Friday 29 Mar 2024
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THANKS to years of excess liquidity flooding the market even as governments took on more debt to fund their various expansionary programmes, tepid global economic growth will be the new norm.   

tsotn_greene_1053“This year will be characterised by sluggish growth, low inflation and an oversupply of everything. We won’t hit global growth figures that we have seen [over the last] 15 years again, not for a very long time,” Manulife Asset Management chief economist Megan Greene tells The Edge.

“I think we are in a new period of much lower growth, and we’ll see global growth of under 3% now and it could reach 3% over the next 10 years. But it will be pretty slow going forward.”  

Over the last few years, major economies have geared up to levels that far exceeded that recorded during the 2008 global financial crisis despite efforts to deleverage.  

Greene emphasises that there is too much debt globally and major economies are over-indebted. She highlights that debt levels are expected to continue growing in years to come, albeit at a slower pace.  

“This debt overhang will be with us for years. There are only three ways to reduce debt; that is, through economic growth, inflation and writing it down. I don’t think we’ll see any of these happen robustly any time soon,” she says.

China is a major culprit when it comes to reliance on debt. The Geneva Report 2014 issued last September highlights that the Chinese economy’s total debt, excluding those from the financial sector, has risen to 72% of gross domestic product (GDP), translating into a 14% increase per year — “a shift almost double that experienced by the US and the UK in the six years that preceded the beginning of their financial crisis in 2008”.

“This brisk acceleration has brought the overall leverage of the Chinese economy to almost 220% of GDP, almost double the average of other emerging markets,” says the report.  

Greene describes the Chinese economy as being “addicted to debt”, with most of it accumulated by the private sector.   

“It’s really high [with private debt] at 210% of GDP. I try to think of the other debt bubbles that have burst lately … I don’t think Ireland hit 210% or even Spain, though they were pretty close. If you’re looking at ratio to GDP, that could form bubbles. In fact, it has. A lot of this private debt has been ploughed into the property market,” she explains.  

Nevertheless, she says the Chinese government has been on a deliberate move to deflate the property bubble in an orderly manner through macroprudential policies. This explains why the average property price levels in China have declined in recent times.

Another bubble that the Chinese government is trying to deflate, says Greene, concerns the financial services sector. With so many financial institutions and shadow banks sitting on bad and non-performing loans, the government has been trying to get these parties to write down the debt. Interestingly enough, the government has managed to keep its balance sheet clean while the state government and private sector gear up. This implies that the government will have the financial muscle to bail out institutions if the need arises.

“I’m pretty sanguine about China’s growth prospects over the next year or two. But in the medium-to-long term, I think the strategy is fraught with risks … a lot could go wrong and fundamentally, their growth model is not sustainable. As long as they are not trying to rebalance [the growth model towards consumption and higher productivity], that increases the risk further down the line,” she says.  

Besides over-indebtedness, she says, the global market is swimming in excess liquidity as central banks engage in monetary policies in an attempt to boost growth and inflation.

This has resulted in compressed government bond yields in all major economies. Greene points to the 2% yield on the US 10-year Treasury note as opposed to 4% before the crisis. Japan government bond yields fell to a record low recently and Germany is currently facing record-low borrowing cost.    

Another repercussion of excess liquidity in the system is the depreciation of currencies.

“It is a beggar-thy-neighbour strategy towards growth,” says Greene. This means that countries are depreciating their currencies with the aim of increasing exports, which will spark a currency war.

She opines that the US will be the biggest loser in this instance as the Federal Reserve has already started to tighten its monetary policy and consider rate hikes while central banks of other major economies are still engaging in quantitative easing of some form.

“This is worrisome because the US is really the bright light in the global economy. If you have the US dollar appreciating relative to everyone else, it will be a major headwind for US growth,” she adds.

