Nevertheless, the risk of a renewed deterioration in the US housing market and, therefore, possible further losses for households’ net worth in the US and the financial sector has not disappeared. While the pace of increase in delinquencies on mortgages and in foreclosures has been slowing down, the excess stock of vacant homes remains considerable and might continue to exert downward pressure on house prices. In addition, the demand for housing has been spurred by tax credits for first-time home buyers, but this incentive has a limited time horizon. In the US commercial property sector, developments have lagged those in the residential property market, both with regard to prices and activity. The recent steep fall in prices raises risks both for banks and other financial institutions that are directly exposed to the commercial property market and for investors in US commercial mortgage-backed securities. The outlook for US corporate sector has stabilised since May 2009, as quarter-on-quarter profit growth has turned positive in the first half of 2009. This has mainly been due to a turnaround in the profitability of domestic financial industries (See Chart 2). As a consequence, corporate sector default rates are expected to peak. Notwithstanding the improvement in total corporate profitability, there are risks: the increase in non-financial corporate profitability has been largely due to cost-cutting measures, which could not continue indefinitely, while weak demand prospects are expected to constrain revenue growth. The macroeconomic outlook in the non-euro area EU countries has improved, although there is still an unusually high degree of uncertainty.

We would expect to see the same factory owners boosting technology investment to be able to manufacture more valuable products in the future, or the banking system being improved to bring funds to investors more effectively. The first component requires full utilization of current resources and can be achieved through demand-management policies, while the second component requires improvement of these resources and production processes so that production can yield a higher rate of return. This can be achieved by supply-side policies: increasing productivity of the labor force, adding value to products by innovation, and improvement in infrastructure. BIS central bankers’ speeches  1  Looking at the Thai economy right now, we can see room for both demand-side and supply-side policies. Our economists have analyzed two decades of trend in capital accumulation and estimated that Thai economic growth potential has declined since the 1997 crisis and is currently at 4 to 4.5% per year. Thai growth potential is also low compared to ASEAN peers, who average around 5%, according to an IMF study this year. This reflects lower productivity, and suggests that there is room for supply-side policies to lift growth trend. Looking at need for demand-side policies, Thailand’s actual growth has averaged 2.5% between 2008 and 2013. In this period the Global Financial Crisis and the Thai mega flood occurred, and the economy’s rebound was not enough to compensate for lost growth during these large shocks. Demand-management policies are needed to restore confidence and growth to full capacity.