On the eve of the public holiday - Deepavali, I took leave today. It feels good to be relaxing on a Monday. I decided to continue where I left behind. In my earlier post, I discussed about the current situation of Singapore economy based on an informal survey, gathered from my own experience as well as collected during chit chat sessions with friends, relatives, business associates across various industries in this country. Since the world is getting “smaller” today, it is inevitable that Singapore’s fate is also largely tied to global economy today. Therefore it is important for us to know what is going on in the world today. In particular, the economic outlook in both the world’s number one power (USA) and world’s number one emerging power (China), is of great importance to Singapore.
Just like Professor Kishore Mahbubani, Dean of LKY school of public policy, splendidly put it during a lecture in Harvard Kennedy School this year, when he mentioned that the world is no longer 7 billion of people living in 193 different ships with different captains, just like in the past. Today, it is 7 billion of people living in 193 cabins in one ship. And with no captain. That is why you have global financial crisis, global epidemic crisis etc.
US has reported a set of relatively strong economic data lately, with low unemployment rate (5.1%) and strong consumer spending in the country, despite manufacturing data weakness persists. Last week, Janet Yellen has hinted on a rate raise within this year if the data is strong enough to support the hike in December. And note that post rate hike, USD will likely to devalue, and vice versa!
Is the US economy really doing well now? Some argue that the data is misleading. The official unemployment figure only takes into account people who are actively looking for a job. It does not include people who have lost hopes searching for a job after months of hapless job seeking. The quality of jobs has also declined, with more part time jobs replacing the full time professional positions, meaning while employments rise, it does not mean the standard of living is better off.
Notwithstanding economic data as importance indicator to the US’s economy, in my opinion, the most important question really is how long can debt continues to fuel US economic growth? US public debt is >$18 trillion today compared to 7.3 trillion in 2004, where about 1/3 is foreign and 2/3 is domestic. As of Aug 2015, the largest foreign holders of U.S. debt were Mainland China ($1.27t) and Japan ($1.19t). As of Aug 2015, Singapore is the 12th ranked holder of US federal debt at approx. $116 billion.
This means that any mishaps that USA might face, the tiny red dot will not be spared lightly either.
Do you really believe in China 6.9% GDP growth published in the last quarter compared to a year ago?
China is a big country and the figures that make up its GDP are very complex. It is undoubtedly that some service and consumer sectors are rising, but the driver of an emerging economy is really the industrial production and its exports, which are both falling. The one thing that is rising, which is bad, is inventory level and debts! Six cuts of interest rate in a year tells a lot about the current state of economy China is in, and it will not be surprising if the next rate cut is coming soon.
Another potentially huge problem China faced is shadow banking. In the last decade or so, China has injected ample of funds into their state-owned-enterprise (SOE) to facilitate investment-led growth. As the country slows down, many SOEs are heavily in debts. The same problem of government sponsored enterprises (GSE) took place in US when the federal government sponsored Fannie Mae and Freddie Mac to stimulate the home ownerships growth. This created the sub-prime crisis, which will eventually lead to the GFC in 2008.
Marc Faber, publisher of Gloom, Doom & Boom report during a recent interview with Bloomberg, said that China is expanding at a real rate of 3-4% and warned investors of a bubble of "epic proportions" as well as the "very heavy capital flight" from Chinese investments.
I believe that China is undergoing the transformation from an export-led to a consumer-led economy, and during this transition, economy is bound to slow down, while the longer term future still remain positive as China becomes the world number power! For now, the short term headwind in China is destined to affect Singapore, since we are the single largest foreign investor in China.
Europe & Japan
ECB President Mario Draghi has hinted more QE to come towards the end last month. Perhaps it has come to a point that if there are no loans, there will be no growth in Europe? If there is more QE, it also means that Euros is expected to decline?
In Japan, Abenomics three arrows of 1) massive monetary stimulus, 2) increased government spending and 3) significant economic reforms fail to hit their targets. Wage growth is sluggish and Inflation is below central bank target of 2%. Aside from the failed policy, one of the biggest problems Japan is facing today is demographic problems. The population is rapidly aging and people are moving out of the country.
Brazil, Russia, India
Both Brazil and Russia are greatly hurt by the falling commodity prices. Their currencies had fell off the roof with looming inflation problems. As a result there is a great deal of emerging market risks developing. Having said that and on a positive note, with the falling commodity price index, the consumer story in these countries is still a good one.
With China’s slowdown, India will probably take a share of the limelight in global growth. Given Indian’s large population and it’s resilience to adverse economic conditions, it is likely that India will steer its way out of any potential headwinds ahead, albeit still be affected if any drastic global crisis take place. As of Apr15, Singapore is the single largest foreign investor in India.
Without any doubts, the global economic outlook today is definitely not as rosy as compared to one year ago. I am not going to predict if there will be a crisis in the next one or two years, because nobody will know. Whether there is a crisis or not in the roads ahead, we still need to face it. Hence the whole idea is not about worrying what will happen, but instead the greater importance is for us to understand, anticipate and then take appropriate measures now.
- How the world is smaller today and the significance of countries inter-dependency?
- What is truly happening in the world today and how Singapore will be affected?
With the understanding, we will be able to:
- Which events have a higher chance of happening?
- What will happen to interest rates, currencies, stocks, commodity pricing etc?
And then, we can:
TAKE APPRORIATE MEASURES
- Whether to increase or decrease expenses/debts and how to plan our financials now?
- Where to invest our money now and in the future, when the anticipated events happen?
- How to prepare and plan for our/or our Children’s future in anticipation of what the world is becoming to?
BE A CONFIDENT PARANOID!
I am not proselytizing that you becoming a pessimist, who only fear and fret! The message I wanted to put across is to be a paranoid and yet stay confident, positive and take charge of your life.
Prime Minister Lee Hsien Loong said this year that he admitted that Singapore is "paranoid" and constantly worried that it could lose all of its accomplishments, saying that such concerns are "necessary".
"You don't expect to go back to where you were in the 1960s, and yet it is not natural that you stay at this place. Is it to be expected that the population of three-and-a-half million citizens and maybe a million foreign workers will have the best airline in the world; the best airport in the world; one of the busiest ports in the world; a financial centre which is one of three or four key financial centres in the world; and an education and healthcare and housing system which gives us a per capita GDP which is - at least by World Bank calculations, if you look at PPP (purchasing power parity) - higher than America or Australia or Japan?
"It is an entirely unnatural state of affairs, and one which we should count our blessings for - if not every day, at least (at) every election,"
- PM Lee in July this year while at a SG50 conference organised by the Institute of Policy Studies (IPS) and the Lee Kuan Yew School of Public Policy (LKYSPP).
"It is the Government's responsibility to be paranoid about the future of Singapore. But I think that the paranoia is not shared by the population. As the odds are against the longevity of a small state like Singapore, "you've really got to work extra hard to survive; you've always got to be paranoid".
- Professor Kishore Mahbubani, Dean of Lee Kuan Yew School of Public Policy