opinion piece enough to rescue the Eurozone. However, until the fiscal compact itself proves to be completely inadequate, the ECB seems content to squeeze as much budgetary discipline from the Eurozone countries as possible. The one thing the ECB has done though is to provide a 489 billion Euro programme of cheap three-year loans for Eurozone banks to help them cope with liquidity challenges. Nevertheless, even this may prove to be inadequate to rescue these banks as we may see many of them facing nationalisation in 2012. In order to comply with new European banking legislations, the banks will have to raise their core Tier-1 capital to nine percent by the middle of this year, and with the cautious market, they may be forced to do so by cutting bank lending, which will consequently worsen the Eurozone recession. Should they fail to meet this target or face more market turbulence, nationalisation may beckon. Whatever the fate of the Eurozone this year, with its share of a quarter of the world’s gross domestic product (GDP), we can expect large implications on the rest of the world, not least the exportoriented economies of Asia which will have to deal with declining demand from the Eurozone countries. In the previous recession of 2008-09, China played a key role in cushioning the fallout and leading the recovery of global, particularly Asian, economies through its enormous US$586 billion stimulus package. However, this large over-investment has created huge overcapacity in China’s capital goods industry, leading to inflationary bubbles, among other things, and dampening China’s ability to play any role in rescuing the global economy from this looming recession. To make matters worse, China is facing a rapidly deflating asset bubble which threatens to explode in 2012. The government has introduced stringent measures to curb property speculation, adding downward pressure on domestic demand. Moreover, in its latest purchasing managers’ index for December last year, which is an index of manufacturing activity, China narrowly avoided contraction by only 0.3 points, while its export orders went through a further month of contraction, the third in a row of declines for Chinese exports. These are signs that China is already facing the pressures of declining demand from the Western economies, and with increasing austerity in the Eurozone, Chinese exports are likely to suffer further, eroding its economic growth this year, unless domestic consumption can increase tremendously. India, the other fastest growing economy in Asia, has its own set of challenges. A declining Rupee and a tight monetary policy by the Reserve Bank of India have hurt India’s corporates significantly, arguably the main driver 10 SICCI Newsletter - February 2012
of the country’s economic growth. The problem really lies with the country’s high inflation, caused by large supply-chain bottlenecks, particularly for food, and poor infrastructure. The Congress-led coalition government will seek to speed up reforms, particularly with elections in key states looming in 2012. However, it has not presented the political strength to do so as yet, and it is more likely that it will turn to more populist policies to score political points with the masses in the face of the elections. This is likely to worsen the government’s fiscal stance and could weigh down on economic growth. However, not all of the clouds in the horizon are dark ones. There are signs of optimism emerging from some unlikely sources. The United States, the root of much of the global economic woes since the 2008 crisis, is showing signs of recovery as its unemployment rate has finally dipped below the stubborn rate of nine percent, together with a growing money supply and a stabilising housing market. However, growth will be incremental until the presidential elections in November this year, as more partisan politics may lead to a continued political deadlock on key economic measures. Japan will look towards burying the ghost of 2011 as it aims to put behind the twin natural disasters of a tsunami and an earthquake, which disrupted global production networks and plunged its economy into a recession. Rebuilding efforts will be in full swing in 2012 and are likely to catalyse the Japanese economy to achieve significant growth. The economies of Southeast Asia appear to be another bright spark in 2012. Indonesia will look towards building