Tuesday, July 21, 2009

It Might Never Be The Same Again

On Business Times: Brace for massive economic adjustment, don tells Asia

  • US CONSUMER demand, which supports current external demand for most countries including Malaysia, is not likely to revert to its previous strength when the economy recovers, says a leading Harvard University economist.

    Professor Kenneth S. Rogoff said because of this,
    there needs to be massive adjustment for the world, which "Asia is not braced for".

    "The consumption market that had contributed 70 per cent to the income of the US economy, will not happen again," he said, adding that Chinese consumer demand is not large enough to mitigate the fall.

    Rogoff, who is Thomas D.Cabot Professor of public policy and economics at Harvard, reckoned that the growth rate of the US economy will look like something from the 1970s, with a 1.5 to 2 per cent growth in the coming year.

    "It is not just because of the financial crisis that the US growth has slowed. The political transition taking place has seen a big push for more European-type policy in healthcare and redistribution of income," he said at a seminar organised by RAM Holdings Bhd in Kuala Lumpur yesterday.

    He warned that Americans are probably going to face staggering higher personal tax rates of more than 50 per cent from 10 per cent now in five to 10 years from now, to fund not only the financial crisis but also new social programmes.

    A former chief economist at the International Monetary Fund, Rogoff forecast that the US economy is also not likely to enjoy a strong decade come 2010 onwards.

    Global economy, after a record deep recession and panic, will also slow to 3.75 to 4 per cent, or lower, in 2010, he added.

    He said although the economic crisis is now seeing the tail end of a fall in output number, the US economy is still at a delicate phase and would need another year of transition before the unemployment rate stabilises.

    Recognised for his sharp remarks in Singapore last year when predicting the fall of Lehman Brothers, Rogoff also said that a second stimulus package for the US was necessary following the US$900 billion (RM3 trillion) that was announced earlier.

    The US economy could post a growth between 1.5 and 2 per cent in the coming year.

    Dismissing a V-shaped recovery (fast fall, fast rise), he said recovery in the US will be slower this time.

    Asian economies, with their strong underlying dynamics and improving output numbers, will give tremendous resilience in the crisis.

A very interesting thought. Many just talked about the possibility of economy recovery but many do not address the possibility that the incredible US consumer spending driven by the housing boom and liquidity boom back in 2006 to 2007 might never be seen again.

Now if the consumer or customer is not buying like before, who would the exporting nations in Asia sell to?

Can they consume it all themselves?

And if they can't consume themselves, how then for the economy of these exporting nations?

And because of these, some would urge not to base earnings expectations on 2006-2008 numbers. These past numbers could represent peak numbers and peak numbers sometimes take many, many years before they can be reached again.

Would it not be prudent to lower one's expectation?

Would it be wrong to say that it might never be the same again?