Europe puts its head in sand over growth crisis

By Alan Wheatley, Global Economics CorrespondentLONDON | Mon Sep 5, 2011

Greek and others European national flags flutter near an euro symbol outside the EU Parliament in Brussels August 30, 2011. REUTERS/Francois Lenoir

(Reuters) – Japanization is shorthand for slouching toward that country’s noxious mix of low growth and high debt. Euro zone governments will find it tough to keep the ugly new word out of their lexicon.

Concern is mounting over a deterioration in Europe’s long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.

The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organization for Economic Cooperation and Development in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.

“A lot of countries are going to take a permanent hit to their trend rate of growth. This is not an ordinary recession and so we’re not going to see countries bouncing back to pre-crisis rates of growth,” said Philip Whyte, a senior research fellow at the Center for European Reform, a London think-tank.

As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.

And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods — a danger stressed by Federal Reserve Chairman Ben Bernanke at the U.S. central bank’s Jackson Hole symposium last month.

Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to gross domestic product ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.

Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy — policies such as making it easier to hire and fire, promoting greater competition and investing more in training.

Far from it. Pier Carlo Padoan, the OECD’s chief economist, says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.

“I see that measures are being announced. I would like to see them being implemented,” Padoan said.

With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change. “This is a luxury that many countries cannot afford any more. The situation does not allow it.”


The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the euro zone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.

“They’re going through some truly horrible times. I’m very worried about the whole southern European fringe, not just on an 18-month to 2-year view but looking out a decade or longer,” said Whyte with the Center for European Reform.

Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.

“The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms,” Jean-Claude Trichet, president of the European Central Bank, said approvingly in Jackson Hole.

How much are countries missing out by not pressing the reform button?

Padoan says Europe’s trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation euro zone could almost double that rate with a supply-side jolt.

Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.


Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.

These policy prescriptions are well worn. Leaders of the European Union enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.

“The Great Financial Crisis hasn’t been a great advert for free-market capitalism,” said Whyte. His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. But in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.

Europe is not doomed to go down Japan’s path of economic stagnation. Its potential growth rate is low but stronger than Japan’s — estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.

But the specter of a renewed recession is a reminder for governments that, even if they can spirit away the euro zone’s currency and debt woes, they have still to find the elixir for growth.

“I’m not saying politicians will implement reform, but they should,” Padoan said. “Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high.”

(Reporting by Alan Wheatley; Editing by Ruth Pitchford)

Newscribe : get free news in real time


Property loans to keep lead; Malaysia’s property mart unaffected by forays abroad

Property loans to keep lead


PETALING JAYA: Analysts expect property loans to maintain their position as a key growth driver of credit expansion with some estimating them to grow between 10% and 12% this year due to the low interest rate environment and ample liquidity in the banking system.

We believe that the full year loan growth for residential property loans will be in the 10%-12% range.- RAM Ratings head of Financial Institution Ratings Promod Dass.

While holding to this view, some feel the external environment, like the slowing US economy coupled with the sovereign debt crisis in the eurozone, could dampen demand for properties.

For the first seven months of this year, property loans remained the key growth driver, accounting for 40.6% of the banking system’s overall credit expansion, followed by working capital loans at 23.6%. Residential property loans currently accounted for about 27% of the system’s total loans.

RAM Ratings head of financial institution ratings Promod Dass toldStarBiz that the credit environment to date had continued to be accommodative for borrowers with ample liquidity in the banking system and a stable economic environment. Coupled with attractive promotional packages offered by some developers, he said residential property loans had already shown a healthy 7.1% growth in the seven months to July (or 12.1% annualised), which was more or less at a similar pace compared with the overall total banking system’s year to date loan growth of 7.5%.

“We believe that the full year loan growth for residential property loans will be in the 10%-12% range although we are closely observing the sovereign problems still brewing in Europe as well as concerns on the US economy and the consequent impact on Malaysia’s economic growth stamina, which could affect consumer sentiment in property purchases,” he reckoned.

Dass said that while there was a slowdown in loan applications for residential mortgages in the few months after the implementation of the 70% loan-to-value cap on the third and subsequent house financing, the momentum had picked up again since March.

The move to curb the third and subsequent home financing was introduced by Bank Negara on Nov 2 last year to quell speculation on residential properties.

Alliance Bank Malaysia Bhd consumer banking head Ronnie Lim said he was bullish on property loans. He noted that in Malaysia, housing loans currently accounted for 50% (or RM255bil) of total household debt (RM510bil) and would continue to be one of the key growth drivers of retail credit expansion this year and in the near future.

“One of the main growth areas for properties is Klang Valley, which accounts for close to 60% to 65% of all property transactions. In addition, the population growth in Klang Valley is expected to reach 10 million by 2020 and the demand for residential property is expected to be fuelled by residents of Klang Valley whose average age is 34 years old.

“Coupled with the shortage of land in Klang Valley, demand will always out-strip supply. The economic growth and the low unemployment rate in the country is another catalyst for housing loan growth. The recentEconomic Transformation Programme (ETP) announcement will further accelerate demand for residential properties as more affordable properties are being developed,” he said.

Lim said prices of properties in Malaysia were still one of the lowest in the region when compared with countries like Thailand, Hong Kong and Singapore. The industry’s total housing loan outstanding stood at RM255bil as of July 2011 compared with RM234bil in December 2010, he noted, adding that this represented a 14% annualised growth.

Given the positive environment and the above factors, Lim said the bank was confident the current growth rate could be maintained despite the recent global market unrest.

An MIDF Research banking analyst said property loans would hold up as a key growth driver of credit expansion this year as the persistent demand for property loans would be driven by low lending rates as well as the sustainable growth of the property market.

