“Uncertainty is bad for growth and economic activity, it will affect the creation of wealth, where if one knows his daily expenses, he can use his savings to use money to make money, therefore if you are spending less than you are making, you will have a surplus, but do not anyhow spent money unless you are debt free, credit money must be utilised for opportunities to make more money. Therefore anything related to the expansion of future income will see a tremendous increase, eg education, IT, investments, infrastructure. – Contributed by Oogle.“
by Sundaram Janakiramanan
The last two years have been very bad for the global economy, with the world’s two leading economies, the United States and Europe, facing major problems.
However, the markets have shown improvement over the past six months.
President Barack Obama’s stimulus package has resulted in positive growth, which – despite being very small – indicates that the structural issues of the US can be tackled if further positive steps are taken.
Unfortunately, the coming presidential election has caused a political impasse in which both the Democratic and the Republican parties have displayed extreme hesitance to take affirmative steps towards improving the economy.
Europe, for its part, is mired in a debt and growth crisis, with no signs of relief without European Central Bank (ECB) bailouts.
Most of the troubled countries in the European Union face negative economic growth and high unemployment.
While the ECB has displayed willingness to come to the aid of such countries, including Greece, that aid is contingent upon those countries implementing contentious austerity measures.
The problems in these two leading economies have had a massive impact on Asian countries: China, where growth has been in excess of 8 per cent over the past few years, has suffered a drop in growth to about 7 per cent.
Singapore’s economic growth is expected to be between 1 and 3 per cent this year.
In this climate, where the economic news has only gone from bad to worse, there is merit to questioning how long it will take for the world economy to turn around and what factors will play into this change in the global economic order.
END TO US POLITICAL IMPASSE
While many may find it hard to believe, this turnaround may not be that far off, and in fact may appear as early as the middle of next year. There are several reasons for such optimism.
The US political impasse will end after the November presidential election, regardless of whether Mr Obama wins a second term or Mr Mitt Romney, the most likely Republican candidate, takes the White House.
Historically, whichever of the two main parties wins the presidency also tends to gain a number of seats in Congress.
Currently, the Democrats hold a thin 51-49 majority in the Senate and the Republicans have a significant 240-192 majority in the House of Representatives.
In all likelihood, these numbers will shift. If Mr Obama wins, then the Democrats are likely to strengthen their majority in the Senate and narrow the Republican majority in the House of Representatives.
This outcome will provide Mr Obama and the Democrats with the political capital needed to pass such reforms as his recent “Five-Point To-Do List”, which includes eliminating tax incentives for companies that outsource jobs and creating tax credits for small businesses that invest in clean energy.
If Mr Romney wins, Republicans are likely to control both chambers of Congress, allowing them to push their political equivalent of Mr Obama’s reforms more effectively.
The breath of political certainty that will undoubtedly manifest after November will put either party in a better position to push their strategy for economic reform.
Since any movement is better than stalemate, the US economy is very likely to improve in response to that political certainty.
EUROPE’S ECONOMIC REGENERATION
Much has been made of the strong European opposition to the ECB’s suggested austerity measures. Again, electoral politics will influence economic growth and progress.
It is likely that the results of the elections in Greece this month will force any new government to leave the euro zone by the end of next month.
Some analysts believe this will have a “domino effect” that will lead other troubled countries, including Ireland, Spain and Portugal to leave as well, resulting in the collapse of the euro itself.
This would cause European nations that currently use the euro to start using their native currencies again.
While this would certainly be a very bad thing in the short-term, such a collapse would force European nations to confront their underlying structural problems head-on and implement policies that would encourage economic regeneration.
Germany, the biggest economy in the euro zone, has pointed out that other European nations would only suffer a 3 to 5 per cent economic loss.
Indeed, Europe is in a better position now than it was 18 months ago to manage an economic fallout, and the contagion risk has decreased dramatically in that intervening time.
But whether the contagion comes to pass or not, Europe is not likely to be as drastically affected by a Greek exit from the euro zone as the media has indicated.
As a result, European economic growth rates will begin to improve over the course of the next year or so.
CHINA AS MAJOR BENEFICIARY
Assuming that the European and American economies will improve over the course of the next year, Asia will certainly benefit from that growth.
China, in particular, will be a major beneficiary. Its economy will grow more from the second half of next year, with its growth rate returning to the rate of 8 per cent or higher. It will probably take advantage of the possibility of a defunct euro to attempt to push the yuan as a reserve currency along with the US dollar.
Since reserve currencies are obliged to be fully convertible, it will certainly work towards rendering the yuan as such.
India is also likely to take advantage of possible improvements in the global economy by turning the rupee into a fully-convertible currency. With the country tipped to grow at a rate exceeding 7 per cent, more Indian companies are likely to take advantage of a global boom to become more involved in foreign acquisitions.
IMPACT ON SINGAPORE
Singapore will prosper in many sectors in the event of an imminent global recovery.
The manufacturing sector would expand based on increased export possibilities. The influx of tourists would increase with the improved economic situation, increasing revenues in the food, beverage, retail and entertainment sectors.
Port revenues are also likely to increase in accordance with an extrapolated increase in demand for shipping. Improvements in the import-export business will benefit our banking sector.
Even the STI Index could reach a high of 4,000 by the end of next year.
While an improved economic situation will provide more employment opportunities, it will also result in increased inflation. If the euro were in fact to collapse, the US dollar would strengthen against the Singapore dollar.
In the event of India and China making their currencies fully convertible, Singapore would actually become one of the leading off-shore centres of trade for these currencies.
A global economic recovery is entirely contingent upon the way American and European politics will proceed over the course of the next few months. At this stage, any movement in those regions is better than no movement and, as such, the outlook is
far less bleak than we think.
Sundaram Janakiramanan is associate professor and head of programme for finance at SIM University’s School of Business.