A TALE OF TWO CITIES

Contrast the gloom of the WEST and upbeat mood of the EAST.

" What has been will be again,
What has been done will be done again,
There is nothing new under the sun. "
All good things comes to an end and from every time of sorrow, good times will come again.

STORY A (IN THE WEST)
Wednesday September 8, 2010

Rising risk of double-dip recession
COMMENT
By NOURIEL ROUBINI

THE global economy is headed towards a massive slowdown this year and next. The global economic recovery since the severe recession of 2008–2009 has been artificially boosted by a massive monetary and fiscal stimulus and the backstopping and bailout of the financial system.

But the fundamental excesses that led to the crisis – too much debt and leverage of the private sector (households, banks and other financial institutions, and even a fat-tail of the corporate sector) – have not been addressed as private sector deleveraging has barely started.

At the same time, there is now massive re-leveraging of the public sector in advanced economies with massive budget deficits and public debt accumulation driven by automatic stabilisers, counter-cyclical Keynesian fiscal stimulus and socialisation of the private losses (massive fiscal costs of bailing out the financial system).

Thus, at best, we will have a protracted period of anaemic sub-par, below-trend growth in advanced economies as the deleveraging of households, financial institutions and, soon, enough governments starts to kick in.

Moreover, at the global level, the countries that spent too much now need to deleverage – in the United States, Britain, Spain, Greece and elsewhere – and now they are spending, consuming and importing less. But those countries that saved too much – China, emerging Asia, Germany and Japan – are not spending more to compensate for the fall in spending of the first group.

Thus, in a world of excess supply, the recovery of global aggregate demand will be weak, pushing global growth much lower.

The global economic slowdown, which is already evident from the data for the second quarter of 2010, will accelerate in the second half of the year. The fiscal stimulus will become a drag on growth as austerity programme in most countries kick in.

The inventory adjustment, which boosted growth for a few quarters, will run its course. The effects of tax policies that stole demand from the future, such as “cash-for-clunkers” schemes in most countries, investment tax credits, tax credits for homebuyers or cash for green appliances, will fizzle out as they have all expired.

Labour market conditions are still very weak with little job creation and a sense of malaise is spreading among consumers.

The most likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double-dip.

In the United States, growth was already below trend even in the first half (2.7% in the first quarter and tracking a mediocre 2.2% in the second quarter). It will further slow to 1.5% growth in the second half of this year and into 2011.

Thus, even if we technically avoid a double-dip it will feel like a recession, given the mediocre job creation and further rise in unemployment; larger cyclical budget deficits; a further fall in home prices; banks’ larger losses on mortgages, consumer credit and other loans; and the risk that the US Congress will take protectionist actions against China which has allowed only a token appreciation of its currency.

Outlook for eurozone worse still

In the eurozone, the outlook is even worse. Growth is likely to be closer to zero by the end of the year, as fiscal austerity and stock market declines, along with a sharp rise in sovereign, corporate and interbank liquidity spreads, increase the cost of capital.

Increases in risk aversion, volatility and sovereign risk will also further undermine business, investor and consumer confidence in Europe and around the world, while the weakening of the euro hurts the export and growth prospects of the United States, China and emerging Asia.

Even in China, the policy tightening to deal with its economic overheating and the rise in goods and asset inflation is now slowing down growth. The slowdown in advanced economies’ growth and the weakening of the euro will further dent Chinese growth in the second half of the year. The world’s leading growth locomotive is thus slowing, from 11%-plus towards a 7% rate by the year-end.

This is bad news for export growth in the rest of Asia and among commodities exporters, which increasingly rely on Chinese imports.

An important victim will be Japan, whose domestic demand is anaemic as real income growth is anaemic and which relies mostly on exports to China for its economic growth.

Japan also suffers from low potential growth, given the lack of structural reforms, and weak and ineffective governments (four prime ministers in four years), a large stock of public debt, scary ageing demographics, and a strong yen that gets stronger during bouts of global risk aversion.

A scenario in which the US growth slumps to a mediocre 1.5%, where eurozone and Japan’s growth slows closer to zero than 1%, and where China slows below 8%, is not a global double-dip but it will feel awfully close to one.

Also, any additional shock could tip this fragile global economy, which is growing close to a stall speed, into a full-fledged double-dip. The sovereign problems of the eurozone could get worse, leading to another round of risky asset-price correction, global risk aversion, and volatility and financial contagion that will hurt the region and the world.

Vicious circle

A vicious circle of asset-price correction leading to weaker growth and in turn downside surprises to growth, which are not currently priced by markets and causing further asset prices falls, could occur like the one that tipped the global economy into a global recession in 2008-2009.

