The 5 biggest risks to effective asset management

According to the PAS-551 standard on asset management from the British Standards Institute, asset management is defined as: “systematic and coordinated activities and practices through which an organization optimally and sustainably manages its assets and asset systems, their associated performance, risks and expenditures over their life cycles for the purpose of achieving its organizational strategic plan.”

Embodied in this definition, of course, are assets of various types (physical, financial, human, information and intangible), which all contribute to the organizational strategic plan. Best practices dictate that an Asset Management Plan, comprising of three main sub-plans (Operations, Maintenance and Risk) or its equivalent, be developed and implemented for physical assets.

The main focus of this article will be on physical assets, but you will find that some of the risks to asset management identified herein will be shared with the other asset type categories. The author suggests that there are at least five such risks that primarily contribute to an organization’s failure to optimally manage their assets: 1) not knowing what they have; 2) over- or under-maintenance; 3) improper operation; 4) improper risk management; and 5) suboptimized asset management systems.

1) Not knowing what you have

In common manufacturing industry parlance, this is known as the FDH (fat, dumb and happy) approach to asset management. While it might seem intuitively obvious, many organizations either don’t appreciate the need to know with a high level of confidence, the assets that they have or they choose not to take the time to do so. Either way, this has to be the first major step taken towards ensuring that one’s asset management program is effective. Not knowing what one has is tantamount to playing a game of Russian roulette. If an organization is truly serious about their program they will need to take the following steps to establish the proper foundation to build upon:

  • Develop a list of all the organization’s assets and verify this list with what is in the field.
  • Establish and configure a physical asset hierarchy. ISO 142242 from the International Organization for Standardization (ISO) can be used as reference.
  • Develop the criticality evaluation criteria for the business and apply to the verified asset base. This is where the individual assets are linked to how they affect the organizational strategic plan.
  • Develop and implement a management of change or configuration management process that will ensure that any future changes to the asset are properly evaluated and recorded.

2) Over- or under-maintenance

During the operational phase of the asset life cycle, there can be a problem of over-maintaining as well as under-maintaining. The key issue regarding over-maintaining typically involves two issues that will make the asset management system ineffective. First, there is generally a significant cost associated with the execution of non-value-added maintenance. In this regard, cost can be loosely used as a guideline since there are well-documented industry benchmarks for maintenance spending that can be followed. Second, the typical organization that can be accused of over-maintaining its assets will most likely be performing intrusive maintenance tasks more frequently. From what we know of how typical failures manifest, this means that there will be additional exposure risk for the business to infant mortality failures and further incurred costs.

The issue of under-maintenance and how it prevents effective asset management is even more clear-cut. Maintenance is often viewed as a business expense open to cutting like any other in order to maximize profits. With these pressures, maintenance departments are constantly struggling with how to balance cost with the performance requirements for the assets such as reliability and uptime. Cost-cutting often wins, however, in the form of delayed proactive maintenance as well as maintenance technicians lacking the necessary skills and tools to perform precise work.

With respect to both the issues of over- and under-maintenance, the author’s recommended approach is, starting with the most critical assets, determine the optimum maintenance requirements of the assets through one of the more rigorous methodologies such as Reliability-Centered Maintenance (RCM). Then, load level the resources (financial and human) required to implement the maintenance plan. Finally, ensure that a training plan is in place to close the skills gap of the persons required for the tasks.

3) Improper operation

Many organizations suffer first of all from a lack of understanding of the inherent design capabilities of their assets and, secondly, how best to operate within their ranges to optimize the asset life cycle. For some assets, either operating below or above the design range adversely affects the life of the asset. A perfect example of this is the typical centrifugal process pump, as illustrated in the pump curve in Figure 1. Operating on either side of the best efficiency point on the curve is accompanied by a myriad of life-shortening issues. Unfortunately, that is exactly what we do when we choose to speed things up, slow things down or continuously operate assets that were designed to be intermittently run. The best guidance that the author can give with respect to this issue is to: 1) find out how your assets should be run; 2) understand the effects of operating outside of design ranges; and 3) if you can’t operate within the ranges, understand the risks or mitigate the risk (example: resize the impellor to match the operating point).

4) Improper risk management

The basic tenet of best practices asset management dictates that a plan is implemented that not only manages the operation and maintenance of an organization’s assets, but also manages the risks associated with the ownership and use of the assets. Risk, in its most elementary form, is a function of consequences and the likelihood of such an event taking place. Risk management takes place on two major fronts: 1) assessment or identification; and 2) management and controls. Each area, when not done well, is a continued contributor to ineffective asset management. One doesn’t have to stretch the imagination too far to understand this concept. Perform a Google search on the “Bhopal Disaster”3, widely regarded as the world’s worst industrial catastrophe, for an example of unassessed and unmanaged risk. In order to fully manage risk, the author recommends that the following four step model, by ISO, be used:

  • Establish context
  • Risk assessment: Risk identification, Risk analysis, Risk evaluation
  • Risk treatment
  • Monitor and review

5) Sub-optimized asset management systems

In recent years, enterprise asset management (EAM) systems have become more popularly used within organizations to manage assets. Most systems have inherent deficiencies that prevent holistic management of all the required areas of the plan. As a result, additional secondary systems are often necessary. That being said, of the features that are available from most EAMs, many organizations are guilty of not fully utilizing them. This generally stems from shortcuts taken during the EAM implementation. The way to fully address this issue is to either do it right the first time or pay more to do it later. The author’s personal preference is the former. This takes planning, resources and treating the implementation as a major change program and not just a project. This is easier said than done, and is often best when supported by the services of change management professionals and asset infrastructure specialists. Apart from the tools (EAM, secondary systems) and technical solutions, we often fail to recognize that our human resources and business processes are important parts of an organization’s asset management system. A lack of due diligence in these areas will also negatively impact the bottom line and should be planned for as well.

