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Global Economic Crisis: Opportunities & Threats

Global Economic Crisis: Opportunities & Threats. Kursus Minda Lembaga Pertubuhan Peladang 31 July 2008. Steven C.M. Wong Assistant Director General Institute of Strategic and International Studies (ISIS) Malaysia steve@isis.org.my. Definitions. Global Economic Crisis?

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Global Economic Crisis: Opportunities & Threats

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  1. Global Economic Crisis: Opportunities & Threats KursusMinda LembagaPertubuhanPeladang 31 July 2008 Steven C.M. Wong Assistant Director General Institute of Strategic and International Studies (ISIS) Malaysia steve@isis.org.my

  2. Definitions Global Economic Crisis? Crisis – long period of negative/low economic growth, negative/low prices and high unemployment Correction – short period of negative/low economic growth, negative/low prices and moderate/high unemployment

  3. Definitions Global Economic Crisis? Recession – negative economic growth for two consecutive quarters (i.e. 6 months) Depression – economic downturn that lasts several years (Great Depression 1929 – 10 years)

  4. Definitions V W U L Short & sharp recovery Short & volatile recovery Prolonged recovery No recovery?

  5. Components

  6. GLOBAL MONEY SUPPLY (Interest rates, money supply) FINANCIAL ASSETS (Commodity funds, derivative trading) PRODUCT DEMAND (Income, price & substitution elasticity) EXOGENOUS FACTORS (e.g. weather, natural disasters, armed conflict) FACTOR INPUTS (Capital, labor, technology) GLOBAL FISCAL BALANCE (US, Europe, East Asia, etc) TRADE (Tariffs, quotas, licenses, export restrictions) PRODUCT SUPPLY (Price & substitution elasticity) Components

  7. GLOBAL MONEY SUPPLY (Interest rates, money supply) FINANCIAL ASSETS (Commodity funds, derivative trading) PRODUCT DEMAND EXOGENOUS FACTORS (e.g. weather, natural disasters, armed conflict) FACTOR INPUTS (Capital, labor, technology) GLOBAL FISCAL BALANCE (US, Europe, East Asia, etc) TRADE (Tariffs, quotas, licenses, export restrictions) PRODUCT SUPPLY Global Economic Crisis Is monetary policy stance anti-inflationary or pro-inflationary? Is excess liquidity fuelling a commodity bubble and raising prices generally? Is fiscal policy anti-inflationary or pro-inflationary? Is there evidence of increasing demand-supply mismatch? Are there external factors that are restricting production? Is existing capacity & planned investment sufficient to meet current & future needs?

  8. Global Economic Crisis • Slowdown of US economy • High inflation rates (energy, food & metals) • Excess money supply growth • US dollar weakness • Financial institution collapse in US & Europe • Losses/reduction in financial wealth • Low rates of employment/high unemployment (?)

  9. Global Economic Crisis • Faced with an imminent economic recession and financial crisis, the US Federal Reserve has been: • Cutting interest rates • Increasing money supply • Lending to US financial institutions • As a result, the US dollar has weakened and inflation has risen • In order to avert ‘importing’ US recession, most major economies have: • Kept interest rates low/stable • Increased domestic expenditure

  10. Global Economic Crisis • Slowdown of US economy • High inflation rates (energy, food & metals) • Excess money supply growth • US dollar weakness • Financial institution collapse in US & Europe • Losses/reduction in financial wealth • Low rates of employment/high unemployment (?)

  11. Economic Growth Rates

  12. Inflation Rates

  13. Interest Rates

  14. Commodity Prices

  15. World Oil Supply and Demand 2004 2005 2006 2007 2008 Total Supply 83.4 84.6 85.4 85.6 Total Demand 82.5 83.9 84.9 85.8 87.5 OECD 49.4 49.7 49.3 49.1 49.3 China 6.4 6.7 7.2 7.6 8.0 India n.a. 2.6 2.6 2.8 2.9 Other Asia 8.7 8.8 8.9 9.2 9.5 Middle East 5.7 6.0 6.4 6.7 7.1 Source: International Energy Agency – Oil Market Report, 11 March 2008. Demand & Supply of Oil

  16. Demand & Supply of Wheat & Rice

  17. Threats (1) • Risks of slow/no economic growth are greater than inflationary spiral • Inflation may moderate but high prices will remain problem for many • Not enough jobs will be created and unemployment will rise in most countries • Real income will fall and income distribution worsen • Wealth will decline and poverty will increase

  18. Threats (2) • Trade will slow due to low economic growth, unstable US dollar and protectionism • Foreign direct investment will decline although portfolio investment (esp. from Middle East) may be sustained

  19. Opportunities (1) • Significant investment opportunities • Invest in foreign companies with good brand names, technology, market share, etc. • Acquire capital and technology • Build national and international supply chains • Develop niche markets

  20. Opportunities (2) • Restructure the economy • Invest don’t subsidise • Increase productivity • Innovation is critical • Raise wages • Lower business costs and liberalise • Regionalise production

  21. Take-Away • Production subsidies are not the way forward; investment is • Food prices cannot keep rising if demand falls; increasing domestic production could be unprofitable • Malaysia’s competitiveness can no longer be found inside the economy; companies must go offshore • Productivity and wages must rise

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