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Signs Of A Prolonged Economic Downturn Imminent
Malaysia Perspective | 25 October 2011

By Predeeben Kannan

You pick up the paper, watch TV, hear the radio, or just surf the internet, the one common thing you hear, see or listen is that the world is heading towards another economic downturn, similar or possibly worse that that of 2008. As a layman going through your daily live, you begin to wonder – are the “so-called” experts and advisers that are paid the “big bucks” really worth listening to? Weren’t they the ones who advised how economies can avoid falling into another “trap” after the “drop into the ravine” by the banking system in 2008? Now, we are hearing them all over again – countries that were once save havens are now piled in debt, banks are hesitant to lend, joblessness is on the rise once again and worse of all, the economy of almost every nation in the world, minus just a few; are back where they were in 2008 – in the “pit”!

How could they have got it so wrong? What did society ever learn from all the crises the world has experienced since the “Great Depression”? Let us take a look at what has been happening thus far – The US economy has been experiencing a period of almost insignificant growth, jobs are not created fast enough, and industries are in a “rut”. To add “salt to the wound” that the US is facing, it had to face downgrade of its ratings, following the inability of the US administration to come out with a suitable solution to service its debt. Prior to that, the Euro region had a contagion with one nation after another experiencing serious debt, with Greece being the centre of the spotlight, although Spain and Italy are not far behind. The inability of the Euro zone to stand united and firm on issues relating to the bailing out of Greece has shown that the Europeans, just like the Americans and the British, lack the leadership qualities needed to get the world out of its current state of distress. Where does China stand in this equation? It is obviously trying to cool off its economy as demand is shrinking in the west and inflationary pressure is creeping within its jurisdiction. Now, be prepared for the worst – manufacturing growth, once the bastion of strength among the major nations of the world, is slowing down across the board. Let us take a look at the situation from an economic perspective.

The Manufacturing Meltdown

The month of September has always been viewed with disdain by investors and the general public alike. The worst period of the last sub-prime crisis took place in the particular month. The US will forever remember September after the worst attacks on its home soil by terrorists during the 9-11 attacks on the World Trade Centre and the Pentagon in 2001. Historically speaking, the month of September has never failed to bring about distressing news, and so the trend continues!

Manufacturing activity in September took a tumble across Asia. Factory activity in some of Asia’s biggest economies slumped to levels last seen during the worst period of the financial crisis as export demand dropped, reinforcing fears that the worst is not over yet!

Even in China, where signs of slight rises in manufacturing were seen, economists saw evidence of a slowdown. China’s factory activity typically rises in September as businesses prepare for the Golden Week holiday, but this year’s increase was smaller than the average.

In Taiwan’s, the Purchasing Manager’s Index (PMI) dropped to 44.5, recording its fourth consecutive month below the 50 line. For a nation that relies heavily on the tech sector and its manufacturing output, drop in new orders for a third straight month, with both domestic and overseas demand weakening, was a reason enough to worry.

The situation was similar in Japan, with the manufacturing sector showing signs of contraction in September for the first time in five months, after the earthquake and Tsunami. The Bank of Japan’s “Tankan” survey revealed that the Japanese business sentiment has recovered somewhat in the third quarter, but a strong Yen and the Europe’s debt crisis has resulted in a cautious outlook on projections for the near-term.

Meanwhile closer to home, Singapore’s manufacturing sector shrunk for the third consecutive month in September as orders continued to shrink, the Singapore Institute of Purchasing & Materials Management said recently. PMI’s declined to 48.3 points from Augusts’ 49.4, staying below the key 50-point level. A separate PMI for the electronics sector also contracted for a third consecutive month in September, falling to 47.2 from 48.0 as orders, production and inventory shrank.

Although the US Institute for Supply Management’s index of national factory activity rose slightly to 51.6 from 50.6 in August, boosted by a rebound in production and increased factory hiring, new orders in the US fell for a third straight month. According to a survey of purchasing managers conducted by Markit Economics released Wednesday, the Euro-zone economy contracted in September for the first time since the end of the last recession in mid-2009. Markit Economics said its composite PMI for the currency area’s private sector fell to 49.1 from 50.7 in August.

Economies Slowing Down

If it isn’t bad enough that Asian factory manufacturing outputs are slowing down, so have the economies of several key nations. On Wednesday October 5, 2011, official data released indicated that the UK economy slowed to a trickle in the second quarter. Its Gross Domestic Product (GDP) grew by just 0.1 percent in the three months to June from the first quarter, the Office for National Statistics said in a statement. The figure compared with the previous official estimate for growth of 0.2 percent. GDP growth for the first quarter, or three months to March, was also trimmed to 0.4 percent from a prior reading of 0.5 percent.

Meanwhile, in its latest review of Europe’s economic prospects, the IMF said it couldn’t rule out another recession in the Euro currency area. Therefore, the Fund called on the ECB and other European central banks to “keep monetary policy accommodative or even ease further as risks to growth and financial stability persist and inflationary expectations remain well anchored.”

With the US economy already in a bad state, without any suitable initiative that could get it out of the mess that it is in, it looks highly unlikely that there would be a “knight in shining armour” to save the world for the current state of decay that it is in. As much as I detest writing this part of my article, be mindful that the next round of economic downturn that takes place would be more prolonged and possibly more “dangerous” for smaller economies such as countries in the South East Asian region. The solution lies within the region – the formation of more “solid” and “joint” economic framework or cooperation, with greater liberalisation of the regional economies as well as closer cooperation between the nations. More importantly, countries in this region must look beyond relying on highly volatile industries like manufacturing, but instead focus on growth industries, such as services, agriculture and primary production as a secure option for the future. Yes! In order for us to grow stronger in the future, we need to pause and look to the past – to focus on the strength that each nation in the South East Asian region has, collectively – to move forward in a highly volatile world.

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