Asset management is an integrated approach to optimizing the life cycle of your assets, beginning at conceptual design, through to usage, decommissioning and disposal. By acknowledging and paying attention to these five primary risks to effective asset management, you can put in place plans to mitigate the effects these might have on their program. Note also, that true excellence in asset management performance does not lie only in avoiding the pitfalls, but in turning each and every one of these opportunities to fail into an opportunity to excel.

Reality behind creating passive income

Some people fantasize about creating passive income by establishing some kind of information product – an e-book, CD, DVD – then kicking back while cash from the sales of these products rolls in. It’s often touted among Internet marketing gurus as an easy, surefire way to create a passive-income stream. But while information products can eventually yield an excellent income stream, Tresidder notes that it’s hardly a passive activity.

“It takes a massive amount of effort to create the product,” he says, “And to make good money from it, it has to be great. There’s no room for trash out there. It has to be something people are willing to talk about.”

Tresidder says to find financial success in selling information products, you must be committed to devoting a great deal of time, energy and money into the project at the outset. You have to build a strong platform, market your products like crazy and plan for serialization.

“One product is not a business unless you get really lucky,” says Tresidder. “The best way to sell an existing product is to create more excellent products.” But once you master the business model, he adds, you can generate a good income stream.

Asian real estate :strong dollar and low interest stimulate foreign investments

China’s economic turmoil is shaking up the real estate industry, especially on Asian markets. According to Real Capital Analytics, commercial property sales in Asia fell 41% in dollar terms in H1 2015 compared to the same period in 2014. The loss is largely due to a decrease in land for sale in China, but also the 13% decline in investment volumes and weakened Asian currencies against the US dollar. According to PwC, a financial services company, the largest Asian markets in terms of real estate investments as of 2015 were Tokyo ($15.7B), Hong Kong ($4.1B) and Shanghai ($2.7B).

Key investment drivers in Asia

Weakened national currencies and falling interest rates on loans in some countries have made investments attractive.

  • Cheaper loans. Certain countries have lowered interest rates and eased requirements on down payments since 2014. For example, in February 2016, the People’s Bank of China announced it was reducing the down payment threshold for first-home purchases from 25% to 20% and from 40% to 30% for second properties. Interest rates have also fallen six times since 2014. In January 2016, the largest Japanese banks reduced variable mortgage rates to their lowest in history (0.625%). Loan-to-value ratios are now as high as 85–90% of the property value. Easier lending terms aim to consolidate internal demand for property with the hope that market prices will grow over the longer term.
  • Currency devaluations. Currencies in Indonesia, Thailand and Malaysia fell by 10–20% in 2015. This had a significant effect on local property buyers, who became less active, but simultaneously boosted demand from foreign investors, especially those with hard cash.

Nevertheless, Asian markets are still less attractive than their European and American counterparts because of low yields on property investments. For instance, office and residential property in the central business districts of Hong Kong, Taipei and Tokyo earn as little as 2–3% per annum.

Office property markets and yields

In Q3 2015, the Rental Rate Index in Asia gained 1.4% and the average vacancy rate rose by 0.1% according to Knight Frank. However, certain markets are at different stages: in Beijing the decline of rental rates has slowed but in Hong Kong and Mumbai, growth rates are rising. In New Delhi and Taipei rates are still falling while in Jakarta and Singapore, their decline has accelerated.

As a general rule, markets with low office vacancy rates have low yields. For instance, in Hong Kong only 6.5% of property is vacant and yields are just 2.8%, but in New Delhi almost one-third of offices are empty and yields exceed 8.0% because of the high risks involved. The highest monthly office rental rates in Asia are found in Hong Kong: $180 per sq m on average for the Class A offices.

Key figures of Asia’s leading office markets

City Rental price,
USD per sq m
per month
(Q3 2015)
Rental rates
forecast by
Q3 2016
Yields,
%
(Q2 2015)
Yield, BPS
dynamics
(Q2 2014–
Q2 2015)
Average vacancy
rate forecast,
%
2016 2017
Beijing 057.8 4.8 09.0 12.0
Hong Kong 180.9 2.8 06.5 07.8
Mumbai 042.0 9.8 +80 22.5 24.6
New Delhi 044.8 8.2 32.1 31.2
Seoul 026.4 4.4 −15 12.1 12.3
Shanghai 044.6 4.5 16.0 15.0
Singapore 078.3 3.8 +15 13.9 13.3
Taipei 023.9 2.3 +05 12.5 14.0
Tokyo 090.1 3.3 −25 05.0 04.8
Source: CBRE, Cushman & Wakefield, Knight Frank

In 2016, global economic instability will force corporate tenants to plan their expenses more carefully and investors to choose the safest options. The strength of the euro and US dollar should attract foreign investors to Asian office markets in spite of the Chinese slowdown as international companies will continue to develop on the Middle Kingdom’s markets. Experts expect office premises in the country’s largest cities, especially Shanghai and Beijing, to be in demand.

