By Kumaran Pillai
He enumerated four risks in his speech that may affect the global economic outlook: The danger of cyclical unemployment in Europe and America becoming structural; China’s structural deceleration; Supply side risk of the emerging economies; and stagnation of the middle class in mature economies.
Stagnation of the middle class
The generational tension in the middle class of mature economies, he said, is a cause for concern for policy makers. He added that policy makers have been responding to these challenges one election cycle at a time.
Short-term policy shifts to cater to the growing demands of the electorate only compounds the issue of global economic instability and may manifest themselves in the socio-political arena. What is required is a major political reform, he said.
The feedback from these tensions may become more significant if the mature world does not address these issues adequately.
Risk in emerging markets
He also highlighted the opportunities in the emerging markets and said that each market was unique and should not be lumped together. However, the challenges facing these economies include political instability, structural gaps and policies that protect local industries. He warned the investment community that these problems can turn into huge frustrations for them.
Tharman added that opportunities abound in these emerging markets but the labour force in these countries often lagged behind and this may result in a supply-side risk.
Deceleration of China
The deceleration of the Chinese economy was also another risk factor affecting the global economic outlook. The world economy may be severely impacted should China’s GDP grow at less than 6.5 per cent per annum. He added that there is a danger that the GDP figures reported may be lower or higher than the actual GDP numbers.
The transitioning of the Chinese economy from an investment-driven to a consumption driven model also poses a major risk to investors worldwide. It is a major undertaking and investors should not expect the Chinese government to get it right straightaway.
America and Europe performing below potential
Tharman said that both the American and the European economies were performing below potential and highlighted the danger that cyclical challenges may become structural if the policy makers do not respond adequately now.
There has also been too much focus and reaction to Federal Reserve’s tapering of interests rates. The withdrawal of monetary accommodation is never an easy process and there are uncertainties in the interaction between markets and policy makers – the central bank can only shape cyclical changes and can’t alter structural problems.
The real problem that we face in the world today is that the challenges are globalized while the policy reactions to them have been largely local. No country is immune to the perils that lurk in this inter-connected world and how our world would be in the years ahead is determined by the socio-political conditions both locally and worldwide.