Moving towards pragmatic realism

Deutsche Bank's global chief economist Norbert Walter offers his outlook on the global economy.
Deutsche BankÆs global chief economist Norbert Walter is in Asia on a roadshow. He talks to FinanceAsia about his outlook for the global and regional economies.

The global economy continues to perform well. What are the key risks to this goldilocks scenario and how long can it last?

The actual risks to the good global economic scenario are the tremendous global macroeconomic imbalances. Although most Americans feel comfortable with the large current account deficit of the US, it will not be sustainable in the long run. Also the real estate market in the US does not seem to be recovering, as last week's (July 23-27) investors' nervousness has clearly demonstrated. Moreover, we cannot disregard that some economies in Europe are suffering from structural problems.

I am convinced that today's optimism on the economic situation will change towards pragmatic realism. Whether it will be a hard or a soft landing after five years of economic boom depends on whether the world's major economies and the emerging markets make structural adjustments on time and whether they resist protectionist tendencies.

How is Asia's growing economic stature likely to transform the global economy over the next five years?

Industrialised countries face more and more competition from Asian emerging markets. Asian products are not only competing on price any more: Asia also takes increasingly a role as technology leader.

No region attracts more foreign direct investment than Asia. Foreign capital inflows attracted by high growth led to high levels of foreign exchange reserves in most Asian countries. It is easy to understand that their governments want to invest foreign exchange reserves in more efficient ways than hitherto. Private equity, for example in Europe, might be a prominent trend. This will further enhance the role of Asia, beyond being a hub for manufacturing to becoming an important investor.

Unfortunately, pre-election times in the US and backward-oriented politicians in Europe may push things towards protectionist regimes.

Has the world become more able to absorb economic shocks, such as a US recession, over the past decade?

The answer is yes and no. On the one hand, most former net external borrowers have accrued huge foreign exchange reserves and have paid back major parts of their sovereign (foreign) debt. Brazil is a good example. Most governments of former crisis countries have done their homework. From a foreign exchange point of view, currency crises seem to be less likely for the time being.

In contrast, the private economy never has been as strongly integrated into the world economy as it is today. Trade and outsourcing have made the world a truly interdependent place. Therefore, assuming a de-coupling from the US-economy has taken place, this should be viewed with great scepticism.

Emerging markets have effectively become the world's 'financiers' in the last five years. Will this role continue and what risks are attached?

If you had asked me 10 years ago whether those countries would finance the old world with their foreign exchange reserves accumulated through current account surpluses, I would not have believed it.

Asian emerging markets and commodity exporting countries will continue to finance the mature economies. This unnatural phenomenon will continue for a while, particularly if foreign exchange appreciation is held back for longer, which is my best forecast for now.
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