Retail property markets and yields

Retail property value growth in Asia is slowing down, according to CBRE. Growth dropped from 6.6% in 2014 to 1.5% in 2015. At the same time, Cushman & Wakefield announced that rental rates were growing between June 2014 and June 2015 in Beijing and Shanghai. However, in Hong Kong they decreased considerably (−13.9%) due to the cautious behaviour of retailers.

Although rent is now cheaper, the Hong Kong Causeway Bay is still the most expensive shopping street in Asia and the second most expensive worldwide after Fifth Avenue in New York. Shops in Causeway Bay let for over $25,000 per sq m per year. The cheapest rental rates (in markets considered by Cushman & Wakefield) lease for an annual rate of about $300 per sq m on Satellite Road in the Indian city of Ahmedabad.

Rental rates and yields for the prime shops in Asian cities

City Street Rental price,
USD/sq m
per year
(June 2015)
Rent dynamics,
%
(June 2014–
June 2015)
Yield,
%
(Jan 2015)
Bangkok Ratchaprasong,
Sukhumvit Road
01,349 +15.2
Beijing Wangfujing 05,455 +08.5 5.1
Hong Kong Causeway Bay 25,815 −13.9 3.3
Mumbai Linking Road 01,520 +00.0
New Delhi Khan Market 02,535 +00.0
Seoul Myeongdong 09,488 +00.0
Shanghai West Nanjing Road 04,714 +06.0 4.5
Singapore Orchard Road 03,624 0−1.8 5.1
Taipei Zhongxiao 02,940 +04.2 2.9
Tokyo Ginza 09,489 +03.2 3.0
Source: CBRE, Cushman & Wakefield

One of the key sales drivers in Asian metropolitan cities (i.e., Tokyo, Seoul and Taipei) is the increasing number of tourists coming from mainland China. Consequently, if the Chinese economy continues to stumble, shops in these locations will no doubt see their retail sales volumes fall too.

According to Cushman & Wakefield experts, China has the potential to become the world’s largest retail property market by 2018. The country’s middle class and domestic consumption are growing regardless of the economic situation and lower export activity. The Chinese market is remarkably flexible and many companies are changing their retail formats in response to the current times. For instance, high-end fashion brands are opening cafés and restaurants and property owners are introducing mobile applications to their businesses and offering free Wi-Fi.

Hotel property markets and revenue per unit

Demand for hotel accommodation in 2014–2015 was affected by terrorist attacks, weakening currencies in certain Asian markets and lower Russian tourism. For example, Bangkok saw demand from foreign citizens shrink after the attack in August 2015. Tourism in Asia fell 49% between July 2014 and July 2015 after the Russian ruble devaluation. During the same period, the Maldives lost 40% of Russian holidaymakers, which was most notable between November 2014 and March 2015, peak season for Russian tourism.

The greatest tourist economy remains Hong Kong, which received 34.3 million visitors between July 2014 and July 2015. This city is particularly successful with business tourists visiting conferences, exhibitions and other events every year.

Key figures of the leading Asian hotel markets

Market Foreign tourists
(spring/summer
2014–2015)
Occupancy
rate, %
Average
Daily Rate
(ADR), USD
Revenue
Per Room
(RevPAR)
USD
People,
millions
Annual
dynamics, %
Bali 02.3 +10.1 63.9 0,449 287
Bangkok 11.4 −11.3 71.0 0,163 116
Beijing 02.4 0−0.7 70.9 0,140 099
Delhi 07.9 +04.5 69.4 0,135 093
Hanoi 01.4 +05.0 74.9 0,105 079
Ho Сhi Minh Сity 01.8 +05.0 66.2 0,115 076
Hong Kong 34.3 +01.0 75.9 0,443 336
Jakarta 01.1 0−6.4 59.8 0,179 107
Kuala Lumpur 06.5 0−8.6 64.6 0,116 075
Macao 17.4 0−3.5 84.7 0,194 164
Maldives 00.7 N/A 63.5 0,792 503
Manila 02.7 +07.7 67.1 0,123 082
Mumbai 06.9 +06.9 71.2 0,130 092
Osaka 04.2 N/A 86.3 0,179 155
Phuket 02.0 +08.2 72.9 0,115 084
Seoul 07.3 0−8.5 65.2 0,152 099
Seychelles 00.2 N/A 63.9 1,059 677
Shanghai 03.9 +00.1 67.5 0,164 111
Singapore 07.3 0−3.4 77.9 0,280 218
Sri Lanka 01.2 +17.1 63.5 0,120 076
Taipei 04.9 +03.4 67.1 0,223 149
Tokyo 07.9 +34.5 N/A N/A N/A
Source: JLL

Despite the negative factors, JLL experts forecast positive growth for the region’s hotel property markets. Demand for rooms should grow thanks to various government initiatives. For instance, Beijing will host the 2022 Winter Olympics and a Universal Studios theme park is set to open in 2019, not to mention the construction of a second airport the same year. Shanghai will benefit from the opening of the Shanghai Disney Resort theme park in 2016, while India’s new electronic visa system for 113 nationalities will stimulate inbound tourism. Jakarta is also expected to sign visa waiver agreements with over 45 countries.

Residential property markets and yields

Weakened currencies like the Indonesian Rupiah (IDR), Thai Baht (THB) and Malaysian Ringgit (MYR) made property in these countries cheaper for foreign buyers with dollar incomes according to the Wall Street Journal. As reported by Exotiq Properties real estate agency, the average property sale price in Bali dropped from $750,000 in 2014 to $500,000 in 2015 and prime residential real estate lost 15–25% of its value.