US economy the brightest light amid the gloom

After many false starts, Greene says, the US recovery this time is sustainable because it is driven primarily by consumer demand. Retail sales and new car registrations appear to be on an upward trend, and Greene expects this to continue into 2015.  

tsotn_usdollarindex_1053She points out that the US industrial production has trended in similar direction as the retail sales and new car registrations since early last year. “The ISM (Institute for Supply Management) Manufacturing Index is a great bellwether of the US’ GDP growth. Usually, GDP lags behind it a bit, so since it’s a clear upward trend, we can expect GDP growth to improve going forward.”  

US non-farm payrolls show that the country has been adding an average of 200,000 new jobs per month, which is above the average seen in 2013, just above the minimum wage rung. Adding jobs at the lower end of the pay scale will not create upward pressure on growth while having minimal upward pressure on prices, she adds. This means that inflation will remain low.    

The Fed is aware of this, and Greene opines that this would mean that it will wait longer before hiking rates. While most analysts are expecting a rate hike in mid-2015, Greene thinks it will happen only in late 2015 or 2016, as raising rates too soon will eliminate upward pressure on wages.  

She forecasts the US’ GDP to grow at 2.9% this year and an average of 2.7% for 2016 to 2018.

While the US economy heads for a modest recovery, Japan and the eurozone could pose a threat to the US recovery story.

Eurozone and Japan drag

“The eurozone is the biggest risk to global outlook right now,” says Greene, who has forecast average GDP growth of 1.4% between 2014 and 2018, with inflation at an average of 1.3% — below the European Central Bank’s (ECB) target of just below 2%.

The eurozone’s approach to boosting competitiveness entails cutting wages and pensions to achieve internal devaluation. While this has brought about stronger exports in most of the eurozone countries, it has caused domestic demand to plummet. This approach has not been effective as many of the eurozone members have been in recession or stagnation in the past six years. Even the eurozone’s powerhouse, Germany, now faces little or no growth, with contracting exports.  

Greene warns that the eurozone is at risk of experiencing a Japan-style “lost decade”, with little or no growth, as well as deflation.

One way out for the eurozone is through aggressive intervention by the central bank, she says. The ECB has committed to increase its balance sheet by €1 trillion (RM4.08 trillion) over the next two years through the buying of asset-backed securities and covered bonds.

However, Greene doubts there are sufficient assets on the market for the ECB to achieve its two-year goal. She says the nature of businesses in Europe differs from the US, with European enterprises being more reliant on banks for funding instead of raising funds from the market. This means that a US quantitative easing-type of stimulus will not have a direct impact on Europe.

In Japan, Abenomics has not seen much success. Greene opines that the Japanese government underestimated the impact from the sales tax last April, which affected consumer sentiment and caused retail sales to plummet. It has not bounced back since.

While the yen has weakened in recent times, it has not been successful in boosting exports in a significant way. According to Greene, this is mainly because Japanese companies have lost much of their competitiveness, while many have left to set up factories closer to their end markets.  

“The real success or failure of the entire Abenomics strategy hangs on a third arrow, which is structural reform. [Japanese Prime Minister Shinzo] Abe has been promising structural reforms for three years running now. These are really very politically unpopular reforms to push through, so it doesn’t make you wonder how serious he is about them,” she says.

She expects Japan’s economy to grow at only an average of 1% from 2016 to 2018.

What does it mean for Malaysia?  

With nearly all of Malaysia’s trading partners likely to see slower growth in the coming years, it can expect slower export growth going forward, says Manulife Asset Management chief investment officer Jason Chong.

“Malaysia’s two largest commodity exports are oil and gas and crude palm oil (CPO). The advent of shale oil or oil sands has changed the global supply dynamics of oil and gas, hence expectations of low oil prices going forward,” he says.

“However, for CPO, the dynamics are very different. As global population continues to grow, demand for edible oils will always be there. But on a year-on-year basis, prices may go up or down, depending on the short-term demand and supply scenario, particularly the weather.”

Last year, the world generally saw a better-than-expected production of edible oils and hence, lower CPO prices. But lower crude oil prices do not necessarily mean lower CPO prices, he explains.

Nevertheless, Malaysia’s economic growth is expected to slow as domestic consumption alone will not be enough to sustain the momentum.

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This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.

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