Published December 9, 2009

Global stimulus likely to continue for many months

China may allow yuan to strengthen to ease inflation: SG


POLICY-MAKERS in the world's major economies are likely to wait many more months before they rein in economic stimulus measures, even in Asia, where many economies have rebounded rapidly, economists at Societe Generale (SG) said yesterday.

In particular, China could allow its currency to strengthen gradually starting early next year to ease domestic inflation pressures, but the government is expected to continue providing strong fiscal and monetary support for the domestic economy through cheap bank loans and direct investments in infrastructure, said Glenn Maguire, the French bank's chief economist for Asia. 'The support of the crutches is still there, and will be there for some time to come.'

And just yesterday, Japan's government announced a 7.2 trillion yen (S$113 billion) spending plan to boost the economy early next year.

'The two biggest economies in Asia are still looking towards more stimulus', rather than winding down government efforts to boost their domestic economies, Mr Maguire said. That suggests governments and central banks in the region are still very cautious about the strength of the global economic recovery, he said.

In the US, too, significant cuts in government spending or interest rate hikes are unlikely any time soon, said Stephen Gallagher, SG chief economist for the US.

'I don't see any fiscal restraint coming out of Washington over the next year at least,' he said. 'We expect huge fiscal spending and deficits for many years to come.'

The US job market remains weak, despite last Friday's better-than-expected jobs report, which showed the US unemployment rate fell to 10 per cent in November from 10.2 per cent the previous month, US Federal Reserve chairman Ben Bernanke said in a speech on Monday.

'Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining,' Mr Bernanke said.

'My best guess at this point is that we will continue to see modest economic growth next year - sufficient to bring down the unemployment rate, but at a pace slower than we would like.'

His remarks 'show that the Fed is not about to change its extremely accommodative monetary policy' by raising interest rates, Mr Gallagher said.

Similarly, in Europe, policy-makers including officials at the European Central Bank are cautious about damaging the nascent economic recovery by withdrawing stimulus measures too soon, said Klaus Baader, SG chief economist for Europe. 'With the help of the crutches, the European economy has recovered remarkably quickly.'

But 'it's difficult to judge' whether the recovery at this stage will be self-sustaining if the policy measures put in place are removed, he said. 'So taking the crutches away has to be done with the utmost care, step by step.'