Another international real estate agency, Engel & Völkers Phuket, announced that Thai homes and flats became 10–15% more affordable for foreign nationals over the year to January 2016. Trends on the online PropGoLuxury platform confirm this, recording a 45% upsurge in requests for prime property in Kuala Lumpur, Malaysia.

The Hong Kong market, however, is suffering from China’s economic situation, which has induced excess property supply. According to Centaline Property real estate agency, January 2016 sales were the lowest on record since 1991. Experts forecast that, in 2016, property in Hong Kong could get 20% cheaper in total.

Residential property prices and dynamics in Asian cities

City Prices/sq m,
USD
Price dynamics*,
(Sept 2014 –
Sept 2015) %*
Yield, %
City
centre
Suburbs City
centre
Suburbs
Bangkok 03,820 01,733 +8.5 4.44 4.01
Beijing 13,098 05,702 +2.7 2.21 2.58
Delhi 02,754 01,215 +1.7 2.20 2.78
Hong Kong 26,081 15,795 +1.7 1.99 2.17
Jakarta 02,666 01,324 +9.4 6.15 5.64
Kuala Lumpur 02,758 01,346 −1.1 4.68 4.76
Mumbai 07,060 02,414 +2.6 1.81 2.54
Seoul 12,231 04,506 +7.6 2.41 4.07
Shanghai 12,312 04,926 10.7 2.14 2.55
Singapore 18,430 09,452 −7.9 2.68 3.17
Taipei 10,998 05,442 −1.8 1.11 1.34
Tokyo 19,032 08,355 +1.8 1.72 1.99
Source: Knight Frank, Numbeo
*in local currencies

One of the main risks for residential property markets in Asia this year is America’s possible base interest rate increase: local Asian banks could also raise their rates if the U.S. Federal Reserve System does.

Where to invest

According to JLL, the most transparent and secure Asian markets are Hong Kong, Singapore, Malaysia and Japan. China, the Philippines, Indonesia, Thailand, South Korea and India are considered “semitransparent”. Among the countries with low transparency, experts place emphasis on Vietnam.

In view of the sluggish world economy, investors tend to choose reliable, low-risk markets. According to PwC, Tokyo and Osaka will be especially popular in 2016. Investors are also optimistic about the Shanghai market. PwC analysts consider the latter to be the only Chinese city where property, including the prime segment, will always be always in great demand.

As for the investments in provincial Chinese cities, they are risky (except Nanjing, Xiamen and Wuhan) where supply exceeds demand and could take years to integrate the redundant construction projects.

Top 10 Asian cities for real estate investment in 2016

1 Tokyo
2 Osaka
3 Ho Chi Minh City
4 Jakarta
5 Seoul
6 Manila
7 Shanghai
8 Singapore
9 Bengaluru
10 Mumbai
Source: PwC

The majority of investors surveyed by PwC named Jakarta, Tokyo and Ho Chi Minh City as suitable markets for office and residential property investments in 2016. Mainland China on the other hand, excluding Shanghai, is considered the best selling location.

Types of property to buy and sell in Asia in 2016

Property type Where to buy Where to sell
Office Jakarta, Ho Chi Minh City, Tokyo Provincial Chinese cities, Guangzhou, New Delhi
Retail Tokyo, Ho Chi Minh City, Osaka Provincial Chinese cities, Shenzhen, Guangzhou
Industrial Jakarta, New Delhi, Shanghai Provincial Chinese cities, Beijing, Shenzhen
Hotels Tokyo, Osaka, Seoul Provincial Chinese cities, Shenzhen, Beijing
Residential Tokyo, Jakarta, Ho Chi Minh City Provincial Chinese cities, Shenzhen, Guangzhou
Source: PwC

The Asian markets have positive forecasts for 2016 according to Cushman & Wakefield. Low inflation could mitigate consequences of the Chinese slowdown, legislative proposals are set to help revive economies in Japan and South East Asia, while reforms by Indian Prime Minister Narendra Modi could stimulate economic growth. Considering the favourable economic forecast, Asian real estate market investments are expected to grow. Cushman & Wakefield estimates that capital investments will increase by up to 3% on average, with major rises anticipated in China and Singapore. According to PwC, over 80% of their survey respondents believe that real estate businesses in Asia can increase their earnings in 2016 to “average” or “fair” — with 11% of them expecting an exceptional year.

Yulia Kozhevnikova, Tranio

Lower interest rates may be the new normal, Stephen Poloz says

Bank of Canada governor Stephen Poloz is recommending pension funds get ready for a new normal: neutral interest rates lower than they were before the financial crisis.

Poloz told a Wall Street audience Tuesday that the fate of neutral rates – the levels he said will prevail once the world economy recovers – remain unknown, but they will almost certainly be lower than previously thought.

The central banker made the comment during a question-and-answer period that followed his speech on global trade growth.

  • Stephen Poloz spawns negative headlines on negative interest rates
  • How negative rates could be a positive for Canada’s economy

Among the reasons, Poloz pointed to the more-pessimistic outlook for potential long-term global growth. The forecast was lowered to 3.2 per cent from four per cent, he said.

“That downgrade means the neutral rate of interest will be lower for sure — for a very long time,” said Poloz, who added it could go even lower if economic “headwinds” continue.

