06/09/2014 Talking Business with Linda Yueh

how healthy is the global economy and are we past the risk

When will the economy get back to normal, we are taking a health check

on the state of the global economy and finding out what it means for

your mortgage and your job. In Singapore, I am Linda Yueh, and

these are my guests and we are Game It has been six years since the

global financial crisis with the world economy almost grinding to a

halt, we have seen a slow recovery and a few setbacks along the way.

Things are finally looking as if they are on the mend and the

International monetary fund 's latest predictions paint a more

optimistic picture for the rest of the year. The IMF is forecasting

global growth at 3.4% in 2014 but it is an uneven picture across the

major economies. The United States and Britain are showing decent

recoveries with good expansions this year, the Eurozone, previously

expected to be stagnant is forecast to grow, by a sluggish 1.1%. Japan

is still struggling to boost its economy with 1.6% growth expected.

China is forecast to grow at 7.4%. Slower than what it is used to and

below the target for the year. Other emerging economies will not be

outperforming any more. The big question is, are we there yet? Will

the recovery be sustained and when can we expect things to get back to

normal? With me to look at the health of the global economy, the

managing director from global economics for Asia, David Mann, from

Standard Chartered. Welcome. Let me start with you. What grade would you

give the global economy right now, grade A, grade B? Nothing lower than

grade C? If we are going to use a US system, I would give it a grade C.

Why is that? Six years into this, we still have growth rates in major

parts of the world which are very low. Normally when you come out of,

what you call the balance sheet recession where banks are not

lending and households have debt, even then, normally you will have a

period in which you are growing faster than potential. Those numbers

you have cited are generally lower than the potential. What about you

David, what grade would you give it? I might give it a B+, I am not sure

whether it is the result of some inflation, asset prices inflation.

It could also be because the focus is on the markets where we think we

are seeing outperformance, even in the years gone by where we had a

weaker growth outlook, we saw the performance in the Chinese region,

even coming down to a trend rate of 7% which we think can be sustained

this year and the year after. It is the envy of many economies in the

West. You will see a diverging staying in place for a long time. I

have got to ask this question, are we passed the point of crisis in the

global economy? We are never passed it, it is how likely that the crisis

is going to be passed or not. CHUCKLES

Part of the complication and the way we are recovering, to a large extent

we are relying on the inflation of asset prices to generate wealth. To

generate spending. House prices, stocks, record highs, US stock

markets. Exactly, it increases peoples wealth and they think they

will spend. Until recently, in the US, you were not creating many jobs,

you couldn't have a rise in real income from wages. Those who had

assets, they were doing better. The problem with this situation is that

ultimately you have to do have the productivity gains and income gains

rather than asset prices, to the extent that asset prices are linked

to interest rates and when the interest rates are risen, you can

have difficulties with the continuation of the rise in the

asset prices, maybe not so much spending, it might not cause a

crisis, but the risk is probably quite low. Because we went through

this and people remember, including households as well as policy makers,

not to make the mistake again. Is there a risk of crisis any time

soon? There are enough of the ingredients for one, you cannot rule

it out. A good example, still top of the list would be something, if it

went wrong, some new government in part of the Eurozone committed to

exiting the euro and people start to panic about the situation resuming.

This is a risk you could put on your worried list for the next ten years.

