Dim global growth prospects in 2013

The year 2012 is coming to a close, leaving behind many problems. Most are man-made originating in politics.

Yet, sadly, there are no major political leaders who have the credibility, charisma and strength of character to garner the needed political resolve to set their own nations or the world on the righteous path of sustainable growth.

The re-election of US President Barack Obama helped a little. As I write, even if he is able to persuade opposition Republicans in Congress to a deal to avoid the looming “fiscal cliff” (self-inflicted arrangement involving US$600bil of indiscriminate tax hikes and “sequester” cuts in military and welfare spending, bringing on a 3% reduction in 2013 fiscal deficit), the resulting cuts and taxes will invariably become a drag on growth estimated by most to be at least 1% of gross doemstic product or GDP in 2013.

The downside risk to global growth is likely to be exacerbated by the spread of the ongoing austerity to most advanced nations. Thus far, the recessionary fiscal drag has been centred on the eurozone periphery and United Kingdom. Latest indicators point to it spreading to the eurozone's core (including Germany and France) and Japan.

This only confirms the International Monetary Fund (IMF)'s contention that excessive front-loading of fiscal austerity will “dim global growth prospects in 2013.”

The recent near simultaneous leadership changes in China, Japan and South Korea offer East Asia a fresh opportunity for reconciliation after a period of tension.

The region's three biggest economies now appear to be confidently over the hump following the Tokyo and South Korean elections last week and Beijing's leadership “jockeying” resolved by last month. But, realistically, they continue to face headwinds from a stumbling world economy.

North Korea's rocket launch last week adds to regional uncertainty. So does continuing unrest in Syria and the Middle East.

Critical to the well-being of nations is how they will use this opportunity to get their ties back on track.

Enter 2013

The year 2013 is a big step following a tough year. To me, six events had dominated:

(i) Europe held the world's fate in its unsteady hands for most of the year. It took the European Central Bank (ECB) president Mario Draghi's promise “to do whatever it takes to save the euro” to rid the sting out of the crisis, with a later pledge of “unlimited” bond buying;

(ii) The impact of the war in Syria and Morsi's uneasy presidency in Egypt;

(iii) Leadership transition in four of the world's five largest economies, with “elections” in United States, France, Japan and China ushering promises of new approaches to politics and policy making;

(iv) Serious political disputes in the East Asia seas;

(v) recent massive anti-Putin unrest in Russia; and

(vi) Serious transformation moves in Myanmar.

Today they still continue to dominate. For the moment, it is too soon to tell what their politics will bring in 2013. But one thing is for sure: Global business gloom has deepened since the third quarter of 2012 and is likely to persist.

I think there are some important lessons.

First, investment risks have turned more political. US businesses today have more than US$1 trillion in cash reserves and committed facilities awaiting investment. For them, the nightmare is Washington staying gridlocked, four days before falling off the “cliff.” Hopefully, like before, the “game of chicken ends at the last minute.”

Second, even a small economy like Greece (barely 2% of eurozone economy) can have a material impact on global business sentiment as the “Grexit” drama showed.

Third, the European episode pointed clearly that governments can't cut and grow. One of the important takeaways from 2012 is that it is critical to always focus on the big picture and not be grappled by event risks as these come and go.

As a US civil rights activist once said: “For all its uncertainty, we cannot flee the future.” So as we step into 2013, nations just have to embrace risks and learn to manage and live with them. Scurrying away will not help.

OECD slashes forecast

Paris-based rich nations' think-tank OECD (Organisation of Economic Co-operation and Development) said in mid-December that its composite leading indicators (CLIs) point to widely differing growth outlooks among its 34 member states.

Signs are of a modest pick-up in United States and the United Kingdom, slowdown in Canada and Russia, and deepening recession in the eurozone (including significant slackening in Germany and France) and in Japan, and possibly Brazil.

OECD's CLIs are designed to provide early signals of turning points between economic expansion and slowdown, based on extensive data that have a reliable history of signalling changes in activity.