“Those in the pension business need to get used to it. They need to adapt to it.”

Since the 2008 global financial crisis, pension funds around the world have had to contend with market uncertainty, feeble growth and record-low interest rates.

Pension funds use long-term interest rates to calculate their liabilities. The lower the rates, the more money plans need to have to ensure they will be able to pay future benefits.

  • Economic data is encouraging but unclear, Poloz says

A December report by the Organization for Economic Co-operation and Development said the conditions have “cast doubts on the ability of defined-contribution systems and annuity schemes to deliver adequate pensions.”

To cushion the Canadian economy from the shock of lower commodity prices, Poloz lowered the central bank’s key rate twice last year to 0.5 per cent — just above its historic low of 0.25.

Poloz linked the higher neutral interest rates of the past to the baby boom, which he described as a 50-year period of higher labour-force participation and better growth.

“Well, that’s behind us,” Poloz told the meeting of the Investment Industry Association of Canada and the Securities Industry and Financial Markets Association.

“We don’t have numbers for all this, but you need to be scenario-testing those pension plans and the needs of your clients because the returns simply won’t be there.”

  • Canada’s economy is ‘like a movie’ Stephen Poloz says
  • IMF downgrades forecast for Canada’s economy this year and next

But with all the unpredictability Poloz said it remains possible current headwinds could convert into positive forces that would push interest rates back to “more-normal levels” seen prior to the crisis.

Earlier Tuesday, Poloz’s speech touched on another aspect of the post-crisis world.

He told the crowd they shouldn’t expect to see a return of the “rapid pace of trade growth” the world saw for the two decades before the crisis.

Poloz was optimistic, however, that the “striking weakness” in international trade wasn’t a sign of a looming global recession.

He said the renewed slowdown in global exports is more likely a result of the fact that big opportunities to boost global trade have already been largely exploited.

As an example, he noted China could only join the World Trade Organization once.

  • Bank of Canada not responsible for record debt levels, Stephen Poloz says

Poloz expressed confidence that most of the trade slump will be reversed as the global economy recovers — even if it’s a slow process.

“The weakness in trade we’ve seen is not a warning of an impending recession,” said Poloz, a former president and CEO of Export Development Canada.

“Rather, I see it as a sign that trade has reached a new balance point in the global economy — and one that we have the ability to nudge forward.”

He said there’s still room to boost global trade through efficiency improvements to international supply chains, the signing of major treaties such as the Trans-Pacific Partnership and the creation of brand new companies.

Poloz’s speech came a day after Export Development Canada downgraded its outlook for the growth of exports.

EDC chief economist Peter Hall predicted overall Canadian exports of goods and services to expand two per cent in 2016, down from a projection last fall of seven per cent.

When asked when he sees monetary policy returning to a period of normalization, Poloz replied that he thinks the Canadian economy will return to sound footing some time in 2016.

“We’re going to get up to full speed this year,” he said.

Abe seeks stimulus for world economy

The forerunner of Group of Seven summits was held in Rambouillet, France, in November 1975. Its purpose, according to French president Valéry Giscard d’Estaing, was to make the then six leaders of the free world “aware of their responsibilities to guide the world out of the economic slump”.

Forty-one years later, the G7 has come full circle. Shorn of Russia, it is once again a club for rich democracies and the main focus for this year’s chair – Japanese prime minister Shinzo Abe — is to aid a struggling world economy.

The leaders will meet on Kashikojima, an island in the picturesque Ise-Shima region of Japan, at a time of turmoil. Among the topics at the informal, no-staff-allowed talks that characterise the G7 will be the UK’s imminent referendum on leaving the EU, and concerns about Syria, Ukraine, North Korea, refugees, Greek debt, the rise of Donald Trump and regional tensions in the South China Sea.

The G7 summit is taking place at a time of leadership flux. It is US President Barack Obama’s final G7 summit. Weakened by the influx of refugees from Syria into Europe, German chancellor Angela Merkel is no longer as secure as she once was, and Justin Trudeau of Canada will be attending his first G7. Yet the main story of the summit will be whether Mr Abe can prevail upon his counterparts – Ms Merkel in particular – to back fiscal stimulus, and whether that backing will turn into action around the world.

In February, G20 finance ministers agreed to “use all policy tools — monetary, fiscal and structural” to support growth. Mr Abe’s goal is for the G7 communique to go further on fiscal policy. “To have something similar to the finance ministers in February would be meaningless,” says one Japanese government official. “At the summit, we want a communique that really gets to grips with this.”

Mr Abe has powerful domestic reasons to seek such a statement from the G7. With upper house elections in Japan this summer, he plans to launch a fiscal stimulus at home. He must overcome opposition within his own party if he is once again to postpone a rise in consumption tax scheduled for April next year. Mr Abe would like to present these measures to the Japanese public as evidence of his strong leadership of the G7.

He is likely to find varying degrees of support from Canada, Italy, France and the US. “One of the biggest challenges we all face right now is a lack of demand in the global economy,” says a US administration official. “It’s a place where Abe is going to want to focus the G7 conversation.”

Yet while officials from several countries say alarm over the global economy has risen, there are still divisions over the best way to boost demand. “The fault lines will be between the countries that want to use more fiscal stimulus and those who are completely opposed to that — [which is] Germany,” says Matthew Goodman, an ex-White House official at the Center for Strategic and International Studies in Washington.

