Looking at economic developments in 2004 and what's next in 2005
By Melanie Yip, Radio Singapore International
First broadcast: 22 December 2004
2004 was a year of highs and lows in the economic scene.
The travel industry for one could not have soared better. The fight against SARS and bird flu epidemic had left the world weary in 2003. But in 2004, travel patterns picked up, and part of the cause is the emergence of many low cost carriers in Asia.
Led by Air Asia, many of the up and coming low cost carriers helped to expand the destination choices in Asia for many travelers, all at a fraction of the price.
Robert Khoo (RK), Chief Executive Office of the National Association of Travel Agents, Singapore, or NATAS agrees.
RK: For the travelers, definitely it is good news, in a sense that the more carriers that come here, the more competitive it becomes. Probably, the fares will be lower, and the service standards could be better. Things will naturally go along those two lines. I think it also spells new holiday destinations for the people.
And Singapore benefited with strong inbound traveling figures for 2004, surpassing 2003 figures with new heights.
RK: It's been quite a good year, to be honest, though the year started quite slowly. Last year, second half of the year was good, after SARS, the whole travel industry surged. This year, first half slowed down again, but second half we saw strong growth, and this has been sustained all till the end of the year. The year end, if you ask around, almost every holiday destination has been booked. And I also understand from the Singapore Tourism Board, the inbound sector is also very strong with 8 million tourist arrivals this year. So this year looked pretty good to us.
The emergence of the fleet of low cost carriers, both from Singapore and the region has also fueled more competition, in air fares. But don't expect fares to stay low for too long, cautions Robert.
RK: I think in the long term, probably in the long term, the low cost and premium carriers would have to come to a certain compromise in terms of price. I don't think they can possible survive, especially the low cost carriers, on such low fares. I think initial fares that come out are mostly for the purpose of gimmick and advertising, but I think sooner or later, they have to come to come down to a sensible level. And I guess the premium carriers will have to pack their products against these people, and probably include a premium in price but not too much, and I think this will be acceptable to the travelers.
And according to Robert Khoo, we can expect the same seasonal travel patterns to continue in 2005.
RK: Okay, I think the seasonal ups and downs will always be there. Some months are busy while some months are not. But I think if you look at the past year, and basing on the (Singapore) government's forecast on next year's growth rate, I think we should be seeing a steady growth, going back to 2000 levels. Definitely this year, we will exceed the 2002 levels.
While it was a generally good year for the travel industry, the same could not be said for the oil market, with its volatile behavior.
Dave Ernsberger (DE) is the Editorial Director for Asia at energy news agency, Platts and he explains the instability of the oil market.
DE: I think one of the classic examples of this year has been that if you rely on forecast, particularly demand and supply forecasting to make decisions about production, it can get you into serious trouble. Now what I mean by that is that this time last year, OPEC decided to cut its quotas to reign in production on the basis that we were expecting 2nd quarter demand this year to be very soft, very weak. In fact, as we all know by now, 2nd quarter was absolutely rampant, Chinese demand rose by 20 percent in the 2nd quarter. And forecast just got it wrong. The producers got it wrong, and we all suffered this year as a result of that. You can’t really rely on forecast too much, to make decisions about production, you need to get into the market and look at what is happening, and make decisions based on that.
Civil unrest in oil producing countries, unpredictable weather conditions, and Iraq - these were just some of the factors that contributed to the sky-rocketing oil prices in 2004. And according to some energy analysts, we can expect oil prices to continue to rise to new highs. Dave Ernsberger from Platts.
DE: Most analysts will tell you that oil futures on the NYMEX (New York Mercantile Exchange) will be at about 43 or 44 dollars next year, maybe as high as 46 dollars, maybe as low as 40. Those are very high compared to historical prices. There are a couple of reasons for this. One is that the new production coming on line isn't quite the same as the crude that's being reflected in those futures prices. Another reason is that the US is not worth what it used to be worth. So 40-dollar crude oil, if you're in Europe, isn't as expensive as you think it is.
Offering another perspective on the oil market is Dr Fred Bergsten (FB), Director of the Institute of International Economics based in Washington DC.
FB: We have learned this year that the oil market is both very unstable, and also not truly a market. It is very heavily affected by the actions of the producing cartel, the OPEC countries, who of course try to keep prices higher than market forces would suggest. Therefore in 2004, we experienced a very rapid rise in prices, a lot of instability in prices, and a big adverse effect on the world economy. We were also reminded that it is very hard to adjust to those higher prices in the short run. Demand does not decline very much in the short run, even when prices go up, and it is very hard to increase the supply of oil. So I'm afraid we're in for high prices in the foreseeable future, and they may even go back to new highs over the next year or so.
And don't be surprised, says Dr Bergsten, if oil prices rise to as high as 60 US dollars a barrel.
FB: World oil prices reached a high of about US$55 a barrel this year. They've now fallen considerably from that but I think they could go back up in 2005 to the high levels we saw in 2004, and possible higher. I would not be surprised to see prices rise to US$60 a barrel during the course of the next year, or even more.