Overall, barring worst fears won't come to pass, combined OECD GDP will only rise 1%1.5% in 2013, not much change from 2012, with a modest pick-up to 2%2.5% in 2014.

Not unlike IMF's forecast, OECD growth will only expand if eurozone deals seriously with its political and debt crisis, and the United States finds a timely credible path to avoid the “cliff.”

Absent such actions, world growth would slide into another downturn, with deepening recession in the eurozone periphery, and contraction or stagnation at the core and related advanced nations. What's needed is “very careful policy steering”.

Eurozone manufacturing kept contracting in November for a 16th month. Data show signs of recession extending into 2013 as policymakers struggle to come to grips with the crisis. For businesses and investors, the October Markit survey concluded that in 2013 companies can expect challenging sales and profits, causing many to focus on cost cutting.

Eurozone: ECB slashed its forecast for the eurozone in 2013, signalling another difficult year ahead. Echoing the IMF, it now expects growth of between shrinking at 0.9% to a growth of 0.3% next year (minus 0.5% in 2012).

The level of uncertainty was reflected in its first attempt to forecast 2014 at 1.2%. “Gradual recovery should start later in 2013” (GDP shrank 0.1% in the third quarter of 2012).

As the eurozone slipped into recession for the second time in four years, Germany's growth slowed down to 0.2% in the third quarter of 2012 (0.3% in the second quarter); expectation is for it to expand 0.4% in 2013 (from 1.6% in 2012). However, Germany faces a “favourable environment on the back of expansionary monetary policy”. Expect some revival later on in the second half of 2013, following better-than-expected jump in investor sentiment in December.

Industrial output in Germany fell 2.4% in October (minus 1.6% in September); France reported a 0.6% drop while Spain and Portugal had increases of 1.2% and 4.8% respectively.

“France is facing conditions much worse than Germany it's fast becoming aligned with its southern neighbours of Spain and Italy.” Germany, given its openness, cannot “prosper alone; it has a particular interest in the welfare of its partners”.

Nevertheless, eurozone's peripheral shows little sign of recovery: GDP continues to shrink because of fiscal austerity, euro's excessive strength and severe credit crunch. Already, social and political backlash against more austerity is becoming overwhelming with strikes, riots, violence and rise of extremist politics.

They just need growth. Another year of muddling through only revives old risks in a more virulent form in 2013 and beyond.

The United States: Growth in United States remained anaemic at 1.5%2% for most of 2012. Political and policy uncertainties abound. Fiscal worries are centred on four key areas: taxes, spending, stimulus and borrowing.

The United States needs:

(i) A package exceeding US$1 trillion in revenues over 10 years and set in motion a tax reform process in 2013 to limit tax deductions and lower rates for businesses and individuals;

(ii) A package of spending cuts with less generous social benefits, health spending reductions and cuts in selected mandatory programmes, including military;

(iii) Some short-term stimulus measures, especially on infrastructure projects and on education and R&D; and

(iv) Raising the debt ceiling now.

Already, with continuing impasse even at this late hour, forecasters are downgrading growth expectations for 2013. “It's a dangerous situation,” says Nobel Laureate P. Krugman. “The opposition is lost and rudderless, bitter & angry as it lashes out in the death throes of the conservative dream.”

All this is happening at a time of significant game changes boosting the outlook:

(a) Housing is recovering;

(b) Manufacturing re-engineering is underway;

(c) The third quarter 2012 growth is up 3.1% (1.3% in the seconbd quarter), with consumer spending rising 1.6% and unemployment down to 7.7%, its lowest since 2008;

(d) Pent-up demand is awaiting to be unleashed upon clarity on the future fiscal pathway; and

(e) New future in energy transformation, especially from low cost shale oil and gas.

But first, the daunting task to regain business and consumer confidence needs to begin now. Because of continuing uncertainty, consensus forecast chances of 24% for greater than 3% growth in 2013, same as chances of a recession.

