Economist: Trends in US, Europe will affect M’sia

KUALA LUMPUR: Malaysia should keep an eye on political trends and unemployment rates in the United States and European countries as these factors will affect the local economy, says UBS Investment Bank managing director and global economist Paul Donovan.

Due to persistent long-term unemployment in the United States and Europe, governments in these countries would want to protect their local jobs and therefore limit international trade, he said at a roundtable session with the media yesterday.

As a result, Donovan said, politicians would try to run economies, which meant rising political risk in the global economy.
Donovan: I believe we will now see a period of relative stability.

Donovan said while politics had always influenced Asian economies, the United States and European governments had for the past two decades maintained a declining role in managing their economies.

“If we look back, the trend of reducing political risk will be reversed as politics is rising in the United States and Europe (now). What happens there will affect this region significantly.

“Malaysia, as a global open economy, will have to take note as decisions made in these foreign countries will have implications as to where the Malaysian economy is heading in the next few years,” he added.

Donovan said the Middle East remained potentially volatile but would not be the biggest political risk for this region.

“Through regulation, governments are playing a direct role in managing the economy. Certain countries will impose capital control and restriction on investments, which changes capital flow around the world.

“The trade protection that the United States and Europe has put in place means that Asia has to change the way it generates growth,” he said.

Donovan noted that exports would no longer be a reliable source for economic expansion. “Malaysia should look into (having a) domestic-focused economy with more domestic investments and consumption,” he said.

As for the world economy, Donovan said the forecast 3.9% growth had been slightly revised downward to 3.6% following the natural disasters in Japan recently.

“At the start of this year, growth momentum was quite good. First-quarter GDP numbers were better than expected in Malaysia but economists say there will be a levelling off of growth.

“I believe we will now see a period of relative stability,” he said, attributing that to continued fair growth in the United States and Europe.

He added that there would be limited slowdown in Malaysia in the second and third quarters.

“We will see a trend-like growth globally, which will continue to keep the Malaysian economy at a reasonable growth rate of 4.5% or 5% over the next two years,” Donovan added.

However, he said, this also meant that things did not get worse or better, reflecting the unchanging unemployment rates and spare capacity in countries that had not recovered well from the recession in 2008 and 2009.

The United States is facing its highest unemployment rate since 1983, with more than 40% of its citizens unemployed for more than six months.