After the crisis, there was some excitement about domestic demand being the driver of growth, and there was some justification for such enthusiasm. There was certainly a component related to the growth in incomes and private demand. But there was also a significant component related to public spending and the rapid growth of domestic credit. The outcome is higher debt levels for both households and the Government. This is clearly not a sustainable strategy for growth. Indeed, the experience has shown that there are limits to how fast and how sustainably we can grow by relying on domestic demand alone. Therefore, going forward, while domestic demand will continue to support growth, we really need to strengthen our integration with both the regional and global economy, and by implication, strengthen our overall level of economic competitiveness, if we are to achieve sustainable growth over the long term. Returning to the economic outlook, the good news is that we are seeing more sustained growth around the world and that is already beginning to benefit Malaysia and creating more balanced growth of the Malaysian economy. Now what are the potential clouds over this rather sunny outlook? There are several, but in the interest of time, I will just mention five. The first of this is the slow recovery of investment in the AEs after the crisis. It has been noted that this recovery, unlike recoveries from past recessions, has been accompanied by rather lackluster investment. This is despite the fact that companies are sitting on large piles of cash.
In that respect, Jens Weidmann’s call for significant pay rises in Germany in 2014 was a courageous and welcome move. Deleveraging is another factor that can act as a drag on demand. A significant deleveraging process took place after the recent financial crisis – among households, firms and also governments. Household debt declined the most in those countries where it had grown the most, such as the United States or Spain. Corporates reduced their net debt positions to insulate their balance sheets from the crisis. And, to make sure that debt remained sustainable, governments had to reduce their deficits from the very high levels reached during the Great Recession of 2009. Unfortunately, fiscal consolidation polices were not sufficiently coordinated in the euro area. While deleveraging might be individually desirable for over-indebted groups, if all agents scale down their debts simultaneously, aggregate demand inevitably slows. Turning to more structural factors, demographic trends and productivity can also weigh on demand through their impact on savings. What are the determinants of savings in the long run? According to economic theory, people save more when the rate of the economic growth slows, either because fewer people are in work or because the productivity of each worker decelerates. Several factors are likely to reduce the growth rate of the working age population and increase the average age of workers: the gradual exit of baby boomers from the workforce, the one child policy in China and the decline of fertility rates in the OECD.