On the whole, they expect growth of 2.3% in 2013, better than three months ago. But, this won't materially help the 12 million jobless. Even by 2014, unemployment is unlikely to be lower than 7%.

East Asia and Pacific (EAP): World Bank's December update places growth in China and developing East Asia at 7.5% in 2012 (against 8.3% in 2011) in the face of weak external demand.

Growth in EAP is still the highest among the developing world and constituted 40% of global growth, but is set to recover to 7.9% in 2013.

EAP (excluding China) will grow 5.6% in 2012, 1% higher than in 2011 due mainly to a rebound of activity in Thailand, strong growth in the Philippines, and relatively modest slowdown in Indonesia and Vietnam. Malaysia held a steady course.

For the entire region, easy fiscal and monetary policies supported growth. Next year, the region will benefit from continued strong domestic demand and the mild expected global recovery, especially in the second half of 2013.

I agree with the World Bank that most EAP nations have retained strong underlying macroeconomic fundamentals and should be better able to withstand external shocks. But many risks remain, including open vulnerabilities in the eurozone that could readily lead to renewed financial market volatility, and global slowdown: The United States falling off the “cliff” resulting in a loss of growth push for EAP; potential hostility arising from political territorial tensions in the Asian seas; and fallout from unexpected developments in Syria and the Middle East.

However, the robust growth in services this year reflects strong domestic support derived from continuing rising incomes. As these trends gather strength, services can be expected to emerge as a new growth driver in EAP.

For the region, latest business sentiment surveys have turned positive for the fourth quarter of 2012, reversing two consecutive quarters of declines, while global uncertainties remained the biggest concern for the region's firms.

China is expected to grow by 7%-9% in 2012 (9.3% in 2011), the lowest since 1999, due mainly to lower domestic demand growth reflecting the 2011 stabilisation measures. World Bank expects China to expand 8.4% in 2013 fuelled by fiscal stimulus and faster effective implementation of large investment projects.

Indications are the recent slowdown has now bottomed out: The third quarter 2012 GDP rose 7.4%, below the historical trend and the lowest in 14 quarters, but its quarter-on-quarter growth reached a 9.1% annual rate in the third quarter of 2012. Growth is, however, expected to slacken to 8% in 2014 as productivity and labour force growth tail off.

Consumer prices will likely continue to fall, averaging 2.8% in 2012, but will rise moderately to 3.3% in 2013 as growth picks up and the lagged effects of easy monetary policies in the second half of 2011 take hold.

China's policy challenge is to balance the trade-off between supporting growth and reforming. But, priority remains at implementing targeted tax cuts, health and social welfare spending and large-scale social housing to support consumption.

What, then, are we to do?

Geopolitical uncertainties will engulf 2013. Consumers, corporate and investors are bound to remain cautious and risk adverse even scared.

But prospects in EAP look bright and the region continues to have ample fiscal space to counter the impact of external shocks.

Much of the global uncertainties are still being generated in Europe. It's messy there right now, but the recovery of Europe will come some day.

Today, the ratio of stock market value to GDP averaged worldwide at 80%. In peripheral Europe, this ratio ranged from 23% in Greece to 38% in Portugal akin to where Asian counterparts were in 1998. Italy's total stock market value is today about the same as Apple's.

R. Sharma of Morgan Stanley made these and other insightful comments in the Financial Times, with this refrain: Is Italy worth no more than Apple? Food for thought.

Look at it this way. We all have to keep the perspective in approaching 2013 in order to avoid our own self-made “cliff.”

WHAT ARE WE TO DO
BY TAN SRI LIN SEE-YAN

 ● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome; email: starbiz@thestar.com.my.

Related posts:
US Fiscal Cliff poses threat to economy worldwide! 
'Cliff' worries may drive tax selling on Wall Street...

