How Asia can move from L-shaped stagnation to a J-shaped recovery
Andrew Sheng says painful restructuring remains the only way the region’s population giants can move beyond the middle-income trap, and that will take guts and will
As we settle down for the year end, the picture on the economic front seems a bit clearer, although on the political front, the Paris attacks, the downing of a Russian jet by Turkey and continuing refugee migration into Europe have escalated the geopolitical risks. As the “war on terror” spreads, consumer confidence in Europe is likely to suffer, depressing an already weak recovery in Spain, Italy and Ireland.
Despite massive monetary creation, the world is facing slower growth with very little inflation in sight, namely, secular stagnation
In a speech this month, US Federal Reserve vice-chairman Stanley Fischer was surprisingly upbeat, noting that Asian growth had slowed, but was still impressive. The pattern of growth in Asia has been quite consistent – a period of fast growth before deceleration to a moderate level, and when the economy reaches maturity, as in the case of Japan, a phase of slow growth or stagnation takes hold.
Fischer explained the growth through two major drivers – trade and demographics. A reason for the Asian success story was the rise of export-driven manufacturing. In the wake of the global financial crisis in 2007, imports to the advanced countries declined. This was compensated for by China’s imports of commodities. But once the investment-led cycle in China turned, commodity prices declined sharply. Today, demand from the emerging markets has also fallen. Basically, despite massive monetary creation, the world is facing slower growth with very little inflation in sight, namely, secular stagnation.
READ MORE: Time to unleash the young and creative on the global economy to spur growth
At the same time, with their younger populations, India, Bangladesh, the Philippines, Indonesia and Malaysia still enjoy potential for high growth. With the right infrastructure and policies, they have the potential to grow above 5 per cent per annum. We cannot underestimate the power of these emerging population giants as new engines of growth.
READ MORE: Time still not ripe for US interest rates to rise, says China’s finance minister Lou Jiwei
One factor weighing down markets is the trajectory of interest rates, which are still historically low. The Fed may be interested in raising them back to normal, but the European Central Bank and Bank of Japan are still committed to quantitative easing. Emerging market interest rates and corporate borrowing rates have already started rising worldwide and this is, in the short term, negative to growth recovery.