The Global Economy and Our Personal Finance
Global economy struggles to gain momentum but asset prices are at or near the all-time high.What does this mean to us?
PMI shows that the global economy is more or less on a plateau from 2010. In order to boost the economy, developed countries have pushed for ultra-low interest rate policy. The current rate of interest is just 0.5% for the USA, -0.4% for ECB and -0.1% for BOJ. This basically means that borrowing is dead cheap for an entity who are “credit-worthy” – like the big corporations, your rich boss.
The amount of cash injection to the market from 2010 to date is more than $7 trillion USD. With FED at $4.5 trillion, BOJ at 1.8 trillion, and ECB at $1.6 trillion. To put into perspective how much one trillion can buy – you can put 8.33 million people to 4 years of college for free (private college at $30,000 annually) or buy all the sports league. If I type a $ in the representation of each $1.00 here, I bet this post would crash.
When the central bank uses loose monetary policy (the supply of money in the market) to fuel the market, they need an indicator to show that the market is "hot". The best indicator to signal that market is chasing a limited supply of goods is by the inflation rate. However, inflation has been low and there are no reasons for a business to increase wages in a low inflation environment. So the gross income of the low middle-income group has not risen but what has increased exponentially is debt. Debt at the backbone of securities, debt by corporations, debt by household. We all seems to owe the world something even if we don’t own anything.
Next question is how sustainable is our debt?
Loans is a form of borrowing from your future and the sustainability depends on your productivity level and growth in the future. One of the structural problem in the developed country is aging. Japan is one of the oldest countries with a median age of 44. The USA is at 37 and surprisingly, Germany is also at 44. As you know, humans in nature get less productive when we passed certain age even with enhancement of health care. ASEAN is relatively young – we are only 27!
The interest rate in ASEAN is still relatively high – Indonesia at 6.5%, Malaysia at 3.0%, Thailand at 1.5% and Vietnam at 6.5%. Our banks will have room to cut interest rate provided that the Feds doesn't increase rates. But that will affect the spending power of retired baby boomers - soon to be another problem. Ironically, the people with the power to make such decisions are also baby boomers. Indonesia has enough population to support their growth (with CARG at 10.4%) and they are massively investing in infrastructure like water treatment supply, railways. Malaysia, on the other hand, depends on external factors – near to 70% of our trade surplus comes from LNG and exports to China. The GDP of China is important for ASEAN. A 1% drop in China will pull down ASEAN economy by 0.25%. Malaysia’s saving grace is infrastructure investment, but how long can we sustain with government debt at 55% GDP (not bad until..) and additional 20% GDP (not in books but guaranteed by Government so - like it or not - it's also a form of Government debt) – ouch.
In Malaysia, a lot of us are complaining that we aren’t earning fast enough. And I think this is one official figure that truly reflects the condition of the people – wage growth rate. The average wage growth in Malaysia is 5.4% in 2015. Due to the slump in oil and gas and the slowdown in banking growth, last year and the nominal increase of 6% cost from GST, plus the painful currency devaluation, the sentiment of "not-having-enough" is definitely true. Of course, a drop in the living standard doesn’t mean we now live in poverty. It does mean that we are getting lower standard goods and have to be cautious in spending or risk higher debt. On the other hand, I recall that the public sector wage increase is way higher and if that was taken into account in this figure, then the wages growth for most of us must be negligible.
Malaysia’s household debt service ratio is near 60%. That’s saying on average 60% of our income is put into loan payments. Financial analyst view is that we are healthy because a high percentage of the loans are higher asset quality loans such as housing. However, underlying this view is the assumption that housing price will only go up. Certainly, the completion of MRT-LRT infrastructure will increase the connectivity value of our housing. Question is - who is going to afford to stay in the higher dense housing area with price premium accounted for? Young professionals are looking for greener pasture Okay, maybe only me. I am an engineer who can decipher economic matters and finance matters. Does anyone care to hire? Most foreign labor we import is under the low wage group. That being said, with the higher resilient power of Asian people, it is not likely that anyone will sell their house at a loss - we believe in long-term investment. So house prices are indeed likely here to stay with a higher probability that rental rate demand will drop *drastically in the next 3 years and then pick up 5-6 years later. If it doesn’t drop, just stay with you parents and take good care of them k? They love you after all.
The current environment is defying the conventional wisdom of saving. In the past, we can pretty much blame anyone who’s in a bad financial state for spending irresponsibly or consuming too much. But if the cost of basic necessity in life rise and wages stays, a person who prudently manages their money could also end up in a bad financial state when they lost their job, have a new-born or reach retirement age.
As I write this I shares the view of some economist that the central banks are losing control. Managing personal finance is a lot about internal control – a belief that your action can affect your destiny. But if the society lost control on how we manage the balance between wages labor versus assets supply and demand – then sad news, *doomsday also lies ahead for anyone who actually delayed life gratification and saves.
Disclaimer: Lynn is not an economist by training and is not to be held responsible for any factual or interpretation mistake. But do tell me in laymen terms and I will get it corrected. *personal view