WILL we get out of this recession soon? Or are things getting worse?

TEXT/ILLUSTRATION: LARRY HAVERKAMP AND MAROO

The experts are divided. Here are two opposing views. Consider both and decide whether you want to splurge or go hide under your bed.

First, lower interest rates are a reason to refinance your home. It saves money so you can afford to spend, spend, spend. It should get the economy moving again.

Second, fixed deposits are paying less than 1 per cent. It encourages people to take money out of the bank and invest in the stock market. That boosts share prices, makes us feel richer and we spend more. It's called the wealth effect.

Third, the recession has lowered prices and people are snapping up the bargains. You can find great deals on homes, cars, holidays and - of course - the Great Singapore Sale.

Many economists expect the US to pull out of recession this year and Singapore next year.

Singapore's GDP is expected to drop 6 to 9 per cent this year. Malaysia just lowered its GDP forecast to minus4 to 5 per cent.

A popular solution is to trade more within Asia, and forget the rest of the world. That is probably wishful thinking.

First, Asian economies are suffering too.

Secondly, Asian countries have big populations, but they don't have big incomes or spending habits. Minister Mentor Lee Kuan Yew made this point at a Future of Asia conference in Japan on 21 May.

He said: 'I do not believe that in the short term, there can be any change in a consumer-led recovery of these Asian economies.'

Consider this: Consumers spend only $3 trillion per year in Asia, including India and China. In the US and Europe, they spend $20 trillion. There is no substitute for their buying power. We need it to feed our exports.

Unfortunately, the US may not bounce back quickly. It is weighed down by massive home loans, which have increased by US$4 trillion ($6t) over the past 20 years.

US mortgage debt almost doubled from 40 per cent of GDP in 1988 to 75 per cent in 2007. Since then, it has backed off to 73 per cent of GDP but that is hardly any change.

As a result, US consumers must still spend a big chunk of their incomes on home loan payments, leaving less for consumption.

Lower interest rates partly offset this. While it helps, high debt levels continue to hold back a big surge in US consumer spending, which is needed to get the world's economies moving again.

US tax proposals bad for S'pore

WE FACE two new long-term problems which may have no solution, although the Government's new Economic Strategies Committee will brainstorm for ideas.

First are the new tax proposals in the US and Europe which are sure to discourage overseas investment.

The big tax breaks for American citizens living overseas were already repealed last year. Now, the Obama administration proposes ending tax breaks for American companies operating overseas.

Europe is likely to follow since it is also anxious to keep jobs and tax revenues at home.

The effect will be to discourage foreign direct investment, which has been central to our economic miracle over the past 40 years.

De-leveraging

The second long-term effect is worldwide de-leveraging.

Everyone seems to think less debt is better. True, it does reduce the chance of a financial meltdown which almost happened last year.

That's good. But it also means less borrowed money is available to buy productive assets. That will lower GDP, employment and incomes.

Imagine that you go fishing with a friend. You use your own fishing pole and borrow one for your friend.

The next day, you go fishing again but the borrowed pole is no longer available.

Can you catch as many fish with only one pole? No way. You will probably catch half as many.

The world's economies are in the same dilemma. The 'new normal' is likely to be permanently lower incomes and growth.

We may have to do the unthinkable and learn to live with less.

 Back to Columnists