It will not go away any time soon. You can also point to the

problematic debt situation in China, and leveraged has risen

dramatically, at a dramatic pace. It has been well in excess of what the

GDP growth has been. The issue really, leveraging is also the

middle of the crisis but you need the trigger. It is very much a

mistake to think you're necessarily will go headlong into a crisis in an

economy where so many key decisions are ultimately made by the same

entity. Let's focus on diverging performance, there has been a

separation from Britain and the rest of the Eurozone, when you look at

Japan, a continuing to try to the economy. The US is another big one,

it stumbled on the first part of the year, now picking up. In the

emerging economies, China, India, relatively speaking growing faster

than Brazil and Russia. The other big markets, Brazil is in recession

and Russia is struggling. What accounts for such big divergences in

the performance among the big economies? Do not ever put these

economies into the same list, even between China and India, the stories

are so different. In the case of China, so much growth is because of

policies enabling it with the infrastructure spending, it should

be able to grow faster than China. China and India, if you were to put

them into one bucket, they would be the consumption related nations. In

the case of Brazil and Russia, a lot of the growth benefits were from

supplying that growth. What about you, what accounts for the

divergences? When you think about where growth comes from it comes

from input, either you have workers and the workforce is growing, or you

have capital and you are building roads and factories. When you

compare Brazil and Russia to India and China, you have in the first

two, lower population growth. Much low investment. You don't have as

many people coming into the workforce nor do you equip them with

the same capital. You grow more slowly. On top of that you have a

set of the policies which can get in the way of people and capital

working effectively together. That is certainly what is going on with

the complications that politics are imposing on the Russian economy,

people are wondering what is going on, we do not want to invest, maybe

we should take money out. There is an election, adding uncertainty in

Brazil as well as the complications between the state working with the

private sector and what decisions can be made. Where as, those issues

also exist in the context of China and India. In a scaling which is not

so can take `` not so conflict ridden. If you would choose one

economy to give a grade A, for the rest of the year, and which one you

would say, oh, might have to flunk you in terms of prospects, which

would you choose? I do not think anybody gets grade A! It is hard to

say, we have seen anything close to the things materialising. If you

were to push on this one I would say that two making, the ones making the

strongest efforts are up in Northeast Asia, China and Japan. And

career. They are doing things, if you force me I would go on the

borderline between grade A and grade B. `` and South Korea. Starting with

China, they are aware of the situation, relatively new

leadership, making a lot of steps towards the short`term pain for the

longer term gains of a more sustainable path of growth. That is

what we have wanted to see from long time. People have taken it badly on

the assumption, growth is slowing. Let's not forget, if we do not track

around 7%, there will be more stimulus and the momentum for reform

is still there. That's the closest to the grade A. Where I would be

more harsh, putting it at the lowest end, not flunking it, many parts of

Europe. We are yet to see some major reforms that would help to make the

long`term growth sustainable. It is a tough situation, which already we

are seeing positive growth as opposed to negative growth. It is

not all terror. `` it is not terrible. What about

you? I think the economy with the potential to perform the best is

Taiwan, we have had data showing it has the fastest manufacturing growth

in the region. Relative to expectations, let's call it the

purchasing managers index, business people, you ask them about the

environment. The high as reading is from Taiwan. Rather than the other

side of the straights. CHUCKLES In terms of the greatest risks,

where life is most complicated, it is actually probably still some of

the economies in the periphery of Europe. Yes, growth is coming back,

but as interest rates globally begin to rise the attractiveness of those

economies will diminish. In places like Portugal, they have high levels

of debt. It creates vulnerability today and tomorrow. Thank you for

joining us. Much of the world responded to the crisis by making a

lot of credit available cheaply, this was aimed at encouraging

businesses to borrow to invest and ultimately to try to spur growth.

Since the crisis hit the US Federal reserve has kept their interest rate

at virtually zero. Similarly the Bank of England has kept the

interest rate at 0.5% since 2009, another historic low. The European

Central Bank has also slashed rates and faces difficult challenges over

the prospect of the flake shin or falling prices. This is associated

with a stagnant economy `` deflation. That is what the bank of

Japan has been facing for two decades and it is continuing to deal

with weak price rises, so, where are interest rates headed and what will

it mean for mortgages and jobs. Has the cheap cash than enough to

discourage lingering investment? We are joined by the chief economist

from the bank of Singapore and the head of research from ING financial

markets. Welcome. Richard, when we will see the first interest rate

rises in the United States? We are not far away, maybe the middle of

next year the Federal reserve will start to push up short`term interest

rates. Probably they will do it slowly and carefully. You have had

six years of crisis, you do not want to rock the boat and risk tipping it

over. Europe and Japan, we are years away, they are still looking to

loosen policy rather than tightening, this seems to be over

the horizon. What about you? We are in the same camp as Richard, US,

maybe next year, at the risk of being brought forward because of the

better employment gains in the US. In the Eurozone and Japan, into the

distant future... I guess the question is, how much lower, if I

were borrowing a mortgage in the UK, what would I be looking for in terms

of the mortgage rate? I'm not sure I would say rates would be lower than

the past, one thing central banks are trying to do is generate

inflation. They are being slow to raise interest rates, even though

economies are improving. You can see that in America and the UK. They

will probably allow inflation to come through and they will raise

interest rates slowly, inflation will overshoot, and interest rates

will have to overshoot any concept of neutral, they will not stop at

the neutral rate. They will overshoot to five, 6%. In order to

squeeze the inflation. They are deliberately trying to create. This

could be many years away, possibly the end of the decade. The logical

outcome I think of the policies being pursued in America and the UK.