Germany’s balanced budget and current account surplus mean it could boost demand globally by spending more at home. Ms Merkel, however, is expected to bring a familiar economic message to the G7: stick to the straight and narrow. German officials were satisfied with solid growth of 1.7 per cent last year — the same is forecast for 2016 — and while the arrival of 1m refugees is creating social and political pressures, their economic impact is insignificant.

Despite extra spending on refugees, finance minister Wolfgang Schäuble has promised another zero-deficit year, with no tax increases and no budgetary juggling. Berlin acknowledges some forecasters have cut their global outlook for 2017 but insists there is no reason to panic. “Alarm bells are ringing in some places,” says a senior finance ministry official. “But the global economic figures are not so bad.”

German officials say there is no need, therefore, for new economy-boosting measures and especially not for further fiscal or monetary easing. Berlin is sticking by its mantra — tight budgets, cautious monetary policy and a real push on structural reforms. Germany also says that much structural reform has already been agreed at the G20, but not yet put into effect. This includes regulatory measures to improve the climate for private investment. Berlin argues implementation should come before new plans are announced.

How isolated Ms Merkel finds herself will depend, in part, on the UK. David Cameron’s government talks about fiscal discipline, but the British prime minister will have one overarching goal at the G7 summit: winning last-minute support for his efforts to keep the UK in the EU. The summit will be Mr Cameron’s last big meeting with world leaders before his June 23 “Brexit” referendum.

Given that every aspect of UK domestic and foreign policy is geared to securing a vote to stay in, it would be remarkable if the prime minister did not try to gather endorsements from his peers. Mr Cameron would be delighted if the references to the risks of a vote to leave the EU were made in the summit communique – a straightforward request, since G7 capitals agree uncertainty about Brexit is an economic risk. “The referendum is the only game in town,” says one aide to Mr Cameron. If the prime minister were to lose the vote, some senior colleagues expect he would step down immediately.

Away from the economy, a host of problems will vie for attention: Syria, Ukraine and the territorial tensions in the South China Sea are the most important. The US official says Mr Obama will stress the need to tackle the refugee crisis and host a session at the G7 “to focus the minds of world leaders on what we can do to address the issue”.

The absent former eighth member, Russia, will still make its presence felt. Against US wishes, Mr Abe went to visit Vladimir Putin, the Russian president on his pre-G7 tour, agreeing “a new approach” to bilateral talks on disputed islands in the Kurile chain.

Mr Abe is also likely to raise China’s building of artificial islands in the South China Sea, though it may not figure in the communique, given a lengthy statement was made recently by G7 foreign ministers at a separate meeting in Hiroshima. A behind-closed-doors discussion will enable Mr Abe to rally his allies without antagonising China.

On his return from Rambouillet, the Japanese prime minister of the day declared the summit a “120 per cent resounding success”. If Mr Abe secures backing for his fiscal stimulus plans, he is likely to do the same.

Robin Harding is FT Tokyo bureau chief and Hiroyuki Akita is Nikkei senior and editorial staff writer. Additional reporting by Stefan Wagstyl in Berlin, Demetri Sevastopulo in Washington and George Parker in London.

World economy to grow by just 2.4 percent in 2016: UN

Massive projections on Sustainable Development Goals are seen on the north facade of the Secretariat building, and west facade of the General Assembly building at the United Nations headquarters in New York, the United States, Sept. 22, 2015. (Xinhua/file photo)

UNITED NATIONS, May 12 (Xinhua) – As world economic growth remains weak, world gross product will grow by just 2.4 percent in 2016, the same pace as in 2015, said a UN report here on Thursday.

This marked a downward revision of 0.5 percentage points from UN projections in December 2015.

The World Economic Situation and Prospects as of mid-2016 report, released by the UN Department of Economic and Social Affairs, pointed out that persistent weakness in aggregate demand in developed economies remains a drag on global growth.

Low commodity prices, mounting fiscal and current account imbalances as well as policy tightening have further dampened prospects for many commodity-exporting economies in Africa, Latin America and the Caribbean, it added.

“Economic activity in the world economy remains lackluster, with little prospect for a turnaround in 2016,” it noted.

In addition, China’s economy is projected to grow by 6.4 percent in 2016 and 6.5 percent in 2017, in line with the government target, said the report.

Lenni Montiel, assistant secretary-general for economic development, said a more balanced policy mix is needed to rejuvenate global growth and to create favorable conditions for the world’s sustainable development.

Reviving the Silk Road and Stimulating World Economy

Despite the fact that the Silk Road dates back to circa 300 BC, this international commercial line still figures prominently in discussions among economists and governments on stimulating the global economy through reviving historically proven initiatives. The ancient Silk Road served as an important enabler of great civilisations, including the Chinese Civilisation, the Egyptian Civilisation, the Indus Valley Civilisation, and the Roman Civilisation.

The Silk Road did not impact only cities of commerce, or those that were considered active markets – it also contributed to the prosperity of cities enroute that the merchants and commercial convoys passed. Merchants in the Arabian Peninsula played a major part in preserving activity on the Silk Road, by loading ships with their goods and sailing through ancient maritime trade routes towards the northern shores of India. There, they would meet Chinese merchants and trade Chinese silk for their incense, perfumes, copper and gum.