Malaysia in 2013, stability amid a global storm

The rotten heart of capitalism: interest rate-fixing scandals

The magnitude of the banking scam must be realised and tough action taken

The UBS building in Zurich. Photograph: Michael Buholzer/Reuters



This is the year the consensus changed. Around the world, policy-makers, regulators and bankers recognised that the legacy of the 20-year credit boom up to 2008 is more corrosive than all but a few realised at the time. The bankers – and the theorists who justified their actions – made a millennial mistake. Navigating a way out of the mess was never likely to be easy, but it is made harder still by not recognising the magnitude of the disaster and the necessary radicalism involved if things are to be put right.

If there were any last doubts they were dispelled by the record $1.5bn fine paid by the Swiss bank UBS for "pervasive" and "epic" efforts to manipulate the benchmark rate of interest – Libor – at which the world's great banks lend to each other. The manipulation was at the behest of the traders who buy and sell "interest rate derivatives", whose price varies with Libor, so that cumulatively billions of pounds of profits could be made. Nor was UBS alone. What is now evident is that all the banks that made the daily market in global interest rates in 10 major currencies were doing the same to varying degrees.

There was a complete disdain for the banks' customers, for the notion of custodianship of other people's money, that was industry wide. It is hard to believe this culture has evaporated with the imposition of a fine. No banker falsifying the actual interest rates at which he or she was borrowing or lending, or trader who requested that they did so, had any sense that there is something sacred about banking – that the many billions flowing through their hands are not their own. It was just anonymous Monopoly money that gave them the opportunity to become very rich. The UBS emails, which will be used to support criminal charges, could hardly be more revealing. This was about making money from money for vast personal gain.

Interest rate derivatives are presented as highly useful if complex financial instruments – essentially bets on future interest rate movements – that allow the banks' customers better to manage the risks of unexpected movements in interest rates. Whether a multinational or a large pension fund, you can buy or sell a derivative so you will not be embarrassed if suddenly interest rates jump or fall. Bookmakers lay off bets. Interest rate derivatives allow buyers to lay off the risk that their expectations of interest rate movements might be wrong.

What makes your head reel is the size of this global market. World GDP is around $70tn. The market in interest rate derivatives is worth $310tn. The idea that this has grown to such a scale because of the demands of the real economy better to manage risk is absurd. And on top it has a curious feature. None of the banks that constitute the market ever loses money. All their divisions that trade interest rate derivatives on their own account report huge profits running into billions. Where does that profit come from?

The answer is it comes largely from you and me. Global banking, intertwined with the global financial services and asset-management industry, has emerged as a tax on the world economy, generating much activity and lending that has not been needed, but whose purpose is to make those who work in it very rich. The centre-left thinktank IPPR reports that people with identical skills earn on average 20% more in financial services than in other industries, with the premium rising the higher the seniority. That wage premium does not come from virtuous hard work or enterprise. It comes from how finance is structured to deliver excessive profit.

Scandalous

The Libor scam is an object lesson in how finance taxes the rest of the economy. Plainly, the final buyers of the mispriced interest rate derivatives could not have been other banks, otherwise they would have lost money and we know that they all made profits. In any case, they were part of the scam. The final buyers of the mispriced derivatives were their customers. Some must have been large companies, but many were those – ranging from insurance companies and pension funds to hedge funds – who manage our savings on our behalf.

Here a second scam kicks in. One of the puzzles of modern finance is why the returns to those who buy shares in public stock markets are so much lower than the profits made by the companies themselves. One of the answers is that there are so many brokers, asset managers and intermediaries along the way all taking a cut. Sometimes it is through excessive management fees, but another way is not doing honest to God investing – choosing a good company to invest in and sticking with it – but through churning people's portfolios or unnecessarily buying interest rate derivatives to protect against interest rate risk, while charging a fee for the "service". Many of those mispriced interest rate derivatives will have ended up in the investment portfolios of large insurance companies and pension funds or, more sinisterly, in the portfolios of the banks' clients.