If you are borrowing based on short term interest rates, you are going

to see at some point a surge in the borrowing cost, you need to be

careful. About the amount of leveraged and exposure you have in

relation to your income. When interest rates rise, otherwise, from

these depressed levels, you can find yourself overextended. Where are you

on this, in terms of mortgage borrowing and Britain, should people

be worried that interest rates could be 5`6%, or is it closer, to 1%,

even lower? I have a different view from Richard, I think the world is

in a Japan scenario, where we have a very sluggish growth picture. Their

re`anaemic inflation pressure, despite central banks best efforts

to generate inflation `` very anaemic inflation pressure. This

presents a conundrum, understanding why this massive increase in central

bank money has not translated into inflation. But it has not. I think

it probably won't. As a consequence, I think we are looking very muted

increase in short`term interest rates which are what in most of the

world mortgage borrowing costs are tied to. I think that the concern,

central banks are expressing for the fragility of these recoveries will

stay their hands to a certain degree in hiking these policy interest

rates. Short`term money market interest rates are tied to the

policy rate. That will mean short`term money market interest

rates, what mortgage rates are tied to, will be going up more slowly

than I think that their case scenario would have it. It leads me

to think, we are at levels below 1% now. Maybe over the next year we

might get between 1`2% and I think that could be it for a while. Do you

agree, Richard, because this is a different take in terms of inflation

coming through? You need to differentiate by geography, Europe

has similar problems to Japan. It's not surprisingly they didn't fix the

banking crisis, they have pursued crazy austerity programmes, they are

still with very high unemployment. Contrasting with America and the UK,

America fixed the banks and cleared the bad assets. It seems like the

economy is recovering, the unemployment rate is 12 months away

from full employment, America is a much more normal recovery. I think

the Eurozone is more Japan style. Very half`hearted recovery. UK is

closer to the States, we have concerns about inflation as the

labour markets tighten, you can see the evidence in the recent Bank of

England minutes where they had a split decision on policy at the most

recent meeting. Focusing on jobs, you think the US could get back to

full employment within 12 months. What about the UK and Europe and

Japan? The jobless rate has been coming down faster than expectations

in the UK. Looking at Europe, it is a completely different picture, the

unemployment rate has just begun coming down. Heading in the right

direction but still very high to the peak levels, it is a terrible social

environment, it is uprising there has not been more social distress

related to this. The public has been surprisingly tolerant. You can see

there is growing political pressure on the government 's to be less

aggressive in pushing the German led austerity. Japan is another example.

I suppose they didn't have the same unemployment shock Europe did. They

had a long period of poor growth. We are having a big problem with

unemployment because a lot of it was disguised within companies, keeping

on employees. What do you think in terms of the appointment picture?

Employment depends on growth and growth is slower. `` the employment

picture. The recovery in the US labour market, we are getting closer

to what is considered is full employment, people forget, before

the global crisis it was below 4%, now we are seeing 5.5% as the

non`accelerating inflation employment rate. Maybe that is

right. We have dumbed down what we call full employment. We are getting

there. It is happening without wage gains and any pressure, Richard says

it is beginning to take up, that is a very muted thing. The direction of

change is positive. It is just very slow. It is not just about

unemployment, it is inequality, people are aware, it is creating

more jobs, but a disproportionate amount of the income created is a

crude to a small part of the population. Even though employment

is increasing you don't get the same increase in spending activity you

would have expected `` it is accrued. I have no idea if you guys

are in the process of buying house, but if you were, given that you

think that rates will go up in a couple of major economies would you

fix your mortgage now? Longer term interest rates are going up, I am

not sure it is really worth it. The difference with borrowing short and

long is fairly wide difference. I am not convinced it is a good time to

be locking in these interest rates. Locking in low rates now would be my

judgement in the US and the UK and in the Eurozone I would wait. As we

have discussed, the Eurozone is looking to cut borrowing costs

further. You might get a break and you can lock in a lower rate in the

years ahead. And for a long period of time. In the US in the UK, I

agree with Richard, rates are heading up. I don't think in the US,

for a 30 year mortgage that the rate is probably not that sensitive to

the short`term money market rates. It is more key to the long`term

borrowing costs. For the Treasury. Those are fairly stable. We have a

2.4% ten year Treasury note yield today, it looks low. But even if I

am wrong about that, 3%, this is the new normal, it is a very attractive

rate to lock in. For the long`term fund. Thank you very much indeed.

The global economy seems to be on the mend but thereafter risks

including the fallacious, it could mean a continuation of the error of

cheap money. Ash macro this is as the US and UK economies

are getting back on their feet and it all makes for a challenging time

for mortgage rates but one thing is clear, jobs are returning which is

welcome news after six years of recession and a slow recovery. That

is all we have time for, check out our website and myself on Twitter,

join this next time on Talking Business, with me, Linda Yueh. ``

join us. It has been a bit of a mixed bag

across the United Kingdom today, if you were in Yorkshire, pretty cloudy

with relentless showers. Many other places saw some sunshine but

scattered showers. Further showers to take is through