future of global demand

Global Demand after the Crisis

WHAT IS CHIMERICA?FOUR UNCERTAINTIES

THREE POST- CRISIS SCENARIOS

FIVE QUESTIONS

WHAT MIGHT GLOBAL DEMAND LOOK LIKE AFTER THE CRISIS?

Chimerica : no independent ‘rise of the rest’.Accounts for over 60% of the world’s cumulative growth for the past 5 years.

Emerging periphery relied on final demand in the G3.

Accumulated earnings were recycled back to the core.

Financial innovation channelled the credit supply to residential investment, fuelling a housing asset boom which boosted consumption.

Export-led growth allowed for rapid industrialisation and urbanisation in emerging Asia, prompting large spikes in commodity prices.

CORE

PERIPHERY



FIVE STRATEGIES


The current crisis: Chimerica has temporarily collapsed. There are four major uncertainties leading from the crisis. Each uncertainty may have legacy effects that can move the world permanently away from Chimerica.

Changes in G3 Changes in G3 consumption consumption behaviourbehaviour

Creeping protectionismCreeping protectionism

Increased government Increased government interventionintervention

Rising indebtedness in G3 economiesRising indebtedness in G3 economies

Legacy effect one: rising indebtedness in G3 economies Sustained financing of this debt may break down.

Fragile balance sheets and increased probability of country default.

Substitution away from US-backed assets could occur over time.

Legacy effect two: increased government intervention Intervention may stifle innovation and future growth.

Greater regulatory oversight may stunt future growth in start-ups and slow long run growth.

Compliance with tighter international lending standards.

Rise in state-run banking industries could stifle innovation.

Legacy effect three: creeping protectionismProtectionist elements of recession policies may spark a trade war.

Competitive devaluation and non-tariff barriers may trigger retaliatory action.

Increasing instances of protectionist measures.

Cumulative impact on trade could be substantial in the medium term.

Mercosur: proposal to increase common external tariffsArgentina: license requirements, forex controls, auto bailoutEcuador: import tariffsBrazil: attempted import license requirements

Canada: auto bailout

India: import tariffs, safety and food labelling restrictions

US: ‘Buy American’, auto bailout

Korea: import tariffs, currency depreciationChina: auto bailout, export subsidiesTaiwan: currency depreciation, potential chipmaker bailout

EC: agricultural export subsidiesRussia: auto bailout, import tariffs, export subsidies, forex controlsFrance: auto bailout, lending restrictions, asset protectionismGermany: auto bailout, lending restrictionsUkraine: import tariffsGreece, Denmark: lending restrictionsIceland: forex controlsSweden: auto bailout

Indonesia: entry point restrictions for imports, new import procedures use of domestic products, forex controls

Australia: auto bailout

Legacy effect four: G3 consumption changesG3 consumers are saving more in response to a downturn.

US consumers accounts for 70% of US GDP.

Failure of the US stimulus package could lead to sustained negative growth and bleak long- term employment prospects in the US. This may, in turn, entrench savings habits.

Source: US Council of Economic Advisors



FIVE QUESTIONS


Post-crisis: moving through the fog The short term will be like moving through a volatile and uncertain fog as economies and the financial system seek to adapt. Which future will emerge?

Wounded BeastUnstable Chimerica

persists until new centres of final

demand appear.

ChasmSustained shortfall in

demand. New centres of final demand take decades to develop.

AbyssLong slump,

persistent instability.

NOW

Wounded BeastNo fundamental shift from Chimerica occurs. G3 final demand continues to power growth. Emerging Asia continues to fund G3. However this is not a return to the status quo, it is transitory and unstable. Branching point: If global imbalances are resolved over time, we see the rise of multiple centres of final demand. If not, we enter Chasm.

Wounded BeastChimerica restarts. US consumption recovers and powers growth.

US consumption recovers and powers world growth.

China continues to rely on export engine and public sector

investment to grow.

Supply chain globalisation continues.

Source of demand

MNC supply chains

Free trade continues

Trade flows

Talent still attracted to G3 but explores emerging Asia.

Talent flows

Phase One – Business as usual

Chimerica restarts and G3 final demand continues to power global

growth. Volatile swings.

High volatility due to demand speculation. High costs. Supply disruptions.

Food-Energy-Water-Metal/Mineral resource flows

Branching point

G3 unable to contain imbalances. Each crisis weakens Chimerica, bringing it closer to Chasm.

Key message: Resilience

Southern Cal $710bnPearl River Delta $220bnBeijing-Tianjin $110bnDelhi-Lahore $50bn

Comparisons of final demand today(not to scale)

World growth at x%Singapore growth at x+%

Wounded Beast Rise of the Rest. Emerging Asia’s final demand proportion grows relative to G3.

US consumption is lower, US exports to emerging Asia.China relies less on exports, more on rural and urban classes for growth.

HQs relocate from G3 to emerging Asia, following demand.

Source of demand

MNC supply chains

Overlapping regional trade architectures emerge.

Trade flows

Phase Two – Asia emergesExport sector diminishes in importance while emerging Asia’s urban middle classes and rural sectors grow.

Southern Cal $937bnPearl River Delta $735bnBeijing-Tianjin $368bnDelhi-Lahore $113bn

Comparisons of final demand in 15 years

(not to scale)

World growth at x%Singapore growth at x+%

Reversal of talent flows to Asia.Talent is sorted by quality of place.

Talent flows

High costs. High volatility due to speculation. Supply disruptions.

FEWMM resource flows

Branching point

Emerging Asia develops many centres of self-sufficient demand.

Key message: Relevance

Southern Cal $1,300bnPearl River Delta $2,700bnBeijing-Tianjin $1,300bnDelhi-Lahore $270bn

Comparisons of final demand in 30 years

(not to scale)

Crossing the ChasmThe world sees a sustained shortfall in G3 demand. Emerging Asia looks inward towards domestic demand, but this may not be fast enough to restore world growth to previous levels. The period of adjustment could be painful and might take decades.

G3 DEMAND

EMERGING ASIA

DEMAND

ChasmG3 centred export model loses its primacy. Decades long low growth ensues.

Source of demand

MNC supply chains

Trade flows

Phase One – Collapse of final demand

US higher saving rates are entrenched and US consumption habits are permanently altered.

Talent flows


Government is the main source of demand. Emerging Asia’s middle class growth slows.

Urbanisation proceeds but is slower.

Supply chains rerouted towards surviving pockets of final demand.

(AP HQ replaced by China HQ)

Trickle of trade but international trade architecture is largely intact.

Talent reroutes towards surviving pockets of final demand.

Less volatility in prices and less supply disruptions. But costs will still trend higher

with China’s urbanisation needs.

World growth at x%Singapore growth at x-%?

Social and political instability spiral out of control and push the world into Abyss.

Key message: Survival

How long will it take PRD to reach Boston-Washington- NYC region consumption levels? (Present figures)

36 years!Pearl River DeltaGreater Mumbai

Boston-Washington-NYC

Branching point

Chasm A different ‘Rise of the Rest’. New mega regions that are not export-dependent.

Source of demand

MNC supply chains

Trade flows

Phase Two – New centres of growth emerge

New mega regions rise on the back of their innovation capabilities and final demand market size.

Talent flows


Rural and urban classes become significant sources of final demand in regions able to retain their innovation infrastructure. Export plays a smaller role.

Regional supply chains centred on surviving pockets of innovation and final demand.

Intraregional trade more important than international trade.

In the absence of exports as a main growth engine, innovation drives growth. Talent is particularly critical to this rise of the rest.

World growth at x%Singapore growth at x-%?

Key message: RelevanceHigh cost, moderate volatility. Possible supply disruptions.

Who are these new mega regions centreed on both innovation and final demand?

AbyssThe world goes into a long slump marked by persistent instability. Middle class collapses and anti-foreign sentiment rises. A vicious spiral emerges.

Source of demand

MNC supply chains

Trade flows

Stagnation

US recovery efforts fail. Asset prices do not recover and government stimulus is unsustainable.

Talent flows


Export-model breaks down. Middle class growth collapses, urbanisation stalls. Governments with

reserves try to prolong growth.

Anti-foreign sentiment gives rise to “Buy local, Hire local, Source local”. MNCs forced to breakup. “Pre-1991

India” closed economy model.

Death of WTO. Competitive devaluation and beggar thy neighbour provisions.

Most talent is immobile and remains bound to home markets.

Considerable supply disruption with accompanying price volatility.

Branching pointHeavy government intervention will not lead the world to Wounded Beast. International coordination restarts trade engine and redesigns a new financial platform. The world moves into Chasm.

Key message: Survival

World growth at x%Singapore growth at x--%

Who is left standing? Emerging Asia nations who have their acts together? China?



FIVE QUESTIONS


Five questions: preparing for the shift away from ChimericaQuestions

How can Singapore cope with increased volatility and resource scarcity?

How do we tap on Asia’s emerging sub- economies?

How do we generate a through flow of consumers into Singapore?

How do we develop Singapore’s niche capabilities?

How should we build our ASEAN hinterland?

Ensure resource security

Diversify from G3 final demand

Tap on foreign consumption

Irreplaceable in Asia’s future

Integrate with immediate region

Most important for

RESILIENCE

SURVIVAL

SURVIVAL

RELEVANCE

SURVIVAL

Energy WaterMetals &Minerals

Food Scalable Infrastructure

Urban Consumption

Rural Consumption

Public sector investment

Healthcare Education

New agriculture New aquaculture

Greater political and economical coordination with our neighbours.

Some suggestions …

BT MICE

Talent flows will determine continued prosperity.How do we rig talent flows in our favour?

Talent is most critical to ensure Singapore’s relevance.

We should not lose sight of talent flows unlike other countries which are putting up barriers to talent.

Talent is Singapore’s trump card.

Key message: Singapore cannot lose sight of talent.

For discussion, please.

Highly innovative companies, electronics, telecoms, flat panel displays

High tech innovation, mfg, finance, design

Semiconductor production facilities

Disk drive, niche in S&T, top Western Universities, creative centre, high culture and street culture, top

destination for all lifestyles

45 mil

$220bil

66 mil

$130bil

19 mil $100bil

6mil$100bil

72 mil

$50bil

62 mil

$60bil

120 mil

$50bil

20mil$130bil

100 mil

$4,500 bil

46 mil

$500bil

43 mil

$110bilMENAGERIE

This is the emergence of mega-city regions in Asia as sophisticated, self-sufficient centres of final demand.

Regions could grow by complementing each other, or through inward-looking development.

How can Singapore be irreplaceable in this model?

High cost, moderate growth, low volatility.

*The orange bar is Light Regional Product, using satellite data of the light emitted at night. Higher concentration of light is correlated with stronger economic production. Data on regional economic production is not comprehensive, so this proxy is useful for comparison.R Florida’s “Who’s your City?”

36 mil

$1,400 bil

18 mil

$430bil

4mil

$200bil

Automobiles electronics

Key message: Relevance

Tomorrow’s self-sufficient mega-regions?How fast can the PRD shift gears from servicing exports to their domestic market?

¥711 bn10 mil

¥681 bn

8.6 mil

¥90 bn1.5 mil

¥361 bn6 mil

¥111 bn4 mil

¥315 bn7 mil

¥123 bn2.5 mil

¥111 bn4.5 mil

¥60 bn3.8 mil

¥110 bn0.5 mil

¥2,002 bn

7 mil

Logistics, Financial CentreMfg in electronics, computers..

Financial, MICE, Business Svc, Port, Intl airport Centre…

Entertainment, MICE Centre

Trade, MICEMfg in auto parts ..

Mfg in electronics … Mfg in laser diodes, electronics…

Mfg in lighting, motorcycles…

Mfg in industrial ceramics…

Petrochemicals, Machinery

PRD excluding HK, Macau (2007 figures)GDP pp RMB 53,820, or 2.8 times national average3.6% China’s population but 8.8% of national retail sales

Port

F&B products