One cannot exclude that Israel will strike Iran in the next 12 months; then oil prices could rapidly spike and, like the summer of 2008, tip the global economy into a recession.

Finally, policymakers are running out of policy bullets – which have been already overused in the last three years – in the event the risks of a double-dip rise. Some additional quantitative easing will not make much of a difference. There is little room for further fiscal stimulus in most advanced economies. And the ability to bail out financial systems that are too-big-to-fail but also too-big-to-be-saved – given the fiscal strains of many sovereign – will be sharply constrained.

Thus, as the delusions of optimists for a rapid V-shaped recovery are now out of the window, the advanced world will be at best in a long U-shaped recovery that in some cases, in eurozone and Japan, may be long enough that it will stretch into an L-shaped near depression. And it will struggle to avoid a W-shaped double-dip recession.

In this world even a V-shaped recovery in stronger emerging markets will be dented as no country is an island and many emerging market economies, starting with China, are seriously dependent on the growth of now anaemic and retrenching advanced economies.

So, fasten your seat belts as it will be a very bumpy ride for the global economy.


STORY B (IN THE EAST)
Wednesday September 8, 2010

Hot property market still grabbing attention

By ANGIE NG


PROPERTY, especially the hot housing market, has become a favourite topic these days. Malaysians are generally quite savvy investors and their penchant for viable investment instruments have contributed to the current run-up in the housing market.

The availability of easy housing facilities, including the 5:95 and 10:90 packages, is also fuelling the strong buying interest.

According to the National Property Information Centre in its latest property market report, average house prices have risen 19% to RM273,000 in the first half of this year, from RM220,000 in the same period last year.

In Kuala Lumpur, prices rose about 35% to more than RM700,000 in the first half of the year, up from RM523,000 last year.

The strong jump in house prices in the past six months in some parts of the Klang Valley and Penang have raised concerns that unchecked speculative buying may cause overheating and result in a property bubble.

Bank Negara is keeping a close watch on the market and is engaging with banks on possible measures to curb excessive speculation on properties. It may consider imposing a 80% loan-to-value ratio (LVR) cap for mortgages to avert the risk of a potential property bubble.

The news have caused concern among industry and consumer groups over its dampening effect on affordability level and buying sentiment.

They worry that if the loan limit is brought down to 80%, many first-time house buyers, including those who have just joined the work force and the lower income group, may not be able to fork out the 20% downpayment for a house.

Their contention is that the proposed mortgage loan limit should not be imposed across the board and should give due consideration and flexibility to first-time buyers and those buying lower priced units priced below RM500,000.

Bank sources said Bank Negara’s aim of imposing the 80% mortgage loan cap was to reign in on speculative buying by certain quarters and the measure would be targeted at the high-end and non-owner occupied houses.

A blanket LVR cap will unlikely be imposed given the differing level of speculation in the various housing segments.

Given that houses of less than RM500,000 still constitute the bulk of transactions, accounting for 94% of the total number of units sold and 68% of sales value last year, the mass housing market may be spared. First-time house buyers may also be exempted from the proposed measure.

Should the proposed LVR cap materialise, houses priced from RM500,000 may be affected the most.

The mortgage loans market is now quite liberalised as the central bank does not impose any standard policy on mortgage loans but leaves it to the banks to manage.

Most banks have traditionally provided loans of up to 90% of the value of the property until about two years ago when market sentiment was impacted by the global financial crisis.

To stem the weak property sales, developers and their panel of bankers came out with different variants of housing loan packages that allow buyers to sign up for a house with just a 5% downpayment of the property value. Some even go as far as doing away with any downpayment and eligible buyers are granted the maximum 100% loan.

Although it has been almost two years since the introduction of these easy financing facilities to raise the affordability level for house buyers, these packages are still around in various forms today.

In fact, banks are still flushed with liquidity and are competing to get a bigger slice of the mortgage loan market. The stiff competition among banks has resulted in a mortgage price war with lending rates dropping to as low as base lending rate minus 2.3%.

But things have changed substantially in the past six months or so, and it should be time to review these housing packages.

If house buyers are made to pay higher downpayments for their purchases, the risk of their loans turning bad will be lower compared with if they have paid lower or zero downpayments.

We must not forget that the massive sub-prime housing debts in the United States that turned bad had triggered the global financial crisis two years ago and the world is still paying a heavy price for it today.

Although the LVR cap could dampen property market, demand for quality products in prime locations is expected to remain strong although buyers will be more selective.

Ultimately, if the proposed mortgage cap succeeds in cooling off the rapid rise in prices, especially for landed upper medium to high end residences, it should ensure a more sustainable and resilient property market.