Local property mart unaffected by forays abroad

THE increase in foreign property investment by Malaysian housebuyers will not have much impact on the local property market, according to those in the local building industry.

“Those houses won’t be their primary home. The primary home is still here where people are used to the local environment and local condition,” says Real Estate and Housing Developers’ Association Malaysia president Datuk Seri Michael Yam.

He adds that people who invest overseas are those with spare cash who wish to diversity their portfolio of investment. They also buy for a specific reason.

“There is the emotional objective which is to be with their children studying overseas,” he observes.

He advises those buying for short-term investment or speculation to be cautious.

“Unless the capital appreciation is great, you may run into currency risks. Both objectives have to work positively in order for the property invested to be well-worth it,” Yam explains.

On the local property front, he acknowledges that prices have shot up in the last two or three years but says one of the reasons is due to a “catching-up exercise”.

“There was adverse risk from the global financial crisis earlier, so many developers chose to defer their launches. During this time, the prices of construction materials have gone up,” he elaborates.

Association of Valuers, Property Managers, Estate Agents & Property Consultants in the Private Sector Malaysia (PEPS) president Choy Yue Kwong says properties in major cities are still beyond the reach of average income earners.

“Those who earn a combined household income of RM20,000 a month (or less) are not likely to be able to afford a central London property where a 700 sq ft apartment could cost about £600,000 (RM2.8mil). Of course, the affordability is likely higher outside of central London,” he adds.

On US properties, he says that while one can find an affordable bungalow, the location “could be in the middle of nowhere”.

On the escalating prices of local properties, he says people have started diversifying their investments and put their eggs in different baskets.

“While it is true that property management overseas are very professional, buyers need to pay a price for their professionalism. In Malaysia, enforcement is not strict. We have laws against default in service charge or tenancy payments but these are not strictly enforced.”

National Housebuyers Association (HBA) honorary secretary-general Chang Kim Loong says in countries like Australia, a buyer only needs to pay 10% of the property price upon signing the sale and purchase agreement and settle the remaining 90% upon completion of the project and issuance of the Certificate of Fitness.

“The 10% is paid to a solicitors’ fidelity fund that is guaranteed by the government. It is therefore in the developer’s interest to quickly complete the project,” he points out.

“Another attraction is the guaranteed returns to be deducted outright from the purchase price. With ready tenants, the property’s yearly lease can be deducted from the purchase cost, so buyers need not pay in full”.

Related post:

Investing in properties beyond our shores

CEO at Home

How would you like to be CEO at home?

Monday Starters by SOO EWE JIN

A FRIEND, Syed Mohammed Idid, posted on his Facebook last week, “Cleaning house, doing laundry, clearing old stuff with kids … and you thought a CEO’s job was tough. Try becoming a home-maker!”

I could not resist making a comment on his wall, “I was a home-maker for some years which is why on the job, when I get to meet CEOs, I often smile when they say their work is tough.”

In my two stints as full-time househusband that stretched a total of six years, I gained much insight into the home environment that most of us simply take for granted.

At home, the working hours are 24/7, no question about that, especially when you have two young boys (and plenty of their friends, I must add) who clamour for your attention.

I had to be driver, tuition teacher, cook, swimming instructor, football coach, kite-flying maestro, story-teller, and a whole lot of other things besides. Neighbours also conveniently assumed that I could run errands, pay their bills, and fix up things as well. Which I was most happy to oblige, pro bono.

But, as I have mentioned in previous columns, my time away from career has been the most meaningful and treasured stints which money simply cannot buy.

My wife remarked that I must be getting quite tired of her these days, noting that we have been in a 24/7 situation with each other for nearly six months now.

My stint at home this time around is necessitated by a medical journey which is coming to an end but staying at home to rest and recuperate has made me realise that there are still so many things in the home environment that we take for granted.

Take the weather, for example. We have always subscribed to the principle of living simply, and an air-conditioner would be considered a luxury.

But 25 years after we set up home together, we finally caved in and installed an air-conditioner a few months back.

“Now you know what it is like to stay at home under such hot conditions,” the “home minister” remarked. I concede that most of us who work in air-conditioned comfort will never experience the stifling heat at home.
A typical home air conditioning unit.Image via Wikipedia
It’s funny, but I am sure the weather was a little kinder in those years I was at home.

The other thing I upgraded during this period was my Internet speed. It was excruciatingly slow when compared to what I had in the office so I doubled it.

But beyond such matters, staying at home is not particularly advantageous in terms of benefits that we take as a matter of course when we are in the workforce.

For example, when my wife decided to improve her education status and do her masters, I had to take care of all the bills and yet was not able to make a claim on my tax returns. The taxman said only she could make the claim. But how could she do so, if she does not have an income?

I am sure many home-makers, especially the women who gave up their careers to jaga anak-anak, would appreciate being able to make claims for books, short-term courses, and even holidays, because they truly deserve it. And we are not even talking about medical expenses here.

Think about it. If they were at work, they would qualify for allowances and paid leave but once they are at home, these are taken away from them.

In my opinion, many of these issues will not be understood by the mainly-male policymakers that predominate both the public sector and Corporate Malaysia. Unless they become home-makers first.

I would like to suggest that all male CEOs take a six-month leave of absence and be CEOs of the home. I am confident that this will lead to many interesting special allowances in the next Budget speech and guaranteed to ensure that all home-makers will vote a certain way.

● Deputy executive editor Soo Ewe Jin has been on a long journey and is thankful that he can now see the light at the end of the tunnel. He looks forward to a normal office routine soon.

%d bloggers like this: