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Insights with Charles Davis, ICAEW Economic Advisor, Head of Macroeconomics CEBR


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In an economic briefing conducted by Charles Davis, ICAEW Economic Advisor and Head of Macroeconomics CEBR (Centre for Economic and Business Research), he unveiled the latest ICAEW’s Economic Insight: Southeast Asia, a quarterly forecast for the region.

In the report, the economist highlighted the three dangers facing ASEAN economies: a slowing China, rising oil prices and the eurozone crisis, but re-affirmed that the region and other emerging economies will occupy a larger share of the global economy.

Following the briefing, Biz Daily managed to conduct an interview with Davis.

In the Singapore context, the main growth drivers were the semiconductors industry in the 1990s, followed by the banking sector, and the Integrated Resorts. In the next 10 years, where do you see the growth coming from?

I think the business services sector is likely to become increasingly important for Singapore as a mature economy servicing the fast growing economies of the ASEAN region, while the planned increase in population is likely to boost the construction sector too.

While Singapore keeps on growing, of late we have seen a situation whereby the fruits of growth have not been evenly distributed to the people giving rise to increased income inequality. As an economist, what do you think a country could do to even out distribution?

In some cases I think there is an argument for increasing the role of the welfare state (effectively, the societal safety net) to protect those on very low incomes but perhaps most crucial is ensure equality of opportunity across society – for example universal access to high quality education and skills, health care and housing. It is also important that the tax system operates to incentivise work – e.g. offering lower tax rates for the lower paid that make work pay.

Economists have coined the term jobless recovery. This is increasingly true for countries such as the US.  Current economic policies have always assumed that jobs will come in hand with recovery but increasingly due to advances in technology and outsourcing, this has not been the case. What could countries do to reduce unemployment or under-employment?

The difficulty is that the recovery in demand across the advanced economies has, in general, been weak. For example, in the UK, output is still around 4 per cent below its pre-recession peak, without robust growth, the economy has struggled to create jobs. Part of this is due to restructuring; e.g. cutting back public sector jobs as countries bring down their budget deficits or sectors declining due to consequences of the financial crisis – so frictional unemployment occurs as the economy’s structure evolves.

What countries can do to reduce unemployment – ensure there is economic growth; in ASEAN’s case this may involve using monetary and fiscal policy to boost growth as the global economy slows. In addition, ensuring there are as few barriers as possible for employers to hire e.g. keeping taxes on labour low, especially taxes that are incident on employers.

In the worst case scenario of a collapse of the eurozone, what will the effect be on Singapore and the ASEAN region?

This is hugely uncertain – but given the eurozone still make up almost a fifth of global economic activity, it is clear that a deep recession in the eurozone would have a serious impact on the world economy and could reduce global growth significantly. It is hard to put hard estimates on what this would mean for Singapore / ASEAN but it is clear it would be a major headwind to growth and could cause the region to grow more slowly. However, I subscribe to the view that the ASEAN economies – and Asia more generally – would have scope to loosen monetary and fiscal policy to some extent mitigate the negative impact.

You mentioned that rising oil prices will have minimal effect on the ASEAN region and Singapore? Could you elaborate on why?

I think one has to be slightly careful here; clearly rising oil prices do have an impact – it is just that, as a share of GDP, the amount of oil imported across the region is not too large and there is significant variation across the region as some countries, such as Indonesia, Vietnam & Brunei are net exporters. There is no doubt that rising commodity markets, linked to strong emerging market growth, contributed to high inflation across the ASEAN region in 2011 in particular.  However, these pressures are showing signs of easing through 2012 as growth slows – so overall inflation is expected to fall back across the region – and central banks will likely be increasingly more concerned at weakening growth rather than high inflation.