Most rotten

Bank managements are presented as ignorant dolts, fooled by rogue traders. They were no such thing. The interest rate derivative market is many times the scale than is warranted by genuine demand precisely because it represented such an effective way of looting the rest of us. The business model of modern finance – banks trading on their own account in rigged derivative markets, skimming investment funds and manipulating interbank lending, all to underlend to innovative enterprise while overlending on a stunning scale to private equity and property – is not the result of a mistake. It represents a series of choices made over 30 years in which finance has progressively resisted any sense it has a duty of custodianship to its clients or wider responsibilities to the economy. It was capitalism allegedly at its purest. We now understand it was capitalism at its most rotten. It needs wholesale reform.

The government's proposals to ringfence investment banking from the rest of a bank's activities, following the proposals from Sir John Vickers, is a start. But it is only that. Last week, Conservative MP Andrew Tyrie's cross-party parliamentary commission proposed " electrifying" the ringfence with the threat of full separation if malpractice continues. It also considered banning banks from trading in derivatives on their own account. But while tough, the commission should extend its brief. The issue is to create a financial system in its entirety that serves individuals and business alike, makes normal profits and, above all, embeds its public duty of custodianship in the bedrock of what it does. The government fears that more upheaval will unsettle banking and business confidence. It could not be more wrong. Reform is the platform on which a genuine economic recovery will be built.

Comment by Will Hutton - Guardian
 Related posts:
The Libor fuss! 
Libor scandal blows to British banking system
Anarchy in the financial markets!

It’s a Smart, Smart, Smart World

 The country that tops the IQ charts isn't the US or in Europe, it's Singapore

Before I get to the dreary budget debates in Washington, here’s a bright spot of good news: We’re getting smarter.

Damon Winter/The New York Times

Nicholas D. Kristo

My readers are all above average. But if I ever had average readers, they would still be brilliant compared with Americans of a century ago. 

The average American in the year 1900 had an I.Q. that by today’s standards would measure about 67. Since the traditional definition of mental retardation was an I.Q. of less than 70, that leads to the remarkable conclusion that a majority of Americans a century ago would count today as intellectually disabled. 

The trend of rising intelligence is known as the “Flynn Effect,” named for James R. Flynn, the New Zealand scholar who pioneered this area of research. Countless other scholars worldwide have replicated his findings, and it is now accepted science — although there is still disagreement about its causes and significance. 

The average American I.Q. has been rising steadily by 3 points a decade. Spaniards gained 19 points over 28 years, and the Dutch 20 points over 30 years. Kenyan children gained nearly 1 point a year. 

Those figures come from a new book by Flynn from Cambridge University Press called “Are We Getting Smarter?” It’s an uplifting tale, a reminder that human capacity is on the upswing. The implication is that there are potential Einsteins now working as subsistence farmers in Congo or dropping out of high school in Mississippi who, with help, could become actual Einsteins. 

The Flynn Effect should upend some of the smugness among those who have historically done well in global I.Q. standings. For example, while there is still a race gap, black Americans are catching up — and now do significantly better than white Americans of the “greatest generation” did in the 1940s. 

Another problem for racists: The country that tops the I.Q. charts isn’t America or in Europe. It’s Singapore, at 108. (The reason may have to do with Singapore’s Confucian respect for learning and its outstanding school system.) 

None of this means that people today are born smarter. While I.Q. measures something to do with mental acuity, it’s a rubbery and imperfect metric. It’s heavily shaped by environment — potential is diminished when children suffer from parasites or lead in air pollution. As a result, the removal of lead from gasoline may have added 6 points to the I.Q. of American children, according to Dr. Philip Landrigan, a pediatrician and epidemiologist at Mount Sinai School of Medicine. 

Flynn argues that I.Q. is rising because in industrialized societies we give our brains a constant mental workout that builds up what we might call our brain sinews. 

