18 January 2012

The Economic Drama of East vs West


Post World-War period saw global growth of 5% per annum on the back of emerging economies such as Japan and the Asian Tigers ....

tandard Chartered, in their recent seminar on Global Research Briefing on 16 January 2012, shared with the fellow Malaysians what they think about the current world economy. The world economy, to large extent, relies on the corporate performance under the management of esteemed CEOs around the world. Whether or not it heads to the right direction, one thing is for sure, these CEOs are making money. It is believed that CEOs are now making 300 times more income than the average worker. With that kind of remuneration, they bloody well have to make sure we are heading towards the right direction. Are we moving towards the right direction? As far as Malaysia is concerned, two economies, or group of economies, are most relevant. They are the West (Europe and USA) and the East (Japan, China, India, etc).

In the 1990's, Japan experienced a bubble burst. Its overhang of debts in the corporate fraternity necessitate government spending/assistance that in turn, increased government debts. A recipe for disaster that eventually chrystalised. During that period, the balance sheets needed to be adjusted. Hence interest rates kept at low levels to boost economy. This is a perfect example of an overheated economy. Will the other Asian countries, Malaysia included, follow the same foot step? I hope not. Careful management of the economy is therefore warranted. We ought to balance between government's responsibilities and corporate responsibilities.

What is the behaviour of the economy? From world economic perspective, there are the Super Cycles that mark the different economic era. Super Cycles are periods of long global economic growth. The first was believed to be between 1870 and 1913 where USA emerged as the world economic super power moving from 4th to 1st ranking economy that has pervasive impact to the rest of the world. The 2nd Super Cycle was from 1945 to 1970, a post World-War period that saw global growth of 5% per annum on the back of emerging economies (back then) such as Japan and the Asian Tigers as well as countries like India and Brazil, all accounted for a huge share of 75% globalisation of economy arising out of international trade. This happened following the strong trade flows between these regions with the rest of the world. A strength that insulated Asia from the global economy that was heavily relying on the USA (& Europe).

In 2010, the world economy only grew by 4.4% and further reduced to 3.8% for 2011 and expected to reduce further to 2.2% for 2012.

In 2010, the world economy only grew by 4.4% and further reduced to 3.8% for 2011 and expected to reduce further to 2.2% for 2012. USA is expected to grow at 2%, Europe at 1.5%, UK at 1.3%, but China,... at 6%. China and the rest of Asia are expected to drive two thirds of the world economy for 2012 onwards. These are merely economists' estimates that are based on economic fundamentals which supposedly have its own merits. Whilst neo-classical economists still believe the "Invisible Hands" theory, the reality is quite the opposite. Government intervention becomes even more critical. Central Banks across the globe may reduce lending rates and governments become strict in their policies. All thanks to Lehman Brothers and Enron. Hence, the headline for 2012 ought to be "2012 will depend on economic fundamentals coupled with financial policy development".

How is the European nation doing? Well, Europe, unlike its US counterpart, is trying to operate 17 countries with 1 currency, Euro. Cross border financial subsidy becomes a big issue. Whilst Greece, Spain and Portugal are forced to remain in European Union draining the financial resources, Germany, on the other hand, bleeds their coffers. Pretty worrying times (for the Germans) especially when money is channelled to support Greece that went through four years (2008 - 2011) of recession and potentially another 5 years to go until 2016. How do you manage an economy (Europe) when under single currency (Euro), different policies are required for the different component countries? Greece, Spain and Portugal need Euro to be devalued to boost their economy whereas German needs appreciation of the currency. A dilemma that haunts the Europeans in this present world with the syndrome of EMU, i.e. European Monetary Union renamed Even More Unemployment.

USA used to generate 400,000 jobs per month. Now down to around 200,000. Housing market in the US hit rock bottom and economic recovery is at a very slow pace. Salaries are growing slowly and tax reforms are badly required. Economists believe that USA will only see a growth of about 2%. A bad year for Obama and his administration.

(1) Made in China 1995-2005; (2) Bought in China 2005-2015; and (3) Paid in Renminbi 2015-2025

So, if Europe and USA are not in their good economic health, then where will the world economic antibody coming from? As Tun Mahathir once said, "Look East". In 2011, Japan, despite their economic turmoil and natural disasters, seems to be on an investment spree. They bought 198 companies in Asia. They are channelling their financial resources outside Japan. Putting their bets on a different horse. It is an irony that investment activities in Asia suddenly increased when times are not good. Why? Asia promises potential growth. With proper recipe such as the 3Cs (Cash, Commodity and Creativity), the growth can go up to 7%. Countries like China, India, and Vietnam are those identified to be the horses on the turf leading the race. Along with those countries, Africa and the Middle Eastern nations are following close behind.

Let's talk about China. They are in their twelfth 5-year plan of boosting consumption, social spending and green economy. With such vast resources and optimistic plan, it will become difficult to manage. Will the Japanese bubble burst recur in China? The risk is there and indicators are apparent. Overheated? Well, as a start, 48% of its Gross Domestic Products are fuelled by investment activities. It is only natural that that is the case given the cheap financial resources flanked by leverage and warm expectations. Despite this bullish outlook, it may be dampened by the contracting property market.

So everyone is looking to the East now? Earlier I mentioned that the two Super Cycles were led by USA and Japan & Asian Tigers. The next Super Cycle is expected to be driven by China. China, with its over 1 billion population will have a significant economic impact to the world, if not real, at least psychologically. The craze over China seems to appear almost every decade changing its perspective to how it influences the world. Almost like Madonna releasing new musical concept every time she releases a new album. In this case, the titles of the album (for China) would sound more like: (1) Made in China 1995-2005; (2) Bought in China 2005-2015; and (3) Paid in Renminbi 2015-2025. A smooth world domination via economic psychology. A sleeping giant waking up. A closed market turned capitalists.

With the global growth expected at 2.2% for 2012, Malaysia is expected to show a growth of 2.7%

So, what do we (Malaysians) care about all these sagas? Will it help boost our economy? Nothing is certain. With the risk of bubble burst, even if the economy is growing, it grows with fear - like a cancer. Asia is expected to show soft growth despite the Chinese prophecy. For second half of 2011, exports have increased steadily. Fuel and food prices slowly reducing easing the inflation to around 3% (CPI). The rapid loan growth now expected to decelerate. International money lenders to Asia may drop their gears (a good opportunity for local banks to step in). With the global growth expected at 2.2% for 2012, Malaysia is expected to show a growth of 2.7% and the above statistics (see table) for the next 3 years, .... a not very exciting story I must say.

* kopihangtuah

| mcmlxxv:viii:xxix |