2 The Global Backdrop
The world economy is entering another period of turbulence and uncertainty following two years of tentative recovery. It now seems clear that the US-led response of easing monetary policy following the 2008/09 financial crisis bought only temporary respite.
The extensive monetary easing masked the structural imbalances in the world economy and allowed “business as usual” to continue. Asian economies continued to depend heavily on exports, particularly to the developed, western economies.
In the meantime, the US and EU governments recorded huge increases in sovereign debt as they eased monetary policy:
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US government debt has more than doubled since 2008, ballooning from US$7.0 trillion in 2008 to bump up against its original ceiling of US$14.3 trillion in Aug 2011. The ceiling was raised only at the last minute after a bruising political battle between Democrat President Obama and the Republican-dominated Congress; and
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In the European Union, sovereign debt worries are expanding. Starting with Ireland and Greece, concerns extended to Spain and, most recently, Italy. Total sovereign debt of the 27 Euro nations soared 26% in two years to €9.8 trillion in 2010 from €7.8 trillion in 2008.
The capacity of the US and Eurozone governments to fund further growth are now severely limited:
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Ratings agency Standard & Poor’s in August cut its rating for US government debt from AAA to AA+. It also reiterated its ‘negative’ outlook, warning that continued high spending, higher interest rates or “new fiscal pressures” could result in a further downgrade;
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World Bank president Robert Zoellick observes there is less room to manoeuvre this time around, saying “Most developed countries have used up their fiscal space and monetary policy is about as loose as it can be.”7
The Asian growth model of exporting to richer, wealthier western nations is now no longer sustainable. Those economies face slow growth as they unwind their massive debt burdens. Asian nations must now look towards home and promising emerging markets for growth.
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7World Bank chief warns of more woes. Sun 15 Aug 2011.
[Pakatan Rakyat Budget 2012 released by Datuk Seri Anwar Ibrahim on behalf of PR in Kuala Lumpur on 4th October 2011. Part 3 of 10]
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