“The brains of the best and most experienced London taxi drivers,” Flynn writes, citing a 2000 study, have “enlarged hippocampi, which is the brain area used for navigating three-dimensional space.” In a similar way, he argues, modern life gives our brains greater exercise than when we were mostly living on isolated farms. 

It’s not that our ancestors were dummies, and I confess to doubts about the Flynn Effect when I contemplate the slide from Shakespeare to “Fifty Shades of Grey.” Likewise, politics does not seem to benefit: One academic study found a deterioration in the caliber of discussions of economics in presidential debates from 1960 to 2008. 

But Flynn argues that modern TV shows and other entertainment can be cognitively demanding, and video games like those of the Grand Theft Auto series probably require more thought than solitaire. (No, don’t call the police. My teenage kids are not holding me hostage and forcing me to write this paragraph.) 

Back to the debates in Washington. To me, the lesson from this research is the vast amount of human potential globally that is available if we can nurture and stimulate kids who now get neglected. 

One challenge is to preserve foreign aid. Some 61 million children around the world still don’t attend even primary school, and President Obama in his 2008 campaign was right to propose a global education fund, in part as an alternative to extremist religious schools. I’m hoping the idea doesn’t get dropped forever. 

The even greater challenge is nation-building at home at a time when funding for schools is being slashed, about 7,000 high school students drop out every day, and there are long waits to get into early-childhood-enrichment programs like Head Start. Literacy programs can help break cycles of poverty and unleash America’s potential — and a single F-35 fighter could pay for more than four years of the Reading Is Fundamental program in the entire United States. 

As we make hard budget choices, let’s remember that the essential fact of the world is that talent is universal and opportunity is not. I hope we’re finally smart enough to try to remedy that.

Related post: 

End of Pax Americana  
Singapore job growth high, unemployment low, vacancies rise despite more layoffs 

QE3 triggers fear of new currency wars! What it means?

A man watches the foreign currencies exchange rate in Rio de Janeiro, Brazil

Fear has crept into the foreign exchange markets: fear of central banks. Currency traders are rapidly shifting assets to countries seen as less likely to try to weaken their currencies, amid concern that the fresh round of US monetary easing could trigger another clash in the “currency wars”.

Fund managers are rethinking their portfolios in the belief that “QE3” – the Federal Reserve’s third round of quantitative easing – will weaken the dollar and trigger sharp gains in emerging market currencies. Such moves would cause a headache for central banks worried about the domestic impact of a strengthening local currency, leading to possible intervention.

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights.

Some investors are allocating money towards countries with beaten-up currencies, such as India or Russia, or those with more benign central banks, such as Mexico, that do not have a history of frequent forex intervention.

Currencies whose central banks have either intervened or threatened to intervene since QE3 have been underperforming the US dollar as investors have steered clear.

The Czech koruna is the worst-performing major currency against the dollar since QE3 was launched this month, according to a Bloomberg list of expanded major currencies. The governor of the Czech central bank last week raised the prospect of forex intervention as a tool to stimulate the economy.

The Brazilian real is also weaker in the past two weeks after Guido Mantega, finance minister, made it clear that the government would defend the real from any fresh round of currency wars sparked by the Fed’s move.

Even the Japanese yen is weaker against the dollar overall since the Fed’s move, despite having clawed back all its losses after the Bank of Japan’s move to add to its bond-buying programme last week.

Currency desks at Baring Asset Management and Amundi are avoiding the Brazilian real, which the country’s central bank keeps managed at around R$2 against the US currency, and are instead buying the Mexican peso, where the central bank has signalled it is happy for the currency to appreciate further.

James Kwok, head of currency management at Amundi, said: “Mexico is an emerging market currency many managers like as they believe the central bank won’t intervene. The Singapore dollar and the Russian rouble are managed by a range, instead of one-way direction, and so are also good candidates for QE play.”

He is concerned that another “big scale” intervention from Tokyo is on the cards after the BoJ failed to weaken the yen substantially this month, and is avoiding the currency as a result.