Later, Islam transformed the Arabian Peninsula and many other lands in Asia and Africa to one unified economic bloc. Muslim merchants significantly influenced all trading activity to and from the Silk Road. While Indian and Chinese merchants docked their ships on the shores of the Arabian Peninsula, it was the Arab merchants who moved goods on their boats or convoys of camels, using a vast network of land and sea routes to re-export merchandise across the ancient world.

The need to revive the Silk Road today, so that the Organisation of Islamic Cooperation is one of its central links, is far more than a nostalgic sentiment – it is rather, a response to the recession that has dominated the world economy for over nine years.

The Chinese economy is the most important catalyst of world economy. If the former is stimulated, the latter will see a proportionate surge. This is one critical reason for the present and future of the Chinese economy dominating discussions at the recent Davos conference. The world today realises that rejuvenating the global economy starts with the recovery of the Chinese economy. The Chinese President, Xi Jingping, said during the G-20 Summit in Turkey in 2015 that despite its current temporary slowdown, the Chinese economy contributes more than 30 percent to the global economic growth. This single fact makes us realise the importance of driving trade with China and East Asian countries through reviving the Silk Road – given the high potential the trade line offers to enhancing prospects for the MENA region.

We must remember that President Xi Jingping’s first visit, after launching the Silk Road initiative, was to Arab and Islamic countries signifying their important role in the success of the initiative.

Despite their risks and adverse effects on several markets around the world, the recent economic circumstances provided the world with an opportunity to reconsider the global economic structure, and revive global trade lines among economic hubs capable of adapting to new developments, and keen to contribute to the growth of the world’s economy.

Given this priority, the Chinese President launched the One Belt, One Road (OBOR) initiative that includes the Silk Road and the Maritime Silk Road in October 2013. The initiative aimed at positively impacting development in more than 60 countries around the world and benefiting more than 63% of the world’s population. In addition, it was projected to step-up global commercial activity, lead to a higher production capacity in major economies and stabilise the prices of raw materials used across industries, including oil, to reasonable levels. As the world’s second largest consumer of energy, China imports nearly half of its energy requirements from countries in the GCC region.

The OBOR initiative was hailed by the members of Organisation of Islamic Cooperation, most of whom enjoy strong and strategic relations with China.

Since 2012, trade exchange between the Organisation of Islamic Cooperation and China has remained above US$500 billion. Moreover, the relationship between the two parties is based on more than mere economic interest – it is historically rooted in the exchange of culture and science. For decades, the Silk Road has contributed to the growth of movement of goods and people, improved documentation and a surge in publication of research studies by different civilisations along the corridor.

Let us examine some of the ways in which the revival of the Silk Road and the Islamic economy initiative can benefit each other:

  • Through the years, many changes have occurred on the world economic map that eventually shifted the bulk of global production and trade towards the east – specifically, the markets of the Middle East and North Africa region. The transition brought with it anticipated benefits and responsibilities for the countries of the region. Today the fate and future of the global economy is closely linked with the economic performance of these countries.
  • The launch of the Islamic economy initiative has resulted in fundamental changes in the economic and cultural structure of Islamic countries. These countries are gradually reaping the dividends of the initiative through the growth in their manufacturing abilities and greater focus on products and services compliant with Islamic sharia – such as food and beverages, clothes and family tourism.
  • The One Belt One Road initiative will provide abundant opportunities to the main sectors of Islamic economy through facilitating the trade of halal products among countries that feature along the route of the Belt. Furthermore, there’s a significant opportunity for Islamic finance to support infrastructure projects along this Belt.
  • Principles of Islamic economy are consistent with the ambitions and aspirations of the Islamic countries for sustainable development and will contribute to strengthening the unity of the Organisation of Islamic Cooperation. For its part, the body aims to become a strong economic and cultural bloc on a global scale and contribute to the successful development of the Silk Road initiative.
  • The changes in the region’s economies, particularly among the GCC-member countries, after the fall in oil prices, has pushed them to diversify their economic activities and increase the contribution of non-oil sectors to the GDP. This has had a positive impact on the future of the people of the region and on the future of the global economy as a whole.
  • Today, following the global financial crisis of 2008, the world is convinced that in order to avoid any future turmoil, it is required to rehabilitate infrastructure as well as social systems in the developing countries, particularly in countries that are on the Silk Road corridor and within the heart of the commercial and trade hubs.

Islamic countries today understand the significance of the new Silk Road and look forward to future cooperation and joint ventures that will no doubt drive the desired momentum in the world economy and provide global markets with that much-needed elevation of their fortunes.

How to Pull the World Economy Out of Its Rut

Crazy things are happening in the world economy. In Europe and Japan, interest rates have turned negative, something long thought impossible. In the U.S., workers’ productivity is improving at the feeblest five-year rate since 1982. China is a confusing welter of slumping growth and asset bubbles.

Through it all, Federal Reserve Chair Janet Yellen practices the central banker’s art of draining the drama from any situation. She insists that conditions are returning to normal, albeit slowly. Her favored approach, “data dependence,” is nonpredictive and noncommittal, like finding your way in the dark by pointing a flashlight at your toes.

Lawrence Summers, the Harvard economist who almost got Yellen’s job, has no patience for such patience. Since losing out to Yellen in 2013, he’s been jetting around the world—from Santiago to St. Louis to Florence, Italy—to argue that the world economy is in much worse shape than central bankers understand. Focusing on monetary policy alone, he says, they’re doomed to fall short of reviving growth. They need to reach out to the governments they work for, he argues, and insist on strong fiscal stimulus in the form of infrastructure spending and the like. As an intellectual brawler from way back, he’s in his element.

