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Humouring the economists

Published by The Straits Times, Singapore on 2004-10-27

A sense of humour isn't something generally associated with economists, who deal with what 19th century author Thomas Carlyle called "the dismal science." He was referring to the pessimistic theories of Thomas Malthus, John Stuart Mill, David Ricardo, and Harriett Martineau not only about economic growth in Britain but also the prospects of slavery abolition in the United States.

But conversations yesterday with economists in Singapore, across South-east Asia, in Australia, Britain and the US about the growing concern in this region about a sharp economic downturn that could affect jobs, prices and production brought out some humour, however black. Some quoted Winston Churchill's complaint that "Where there are six economists, there are seven opinions."

Churchill - who invented many quotable sayings in his extraordinary life - did indeed mouth those memorable words. But he was only borrowing them from the late Barbara Adam Wootton, Baroness Wootton of Abinger, in the days of the Second World War when economics had not yet been enhanced by sophisticated quantitative gadgetry. He sought clear advice from his economic team in those dark days when the Nazis seemed about to overrun all of Europe. What, Churchill wanted to know, was going to happen to the British economy?

He did not receive definitive responses. In fact, Churchill even complained that John Maynard Keynes gave him two opinions on every issue.

Policy-makers in South-east Asia - whose worries about not only a major regional economic slowdown but also a sharp global downturn have deepened over the last few days - may be forgiven if they feel a bit like Churchill these days. What's clear, however, is that from Japan to Indonesia to even Australia, there's increasing discordance among economists about the timeline and impact of the downturn. They even interpret data differently, making it confusing for national decision-makers - let alone everyday consumers - to assess what lies on the horizon in this region and globally.

"There are optimists and pessimists, as in Carlyle's time," said Mr Arjuna Mahendran, chief economist and strategist for Asia-Pacific at Credit Suisse in Singapore. "But what we do have in common is the recognition that economic slowdown taking place regionally and globally. What we don't have is any consensus about addressing the situation."

Contributing to the overall uncertainty is a confluence of three key developments:

(1) The leading indicators published by the 31-member Organisation for Economic Cooperation and Development (OECD) - the Paris-based think tank of industrialised nations - and the Institute for Supply Management in the US all show a slowing of growth in the US in early 2005 to under 3 percent, from the current growth rate of 4 percent. This will inevitably impact Asian export growth and dampen investment and consumption across the region in the first half of next year, especially since the US economy, at US$11 trillion, is not only the world's largest but also the most reliable engine of growth for the global US$31 trillion economy.
(2) For the first time ever, China has become the main export centre for most Asian economies, overtaking the US; goods being sent to China are not only re-exported, as some have traditionally been, but increasing consumed within China itself, raising the issue of inflation and an overheated economy. If China simultaneously re-applies the brakes on bank lending and investment - which Mr Mahendran thinks it will, it would constitute a "double whammy," particularly for its Asian neighbours. Translation: South-east Asian countries wouldn't be able to sell as much to China in the months ahead.
(3) High oil prices - which increased 70 percent since January 2004 and remain near a record high of US$55 a barrel - will probably shave 0.5 percent off global growth next year. The US economy will slow down to a growth rate of 2.5 percent. This translates into South-east Asian growth rates falling to about 5 percent in 2005, from between 7 to 8 percent this year.

Mr Manu Bhaskaran, the Singapore-based partner of the centennial Group in Washington, cautions against excessive worrying, however.

"South-east Asia will be helped by some intra-regional factors - Indonesia's elections are successfully over and there is probably pent-up demand for business spending plus increasing confidence that the worst residual effects of the crisis are behind them," he told The Straits Times yesterday. "Not just in Indonesia but elsewhere in South-east Asia there is a renewed sense of confidence and a new investment cycle appears underway - stepped spending by companies to increase capacity, governments making up for under-spending on infrastructure for so long, and the diminishing excess capacity in property allowing a modest recovery in construction related investment to begin."

"Banks appear to be willing to lend more to companies also," Mr Bhaskaran added. "These features can help support South-east Asian growth when global demand eases next year."

But economic contraction inevitably brings about hardships for everyday people. Shouldn't South-east Asians as well as Singaporeans be concerned about jobs and their financial security?

"Singapore's economy will slow next year in line with a global slowdown," Mr Bhaskaran said. "Financial markets are already pricing that in, hence the weakness of equities recently which would have affected shareholders of listed companies. Jobs growth will certainly be affected if global demand slows. But Singapore companies have already restructured a lot during the previous years, so many are now lean and better able to handle the moderate slowdown next year without major retrenchments."

Mr Sim Moh Siong, the Citigroup economist who monitors Singapore's economy, echoed that sentiment.

"There's not much that Asian economies can do about the global downturn," he said. "But I think that Singapore is prove much more resilient than other regional economies. That's because it has accelerated economic liberalisation and diversification in manufacturing, and it has steadily reduced the cost of doing business here - which is attractive to foreign investors."

Credit Suisse's Mr Mahendran said: "The possible silver lining next year could be an autonomous consumption dynamic emerging in China. If the government can skillfully negotiate a soft landing for the economy by diverting investment flows into funding domestic consumption, South-east Asia will ride this wave. China will need all kinds of primary commodities and technologies, which it still cannot produce. The fact that South-east Asia has still not seen a hollowing out of industry due to China's competitive pressure is encouraging."

In a telephone conversation from his office in London, Mr David Mann, Senior International Economist and Foreign Exchange Strategist for Standard Chartered Bank, said:

"Many economies in Asia are moving to depend less on the global trade cycle and instead of domestic demand. In this regard allowing regional currencies to strengthen, which boost the spending power of domestic consumers, is a logical step. Driving domestic demand and increasing the leverage of domestic consumers will reduce vulnerability to external shocks in the future.

In Melbourne, Ms Karen Pringle, Chief Economist of ANZ, told The Straits Times: "The view from Australia is that the world economy remains fundamentally quite strong even though it faces several challenges. The current oil shock will damage growth but at this stage will not cause recession. Therefore the world economy still provides a favourable backdrop for Asian and Australian growth prospects. We are understandably concerned that South East Asia is more adversely impacted by high oil prices than G4 economies, especially given the high degree of oil dependence of countries such as Korea, Malaysia and Singapore."

And the real danger for Asia?
"The real danger for Asia is not the direct effect of oil prices but the indirect impact which would arise if it caused a more marked slowdown of the global economy thus undermining the demand for Asian exports," Ms Pringle said. "The other risk we worry about is that of a hard landing in China - growth substantially weaker than even our relatively pessimistic 6 percent scenario. This is a real risk given the dependence on investment spending, which has contributed about two thirds of GDP growth in the past three years. If investment were to just level off and stop rising, then GDP growth could slow sharply.
"Though we continue to expect a relatively mild dip in growth it is natural for investors to become wary, given fears and speculation of even higher oil prices and possibly global recession. This suggests risk appetite for Asian investments may diminish both in terms of direct and portfolio investment and lending to Asian companies may be restricted by tighter credit controls," she said.
I asked Mr Mahendran of Credit Suisse what his long-term concern was. His response: "If China doesn't step into the reach when the US engine of growth slows down, you might see some real volatility in world markets."
So we come back to Carlyle on the one side, and Ricardo & Co. on the other. Perhaps what Baroness Wootton would be an even better point of reference. In Carlyle's time, as in the baroness's and today's climate, there are many voices in economics. The tough thing for decision-makers is who to listen more attentively.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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