“We definitely take the intervention risk into account when investing in a currency,” says Dagmar Dvorak, director of fixed income and currency at Barings. “In Asia, intervention risk is fairly high. We have still got positions in the Singapore dollar but remain cautious on the rest of the region.”

Other investors are opting for currencies that have weakened substantially this year. Clive Dennis, head of currencies at Schroders, says: “Russia and India have currencies with strong rate support and levels which remain well below their best levels of the last year, hence pose less intervention risk. I like owning those currencies in a US QE3 environment.”

Some currencies are strengthening on a combination of Fed easing and domestic factors. While the Indian central bank is not seen as likely to intervene to stem any appreciation in the rupee, the currency has also been popular this month due to a reform package from the Indian government aimed at stimulating the economy.

Commodity currencies including the Russian rouble are responsive to expectations of a rise in commodity prices fuelled by Fed easing, while investors view the Mexican peso, along with the Canadian dollar, as a play on any economic recovery in the US because of their strong trade links.

However, some investors believe the QE3 effect could be lower this time. They argue that central banks in emerging markets face a tough decision over whether to weaken their currencies to help struggling exporters and stimulate growth, or allow them to strengthen to offset the impact of rising food prices.

In fact, the US dollar has shown signs of resilience since QE3 as fears over the health of the eurozone continue.

While flows into EM debt and equity funds rose substantially last week, according to data from EPFR Global, Cameron Brandt, research director, says this week’s flows looked more muted: “There’s a certain amount of reaction fatigue setting in.

By Alice Ross, FT.com

What QE3 means for China and rest of Asia?

 

China recently announced plans to boost spending on subways and other transportation infrastructure to boost its economy. But China may not be as aggressive with stimulus as the Federal Reserve and European Central Bank.

NEW YORK (CNNMoney) -- Peter Pham, a capital market specialist and entrepreneur with expertise in institutional sales and trading, is the author of AlphaVN.com, an investing blog focusing on Vietnam and other markets in Southeast Asia
 
Now that most of the developed world's major central banks have all committed to some form of open-ended quantitative easing, we can start to make some concrete predictions about the effects this will have in Asia.

In general, QE is being undertaken in the West to stabilize debt markets that are deflating. So this may do little to actually stimulate sustainable economic growth. But, the uncertainty as to whether the central banks would act aggressively kept a lid on many emerging growth markets for months. Here's what may happen next.

China has been lowering interest rates but it cannot afford to do print money to buy bonds like other central banks have done. China's central bank can still announce more fiscal stimulus due to its strong trade surplus. The recent plan to spend $156 billion on domestic infrastructure is significant, but compared to the amount of money the Federal Reserve and European Central Bank may wind up spending, it might was well be $156.

The political situation in China is proving to be more volatile than we may have originally thought as the response to Japan's buying the Senkaku islands seems completely out of proportion with the level of threat or even insult this is represents. It speaks to a party that needs to redirect anger at its own mishandling of the economy.

That this is coming just a few months after Japan and China signed the most sweeping currency and trade agreement of any that China has signed with another country seems very odd.

Japan's response to the QE announcement by the Fed was to extend their existing QE program another 10 trillion Yen (~$128 billion US). That may sound like a lot but it's even less than China's most recent stimulus program.

This suggests that the Bank of Japan is uninterested in printing to oblivion at the same rate as the Fed and ECB, and that Japan will manage the yen's rise while shifting its focus towards more regional trade. Japan and China are each other's largest trading partners, which makes this row over the Senkaku Islands seem manufactured to force the Japanese to choose a side in the growing cold war between the U.S. and China.

So far, Japan has been trying to work with both sides. It is helping to internationalize China's yuan currency and is giving China a clear alternative to U.S. Treasuries with its own bonds. At the same time, Japan has stepped up its purchase of Treasuries, buying more than $200 billion's worth in the past 12 months.

