The Economy

Asia is beginning to see the effects of a sluggish economy and the effects of a contracting financial market. The beginnings of the economic crisis began with the American banks and the US economy exhibiting signs of trouble. This was followed by the effects trickling to the European markets. However, Asia had been quite well sheltered from the effects until now. This, though, is not to say that the effects were not felt earlier but it was probably related to the media in Asia which can sometimes be less liberal than western media in order to prevent panic within the Asian community. In spite of the best efforts to put a good twist to the situation, the effects right now in Asia is very real and this is not merely in the financial industry.

As we flip the papers daily, in countries like Singapore, Malaysia and China (3 relatively robust economies that have encountered good growth results in the past years), we are beginning to see the effects of the sluggish global economy. The effects in Singapore, for example, were not really felt until the beginning of this year. In addition, in December 2008, the biggest layoff of employess were from a local bank and this seemed isolated as an incident. During the holiday season in December 2008 though, many were still not believing how rampant the problem would become. For example, I looked around me during that season and still saw widespread buying of big ticket items, luxury items and bookings for holidays. However, how things have changed in a short period.

Today, as I walk through usually crowded traditional shopping areas, I am beginning to see a reduction of shoppers as well as read of shops having problems as consumers have dwindled. In addition, as we flip the papers daily, we hear of layoffs now from the manufacturing industry with companies trying to monitor costs and make ends meet as a result of the reduction in consumption; cranes at the ports are also up in their resting positions instead of down unloading ships due to the reduced exports coming through. The effects are trickling through all industries as a result of the contraction.

Why am I writing the above? The reason is not to look at it as doom and gloom as many analysts have viewed it but rather, to offer a different analysis on the problem. I realize as I read many of the analysts, they seem to be using the traditional "year on year" analysis; even companies use such an analysis to see how they are doing compared to the previous year. This method of analysis is relevant if there were no problems in the economy and we are not in severe contraction. The result of this method of analysis though results in a flawed result. Let me explain why below.

Let's take a quick look at a "year on year" (yoy) analysis. This method of analysis bases the baseline number on the previous year's results. Analysts look at the results and draw a percentage change from the previous year at the same time. This is the basis of the yoy analysis and this is where I feel a problem can occur. The problem now is that we are in a recession which basically means that the economy is shrinking and all numbers WILL ultimately go down. Compared with the previous year, we would definitely see a significant drop so what else is new. As such, we see many analysts reporting doom and gloom in their forecasts but the reality of this is how is knowing that the economy is shrinking and the company/country's figures are down; we all know this issue already and how does this help us plan our way out of the problem. Overall, we know the problem and we are looking for a solution. As many have said, this is a major economic crisis and unconventional times call for unconventional solutions.

From a layman's perspective (I am no economist but merely a business owner), I would like to put forth a new outlook to all. The first thing that I am suggesting is to change the basis of what we are using to compare our performance. I, for one, am looking at perhaps what was the root cause of this crisis, i.e. why are we in this situation. I am looking at perhaps the US economy and credit crunch as the main cause as the banks over there were the first to experience problems which in turn, resulted in other global banks experiencing problems. Due to this, I have begun looking towards them as a base for looking at things. For example, the housing market doubled in value between 1994 to 2002 and beyond (until recently). Many homeowners were elated by the new found "wealth" in their properties. I shall explain why I put "wealth" in inverted commas in a bit. Another factor, home mortgage interest rates droped from 8% p.a. to 3-4% p.a.

Now, is the picture becoming clearer regarding why I put "wealth" in inverted commas? Let me explain. The "waelth" experienced by many was merely a paper gain as opposed to real wealth. Many of us understand that Economics 101 does not regard a mere paper gain as creation of wealth; wealth equates to liquidity and actual cash being created i.e. a true expansion of the economy. The result of dropping interest rates merely changed the demand and supply curve without creating real wealth. Take a close look at the following. If I had a home that was purchased at $86,000 but was revalued at $150,000 when interest rates halfed, did I really make a gain or was the gain the result of inflationary factors? I would suggest that the gain was not really there no wealth was created because the drop in interest rate merely means people were not able to borrow more with no increase in the actual size of the economy; we merely moved the numbers by the same factor that interest rates had dropped. However, many were unaware of this factor and they went out to borrow against their new found "wealth"; banks as well fell into the trap of their greed and lent on paper gains. The result of this exercise, collapse of an economy that was unable to support the growth as there was no wealth created to begin with; the wealth was all only on paper.

With the above analysis in mind, let me make a few suggestions for analysts and companies even though I am no economist.

1. Stop looking merely at yoy analysis as your basis for planning and forecasting. The answer is very simple regardless of what numbers you want to throw in; your company/country's performance will contract and show a drop and this is a given. In addition, telling everyone that the performance is down 20% from last year doesn't help you set a solution or strategy because you were in a boom time the previous year that was built on artificial wealth (paper gains). To ask your employees or population to achieve the previous year's figures just do not make sense because next year the numbers may show a mere gain of say 5% and the same analysts would say we are recovering because there is growth (if we are down this year and it is the basis, any increase next year would show a gain which is flawed logic).
2. Start thinking through the actual problem itself. People are tired of all the doom and gloom analysis as well as news of how bad the economy is. What people are looking for is a solution because any person off the street can now give you the same doom and gloom forecast without needing an economics background!
3. Think out of the box and stop pretending that you have a solution. In such unconventional times, unconventional solutions are required. As I showed in the above, pick a different basis for your analysis. For example, use figures from the mid 1990s as your baseline before the artificial wealth were created as this may be the true size of the global economy even up to now; there has been no real wealth created in the last 10 years and using that baseline may be a better indicator. By using this basis as your indication, companies may be better equiped to devise a recovery plan because you are looking at true wealth (i.e. money available) rather than artificially created wealth.

Many readers may discount what I have said above but I truly do believe that we have all erred in our analysis. I have merely offered the above as a suggestion and by no means put forth that my analysis is correct (as I am not an economist). I am merely putting forth the above as a way to look at the current issue because I, for one, am becoming tired of the doom and gloom news but I am looking at creating a solution; I manage a company and I am going to look for a solution to save my company instead of merely regurgitating the negative because anyone can join the masses is telling what the problem is but few will take the time to look for a solution. I am going to look for the solution instead of contributing to the problem; I hope all of you will join me.