It is a false dawn simply because such economic activities are fueled by government economic stimulus packages based on fiscal deficit policies.
The question is, whether the private sector is recovering fast enough to take over the economic momentum from the governments. I suspect that in Malaysia and elsewhere, the answer would be a resounding "NO!".
Another aspect is the extremely low interest rate regime in Malaysia and elsewhere which is fueling asset bubbles. Singapore is clearly experiencing an asset bubble of sorts due to low interest rates. People will shift their savings portfolio from fixed deposits to property. Surely, that is not the type of economic activity that is sustainable. This is merely the migration of savings portfolios. It is not green shoots that are sprouting.
Malaysia, as I have said previously, is not in such a desperate situation as many more advanced economies. But, we are not in a cocoon. We are not immune. Therefore, policy makers and investors need to be extremely wary in the coming months.
Markets are too dependent on unsustainable government stimulus. Something’s got to give...
THE effect of free money is remarkable. A year ago investors were panicking and there was talk of another Depression. Now the MSCI world index of global share prices is more than 70% higher than its low in March 2009. That’s largely thanks to interest rates of 1% or less in America, Japan, Britain and the euro zone, which have persuaded investors to take their money out of cash and to buy risky assets.For all the panic last year, asset values never quite reached the lows that marked other bear-market bottoms, and now the rally has made several markets look pricey again.
Central banks see these market rallies as a welcome side- effect of their policies. In 2008, falling markets caused a vicious circle of debt defaults and fire sales by investors, pushing asset prices down even further. The market rebound was necessary to stabilise economies last year, but now there is a danger that bubbles are being created.
Aside from high asset valuations, the two classic symptoms of a bubble are rapid growth in private-sector credit and an outbreak of public enthusiasm for particular assets. There’s no sign of either of those. But the longer the world keeps its interest rates close to zero, the greater the danger that bubbles will appear—most likely in emerging markets, where growth keeps investors optimistic and currency pegs import loose monetary policy, and in commodities.
Central banks have a range of tools they can use to discourage the growth of bubbles. Forcing banks to adopt higher capital ratios may curb speculative excesses. As Ben Bernanke, chairman of the Federal Reserve, argued this week, the rise in American house prices could have been limited through better regulation of the banks. The most powerful tool, of course, is the interest rate. But central banks are wary of using it to pop bubbles because it risks crushing growth as well. And, with the world economy in its current fragile state, they are rightly unwilling to jack up interest rates now.
But even if governments judge that the risks posed by raising rates now outweighs that of keeping them low, investors still have plenty of reasons to worry. The problem for them is not just that valuations look high by historic standards. It is also that the current combination of high asset prices, low interest rates and massive fiscal deficits is unsustainable.
Interest rates will stay low only if growth remains slow. But if economies grow slowly, then profits will not rise fast enough to justify current share prices and incomes will not rise far enough to justify the prevailing level of house prices. If, on the other hand, the markets are right about the prospects for economic growth, and the current recovery is sustained, then governments will react by cutting off the supply of cheap money later this year.
It doesn’t add up
But the more immediate risks may be posed by fiscal policy. Many governments responded to the crisis by, in effect, taking the debt burden off the private sector’s balance-sheets and putting it on their own. This caused a huge gap to open up in government finances.