I expect the Bank of Japan to continue to try and position the yen as an alternative regional reserve currency as other Asian nations like Thailand, Malaysia and Indonesia try to lessen their reliance on the U.S. economy.

By keeping the yen strong versus the euro and the dollar, Japan can attract capital from overseas and use it to deploy it around Asia. There should be enough money sloshing around the region so that Asian nations can continue their trade with the West at current levels while also focusing more on regional growth.

The economies of Indonesia, Thailand and Malaysia are already growing above expectations this year despite volatility in their currencies because of the fear over Europe. With worries about Europe starting to wane, these countries, as well as the best companies in them, should have little trouble raising capital through bond sales.

The wildcards for Asia are Hong Kong and Singapore. We're already seeing signs of a property bubble in Hong Kong thanks to the Fed's four-year old policy of interest rates near zero. That's because Hong Kong's dollar is nominally pegged to the U.S. dollar.

Now that the Fed has implemented a program that will further debase the dollar -- and expand its already bloated balance sheet -- Hong Kong is being forced to reassess its currency peg. If they do not make changes, this could result in an even bigger property bubble. That would lead to loan problems for Hong Kong banks similar to those plaguing those in the U.S., Europe, China and, to a lesser extent, Singapore.

Since the Monetary Authority of Singapore (MAS) pegs its interest rates to that of the Fed, its economy is vulnerable to a property bubble like the one in Hong Kong. Inflation is currently above 4% and has recently been above 5%. While Singapore's banks are all very well capitalized and their foreign exchange reserves are higher than their annual GDP, the Fed's QE3 policy will put pressure on an economy already dealing with sluggish growth.

But all in all, the latest round of QE is mostly bullish for Asia as it creates some certainty after the past 12 months of extreme uncertainty. Even though the actions by central banks in the West appear to indicate that their economies are worse than the headlines make it seem, the mere fact that the Fed and ECB have acted should reassure investors throughout Asia.

By Peter Pham @CNNMoneyInvest
Newscribe : get free news in real time

Related post:
New global currency wars warning!

Reducing income tax

I BELIEVE that the path to economic recovery in Europe and for the rest of the world will be a very long journey this time.

It needs all sorts of new ideas to test and try, as old ideas used previously to boost the economy may not work this time, as you still hear some countries considering another round of quantitative easing and financial bailouts.

Perhaps certain administrative policies of these countries may have to be tweaked but they have not done so.

One aspect that I wish to discuss here is the taxation policy, which Malaysia can reap benefits from and put itself on a level playing field with Singapore and Hong Kong.

The taxation policy of a government can impact the level of disposable income of households (i.e. after-tax income).

A tax increase will reduce household income, as it takes more money out of household.

A tax decrease, on the contrary, will increase disposable income, because it leaves households with more money.

Disposable income is the main factor driving consumer demand and thereafter, pull a sluggish economy out of recession.

Despite this knowledge, some countries in Europe had begun raising tax rates, especially on value added tax/sales tax on products and services.

Recently, I read that France is planning to increase the top tax rate for individual income tax to 75%. That is to say, the more you earn there, the less money you can take home after paying your taxes.

Individuals are also consumers. As consumers have less money to spend (since most of the money is used to pay tax), they are likely to cut down on spending.

As a result of “careful” consumer spending, businesses (which are also paying taxes) will derive lesser income and thereafter, pay lesser tax.

This is because the income that is subject to tax is less, therefore, the tax amount will also be less.

So, instead of the intended effect of higher tax revenue from tax hikes, the tax revenue will go down instead.

So, what is the solution?

The answer – major reduction of individual income tax rates.

Let people pay less tax and have higher take-home pay (after tax) and encourage them to spend more.

In the case of Malaysia, a major reduction in individual income tax rates should slow down the effect of brain-drain of our talented individuals to overseas countries and help the country to retain the “tax base” or “tax-paying individuals”.

KEVIN TEO Singapore

Related post:

Time to reform Malaysia's tax system?