ravi menon : forces driving the global economic outlook keynote address by mr ravi menon, managing director of the monetary authority of singapore, at the investment management association of singapore 13th annual conference, singapore, 14 march 2012. * * * mr lester gray, chairman of imas, distinguished guests, ladies and gentlemen, good morning. a. fragile equilibrium 1. the world economy appears to have found a fragile equilibrium. there are weaknesses in key economies balanced by pockets of growth elsewhere. more notably, the worst fears of the last three months of 2011 have not materialised. the last six weeks in particular have shown signs that the global economy has avoided imminent disaster. 2. in the eurozone, the threat of a major crisis has receded, at least for now. a deal has been struck on the second greek bailout package, allaying fears of a messy default situation. the ecb ’ s two tranches of long - term refinancing operation, or ltro, amounting to more than 1 trillion euros, has provided eurozone banks much needed liquidity to meet their funding needs. the ltro has also helped to compress sovereign yields significantly, particularly at the front end of the yield curve. 3. in the united states, the risk of a double dip recession has waned. employment data have surprised on the upside. new orders for both manufacturing and non - manufacturing continue to indicate higher levels of activity for the next six months. 4. in china, the odds have improved in favour of a soft landing. while economic growth has continued to ease in the face of weakening external demand, domestic demand has been holding up well. inflation appears to have peaked, providing monetary policy more latitude to support growth if necessary. 5. but the outcome for 2012 is by no means assured. significant risks remain on the horizon : first, resolution of the sovereign debt situation in the eurozone is still a work - inprogress. with europe sliding into recession, sovereign and banking vulnerabilities will remain a protracted concern. second, the sustainability of consumer spending in the us remains critically dependent on further improvements in the labour and housing markets – both of which are uncertain. third, a sharp spike in oil prices could potentially derail global economic growth. oil prices, which have already started rising, are highly vulnerable to geopolitical developments in the middle east. bis central bankers ’ speeches 6. barring these potential shocks, the imf projects the global economy to grow by 3

higher savings for some time. emerging economies, especially in asia, must increase domestic demand to help offset some of the impact of the slowdown in the g3 economies. but they will not be unaffected. they too will see slower growth. monetary expansion 22. a second driving force in the global economy is the widespread phenomenon of easy money. since the beginning of the financial crisis in 2008, central banks in the us, uk, and the eurozone have embarked on unprecedented monetary expansion. with fiscal policy constrained by sovereign debt concerns, the burden of supporting growth and ensuring financial stability has fallen disproportionately on monetary policy. with interest rates close to the zero bound, central banks have been relying heavily on unconventional measures, especially large scale asset purchases aimed at lowering long - term interest rates and spurring economic activity. unconventional as these measures may be, they have been effective in preventing financial crisis and preserving market stability. 23. while this unprecedented monetary expansion may be necessary in the context of the current situation in the advanced economies, it is neither without risk nor contagion. the key risk is that if monetary stimulus is not withdrawn at the right time, inflationary pressures could rapidly build up. 24. monetary expansion in the g3 economies also has significant cross - border contagion effects. low interest rates in the advanced economies, coupled with relatively favourable growth prospects in emerging economies, have triggered bouts of large and volatile capital flows to the latter. 25. easy monetary conditions are appropriate in the advanced economies given the stage of the business cycle they are at, with significant negative output gaps. but emerging economies, especially in asia, are at a different stage of the business cycle : capacity utilisation is above pre - crisis levels in many asian countries. labour markets are tight. the output gap in many asian countries has closed and turned positive, although the recent easing of exports has reduced the gap somewhat. 26. partly due to the tightening of monetary policy earlier on, inflationary pressures in many asian countries have subsided. but as long as monetary conditions in the advanced economies remain easy, the risk of disruptive capital flows and surges in inflation, especially in asset prices, remains real. 27. the challenge facing asian policymakers is this : how to adjust policy settings to cope with slower economic growth while inflation has not been entirely tamed? while there has been some normalisation in policy rates over the past two years, real interest rates remain generally low to negative in the region. credit