a medical clinic in every village by 2012 and national health insurance by 2020.
'The macroeconomic stimulus story worked well for a year but is both unsustainable and undesirable if continued year after year,' he said.
'The real reforms in social security... that story is real, but it takes time.'
A HARD SLOG
'The weight of evidence suggests this is going to be a hard slog. The recovery over the next two years is going to be slower than previous recoveries, and we cannot rule out setbacks from time to time.'
STILL NOT ENOUGH
'Chinese consumption growth is not ready to compensate for the US consumption growth. Even if they try their hardest, it's about one-sixth the size of US private consumption.'
Source: Straits Times, 8 July 2009
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