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No
way of getting away from the R-word
Hardev Kaur
The New Straits Times
25 Jan
08
http://www.nst.com.my/Current_News/NST/Friday/Columns/2140593/Article/index_html
The planned
agenda, "The Power of Collaborative Innovation", of the
World Economic Forum in Davos, which has taken the organisers
months of agonising and time-consuming discussions, is being
hijacked by the developments in the capital markets.
Even
before the opening of the week-long annual forum, the word
"recession" is overwhelmingly being used to describe
the United States' economy, as the world's equity markets slumped
across the globe. This year, the World Economic Forum is actually
going to be about the world economy.
The US Federal
Reserve "panicked", according to some economists, and
has been led by the markets, instead of the other way round. It
is behind the curve. It cut its key interest rates by 75 basis
points, described as the largest single cut; a "once in a
generation" cut.
Undoubtedly, the severity of the
situation was reflected in the scale and timing of the Fed's
action. The announcement by the US Central Bank was made ahead of
its scheduled meeting at the end of the month, and observers
think there is likely to be another cut next week.
While
some nerves might have been calmed, as evidenced by the behaviour
of the markets in Asia following the US cut in interest rates,
market observers say the move by the Fed could be "too
little, too late".
Steven Roach, head of Asia for
Morgan Stanley, noted: "We have a market-friendly Fed
possibly injecting a lot of liquidity in the system, which will
set us up for another bubble economy.
"I'm sort of
worried that all they (the US Fed) did was to hit the snooze
button. This is excessive monetary accommodation that just takes
us from bubble to bubble to bubble."
The gloom of the
markets was also reflected in the outcome of a chief executive
officer survey conducted by PriceWaterhouseCoopers, which for the
first time showed that CEOs are not optimistic of the economy
going forward. Fears of recession have replaced those of
terrorism and regulation.
But it is a tale of two worlds;
CEOs in US and Europe are less confident than their counterparts
in Asia, especially those in India and China.
The fall in
business confidence was more pronounced among American CEOs, with
only 35 per cent "very confident" about economic
growth, down from 53 per cent just a year ago.
The survey
among 1,150 senior executives was conducted at the end of last
year and before the latest "bloodbath" in the equity
markets.
Last year, panellists at one of the opening
sessions of the WEF were more optimistic about the economic
outlook.
The state of the world economy going forward
then was described as a "Goldilocks economy", not too
hot and not too cold, but certainly the word "recession"
was not used. Today, the R-word is everywhere. A participant at
this year's opening session cheekily observed that none of those
who spoke of the economy last year were here today.
The
question now is if the US sneezes, does the rest of the world
still catch a cold? Another participant said that perhaps the
question should be rephrased to: "If the US catches viral
pneumonia, where does the rest of the world hide?"
A
prominent banker told the world's movers and shakers among the
participants that the world today is facing very large secular
trends, and the crisis in July and August was far deeper than the
central bankers and regulators understood at that time. Have
central bankers been caught asleep at the switch? George Soros
says "central banks have lost control".
Will the
latest move by the world's largest economy, which "manufactured"
the subprime problem, have a positive impact on the global
economy, or will other regions such as Asia take up the slack and
act as the engine of growth?
Participants at a session on
the "New Actors in Asia" expressed confidence that the
region will not be as badly affected by the downturn as the US.
Yes, growth will slow, but a slowing from an average 11 per cent
for the Chinese economy to about eight or nine per cent would
still be very healthy growth and nothing to sneer at.
A
participant at the World Economic Forum said the meltdown in the
global markets earlier this week debunked the theory that there
had been a decoupling of the economies. What the downturn in the
markets shows is that the financial markets are still very
interconnected.
Nonetheless, there is a discernible shift
in economic gravity towards Asia. For example, major banks in US
such as Morgan Stanley, Merrill Lynch and Citibank Group going
out with a begging bowl in hand, turning to Asia.
South
Korea's and Singapore's sovereign wealth funds have come to their
rescue, as have some Middle Eastern funds. Note that this is the
opposite of what it used to be. In the past, Asian countries
sought loans and financial assistance from the West. Today, the
developed West is seeking assistance from Asia.
Of the
world's 20 most valuable companies as of Oct 7, eight were
Chinese, seven American, two British, one each French and Dutch.
Just a decade ago, there was hardly any Chinese company
on this list. In 1989, of the 20 most valuable companies, 14 were
Japanese; today, there is none.
Asia is also beginning to
increasingly co-operate and trade with itself. Japan's exports to
the US, for example, now account for about 20 per cent of its
total exports against almost one-third previously.
It
exports more to China now than it does to the US. China, a major
exporter to the US, is likely to see its exports to the US
decline, and this may in turn affect its imports from other Asian
countries.
Fred Bergsten, director of the Peterson
Institute for International Economics in the US, is of the view
that instead of decoupling there is "reverse coupling".
By that, he means that the rest of the world is propping
up the US economy. Citing examples, he said while IBM and
Caterpillar had recorded lower sales in the US market, their
sales in emerging markets had increased by as much as 20 per
cent. This indicates how the rest of the world will pull the
American economy along, and with it the global economy.
There
was agreement among some participants that while the downside for
the economy had increased, it would not have such an adverse
impact on the rest of the world as feared.
David
McMormick, US under secretary of the treasury for international
affairs, said growth in emerging markets would offset the slow
growth in the US.
"There is much to celebrate and
it's a great story. It will reverse the impact of the US economy,
but not totally, as the US remains the 800-pound gorilla,"
he added.
Kishore Mahbubani, dean of the Lee Kuan Yew
School of Public Policy, said: "Everybody is responding to
the competition from China and India." And this may not be
such a bad development.
The world economy is far too
complex today. With the US and its numerous problems going into
the presidential elections, the rest of the world cannot just
stand by and watch. "The Rise of Asia" is good for the
global economy, and for Africa, as the demand for commodities
from the continent will rise as is evident.
The increased
demand to fuel the rapid growth of China has led to increased
investment flows from China in infrastructure and resource
industries in Africa. This could provide the impetus for the
economies on the continent that have lagged behind the rest of
the world in almost every area.
Mahbubani said the world
had still not figured out how to jump-start economic development
in poor countries.
He said development and economic
progress in Asia, with many Asian countries attaining
developed-nation status, could have a psychological impact on
others.
In India, for example, there is increased
confidence among the youth who believe that the future belongs to
them. This was not the case not too long ago. This confidence
among youth in emerging economies also bodes well for the global
economy.
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