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ETHOS_end of the World Economy

ETHOS_end of the World Economy

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Published by chorpharn4269
Published in Ethos an abridged version of the future of global demand post-crisis.
Published in Ethos an abridged version of the future of global demand post-crisis.

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Published by: chorpharn4269 on Jul 09, 2009
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| Issue 6 |
 JUNE 2009
The End of the World (Economy) as We Know It
| Adeline Aw, Wee Shu Lin and Lee Chor Pharn
any economists have describedthe current economic andnancial crisis as themost severe economic recession since World War Two. The crisis has indeedhad ar-ranging consequences: once-mighty banks and nancial institutionshave evaporated; major industries areexperiencing signicant consolidation;thousands o actories all over the worldhave shut down, and millions o workershave lost their jobs. Some economistshave even speculated that the world was poised or a second Great Depression.It is still too early to determine i the global economy has indeed seenthe worst o the downturn as there aresimply too many uncertainties thatcould destabilise any sort o recovery.However, it has become increasinglyclear that the global economy will notrevert to its pre-crisis status quo.The years leading up to thenancial crisis were marked by very benign economic conditions leadingto structural imbalances in the global
Adeline Aw, Wee Shu Lin and Lee Chor Pharn
The End of the World(Economy) as We Know It
MTI’s Economics and Strategy Division expects signifcant shits inpatterns o global demand and growth once the current crisis abates.
| Issue 6 |
 JUNE 2009
economy. At the global level, thedeveloped economies saw stronggrowth in credit growth and privateconsumption, while the level o savingsplummeted.
Emerging economiesredirected their excess savings tonance consumption in developedeconomies. This cycle reinorced tradeinterdependence between the G3nations (US, Japan and the EuropeanUnion) and emerging Asian economiesand meant that the Asian economicgrowth became more, rather than less,dependent on G3 growth. The current nancial and economiccrisis has unravelled this intertwinedrelationship, which the historian NiallFerguson has described as “Chimerica”.
Consumption in the US has allen,perhaps or the oreseeable uture.
Exports rom Asia to the developedcountries have collapsed. Singaporehas been aected severely, with itseconomy expected to experience itslargest contraction since 1965. Todate, Singapore’s economic success haslargely been attributed to the opennesso its economy and its concentration
The End of the World (Economy) as We Know It
| Adeline Aw, Wee Shu Lin and Lee Chor Pharn
on activities which largely serve G3demand. But with the unravellingo “Chimerica” bringing long-termchange to the global demand landscape,Singapore, along with much o Asia, islikely to ace signicant challenges inthe post-crisis uture.
lEgACy EFFECTs From ThE Crisis:TiPPing PoinTs For ThE worlD
 The crisis o 2008–2009 will haveat least
our legacy eects
thatcould permanently alter the globaldemand landscape.
Rising public debt
in the US, Japanand Europe has escalated with thehigh cost o recovery scal spending.I these countries do not oer viable and sustainable solutionsto reduce debt levels in the longerterm, investors’ condence in assetsdenominated in these currenciescould diminish. In any case, investors would also be wary that high levelso public debt now could lead tohigh levels o taxation later. Reducedoreign appetite or G3 assets (inparticular US assets) will impairthese governments’ abilities toinvest in areas such as education,inrastructure and social saetynets, reducing their long-termeconomic potential.
It has become increasinglyclear that the global economy will not revert to its pre-crisisstatus quo.
| Issue 6 |
 JUNE 2009
The End of the World (Economy) as We Know It
| Adeline Aw, Wee Shu Lin and Lee Chor Pharn
Increased government intervention
 in the nancial sector may stifethe innovation necessary or wealthcreation and the nancing o thereal economy. Over the long run,private consumption and growthlevels may be muted i access tocredit is restricted.
Creeping protectionism
could reducethe overall level o global tradeand aect the main mechanismthat has supported Chimerica’sprosperity. Blatant orms o protectionism, such as tari  wars, seem less likely. But moresubtle orms o protectionism,embedded as clauses inmany scal stimulus plans,may hinder the ree fow o trade too.
Fundamental changes inG3 consumption behaviour
 could aect the growth path o the world economy. US consumptionspending, in particular, accounts orone-third o global growth in privateconsumption. Hence, any decline inG3 consumption, arising rom higherlevels o unemployment and the needto save more, would signicantlyaect global GDP growth. 
ThE ChAnging lAnDsCAPE oFgloBAl DEmAnD: PossiBlE sCEnArios
 The interplay and depth o these legacyeects will determine the likelihoodand extent o revival in the growthengines o Chimerica. While the currentcrisis has certainly increased the rangeo possibilities acing the world economyover the next ten to twenty years, we canextrapolate these legacy eects to derivethree possible scenarios or the uture o the global economy.
scea 1 : wuded Beat
In this scenario, the world emergesrelatively unscathed rom the economiccrisis o 2008–2009 as coordinatedgovernment eorts succeed in stabilisingthe global nancial system. Financialinnovation, in turn, manages to outpacethe tightening in regulation, allowinghouseholds and rms to attain easyaccess to credit. Consumer and businesscondence are restored in the majordeveloped economies, and the export-
Source: Courtesy of Economics and Strategy Division,Ministry of Trade and Industry

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