And the supply of oil is not looking to slow down either in 2005. Dave Ernsberger, Editorial Director for Asia at Platts.
DE: There's more than enough supply to meet all of our demand, but the problem is, not enough of the oil that's being supplied to us is the oil that we need to run our refineries at the levels we want to run them at and to produce as much gasoline in heating or in other products that we're demanding as the global economy keeps on growing. We all expect demand to rise quite significantly in the next year. The main drivers of oil demand growth have been China and the United States and the factors that made both those countries increase their demand a lot this year are still going to be there next year. Already we are seeing some impact on GDP from the high prices that started to happen in the middle of this year. I think most experts would definitely concur, that around US$40-42, US GDP growth will probably slow by half a percentage point from the 3-4 percent growth that we've seen this year. So the US GDP growth might fall off by half a percentage point. That feeds through directly to the other economies of the world that are relying on US growth for their own growth.
On the role of the United States (US) in all of this, US President George W Bush, who was re-elected to the White House in November 2004, faces a tough challenge of trying to bridge the widening budget and trade deficit.
Dr Fred Bergsten (FB) from the Institute of International Economics in Washington DC says that the widening deficit has presented early problems for the US, particularly in its weakening currency exchange.
FB: Well, President Bush faces a major risk to the entire US economy, from the huge trade and budget deficit. Due to the huge and growing trade and budget deficit, the exchange rate of the US dollar has been coming down considerably. But it has all only gone about one half of the distance that is required to bring the trade deficit back to a sustainable level, and I suspect the dollar will fall a lot farther for next year. That could happen gradually and slowly, as has been the case for the last two to three months. But it could also speed up, and we could have a sharp fall of the dollar, or a crash of the dollar in fact would push US inflation, and US interest rates up very sharply. That would be very costly to the world economy, as well as the US.
Echoing a similar sentiment is Professor John McKay (JM), a partner at Analysis International in Australia.
JM: There are many people on the Asian side who worry about what all of that might mean for Asia. Currently, as we can tell from the figures, maybe two-thirds, maybe even more of the US deficit is being paid for by Asians. Asian savings are essentially propping up in the US deficit, and we've seen very large scale investments by central banks and other groups in Asia in funding the issue of a US deficit. Now, one of the questions is whether that will continue, or whether it is in Asian interests for that relationship to continue? Many financial commentators have been suggesting that before too long, the impact of that propping up, the deficit may not work in Asia. So far, Asian central banks and others have been willing to pour money into the US because in so doing, they keep the value of the US dollar up, which helps the competitiveness of Asian exports. If the US dollar were to collapse, that would have serious implications for exports from a number of countries, and so Asia has been willing to do that. The question is whether that will continue, or whether the other impact, such as inflation are going to make that impossible to continue in the future, I think it is a very serious question.
However, the year also saw the United States making positive inroads in the Asian economies, through trade negotiations, and free trade agreements. In 2004, Singapore became the first Asian country to sign a free trade agreement with the US. Nicholas De Boursac (NDB) is the Executive Director of the American Chamber of Commerce in Singapore, and he is hopeful about the next four years of the Bush Administration.
NDB: I believe we can look forward to more of the same. I think the Bush Administration and the Singapore governments have gotten on very well. The relationship is as warm as ever, not only on the trade and economic front, I think also on the political front. We see eye-to-eye on many things, including the war against terror. And as for the US and Singapore's relationship to flourish, and with that we expect trade to flourish too. One of the benefits of the free trade agreement has been better access for Singapore companies to US government contracts. And obviously, a warm relationship between the two governments also improves the chances of Singapore companies winning some of that business.
When asked about trade relations between the US and China, Jim Gradoville (JG), Chairman of the Board of Governors at the American Chamber of Commerce based in China echoed the same views.
JG: I'd say it is essentially good and very solid. China did a good job last year implementing that WTO obligations, and the bilateral meetings with the US and senior leadership led by Chinese Vice-Premier Wu Yi, and on the US side, by the US trade representative like Commerce Secretary Evans were a big success, as well as the ongoing US Treasury Department's talks with China's Ministry of Finance regarding China's financial market systems.
While the US-Asian trade relations continue to flourish in 2005, Professor John McKay feels that the widening US trade and budget deficits show no signs of slowing in 2005.
JM: I can see nothing that would stop it from widening. The war in Iraq is continuing to suck huge amounts of resources out of the United States. There are no signs of that situation being resolved. There is no sign that President Bush will do anything on the other side of the ledger. For example, he has said very clearly he will continue his program of tax cuts, which means that domestic funding for the US government is not going to increase. It is almost inevitable that the budget deficit will increase. The other issue relates to the balance of trade between the United States and the rest of the world. Last month, there was some improvement in that position, but overall, I think the dynamic is for the United States to be faced with very serious problems economically. - RSI
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