The jury’s still out on Yellen vs. Summers. Boring does not equal wrong, and provocative does not equal right. If the U.S. economy heals nicely over the next few years under business as usual, Yellen’s incrementalism will look smart. But the longer things stay weird, the more Summers appears to be onto something.

“My sense is that if Larry’s hypothesis is true, it’s a total game changer. It will affect how we think about macroeconomic policy for the next several decades,” says Gauti Eggertsson, an Iceland native who worked in the Federal Reserve System for eight years and is now a macroeconomic theorist at Brown University. In November, after Summers presented his ideas at the Peterson Institute for International Economics, its president, Adam Posen, himself a former policymaker at the Bank of England, blogged that “all of us in the profession have a lot of work to do” to respond to the “disturbing questions” Summers raised.

For economic policymakers, the most disturbing question is why global growth remains paltry and uneven. The annual growth rate of gross domestic product in the U.S. in the January-March quarter was just 0.5 percent. The euro zone was stronger than the U.S., at 2.2 percent; Japan, which has been flipping in and out of recessions for a quarter century, shrank 1.1 percent. Deflation once seemed to be a strictly Japanese problem—now it’s a worldwide threat. Pessimism about growth prospects is reflected in low forecasts for long-term interest rates. The annual yield on German 10-year notes is only 0.13 percent.

It wasn’t obvious in the summer of 2013, when President Obama was choosing between Yellen and Summers, that Summers would turn out to have such out-of-the-box ideas. Obama said that “when it comes down to their basic philosophy on the future of the Fed,” the differences between the candidates were so small “you couldn’t slide a paper between them,” according to Democratic Senator Dick Durbin of Illinois, who attended a meeting with the president. Both were highly credentialed—she as a longtime Fed official who was a labor economist at the University of California at Berkeley’s Haas School of Business; he as Treasury secretary under Bill Clinton, former Harvard University president, and former head of Obama’s National Economic Council. If anything, Yellen seemed more likely to be an activist Fed chair and “would probably be more committed to keeping stimulus in place until the economy was definitely recovered,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said at the time.

But in November 2013, after Yellen was chosen but before she replaced Ben Bernanke as chair, Summers went to the International Monetary Fund in Washington and raised the specter of “secular stagnation,” a term coined in the Great Depression by Harvard economist Alvin Hansen, who lamented “sick recoveries which die in their infancy, and depressions which feed on themselves and leave a hard and seemingly immovable form of unemployment.” “Secular” is econospeak for long-lasting, as opposed to cyclical. Hansen’s warnings about secular stagnation seemed to be disproved when U.S. growth accelerated in World War II and then remained strong after the war stimulus ended.
For Summers, bringing the idea of secular stagnation back into the academic debate was like putting on a moldy old coat from Grandpa’s attic. But revive it he did. “Now, this may all be madness, and I may not have this right at all,” he told the IMF audience, before coming around to saying, “we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”

In other words, Summers claimed world economies could be so imbalanced that even zero interest rates would be too high—and for many years, not just briefly as economists had believed. The speech lit up the Twitterverse and drew heavy news coverage. Journalists’ attention has waned a bit, but Summers has kept developing the concept on his blog, in his Financial Times columns, in speeches, and in papers written with other economists, including Brown’s Eggertsson, who’s translated Summers’s thinking into the formal language of general-equilibrium economics. The real world is helping Summers’s case. The longer stagnation lasts, the more it looks secular rather than just cyclical. “I’ve come to a growing conviction” that the theory is right, he says.

To be clear, Summers is challenging much more than when and how much the Fed should raise interest rates. True, he criticized it for voting in December to lift the federal funds rate by a quarter of a percentage point after seven years at just more than zero. But that’s an ordinary argument over how high to set the monetary thermostat.

These are weird times. Growth is weak. Interest rates are negative. Is there a way out?
Summers’s deeper argument is that world growth is stuck in a rut because there’s a chronic shortage of demand for goods and services and a concomitant excess of desired savings. The U.S. and other industrialized nations tend to save more as their populations age, he says. Meanwhile, growing inequality puts a bigger share of the world’s income in the pockets of rich people; they can’t spend everything they make, so they save it. The investment that would ordinarily soak up those savings is falling short. That’s partly because the new economy is asset-lite: Companies such as Uber and Airbnb prosper by exploiting assets (cars and houses) that already exist. Software, which is pure information and doesn’t require the construction of factories, accounts for a bigger share of the economy. Slow growth in output and productivity reduces investment as executives lose faith in the payoff from capital spending.

Exhibit No.1 in Summers’s case: Interest rates have been trending down for 30 years, even after taking into account the decline in inflation. The interest rate, like any price, reflects supply and demand. It’s fallen because the demand for loans is weak and the supply of loans from savers, who have extra cash to deploy, is strong. It used to be thought that interest rates couldn’t go below zero, but the Bank of Japan and the European Central Bank, among others, are so desperate to kindle growth that they’ve pushed some rates below what used to be called the “zero lower bound” into negative territory.

Despite opposing the Fed’s December hike, Summers continues to worry that an extended period of ultralow and even negative rates will cause bubbles in assets like stocks and housing, as desperate investors chase after higher returns. He says fiscal policy needs to play a much bigger role than it has. How? On the investment side, he favors government spending to fix America’s dilapidated roads and bridges, combat global warming, and improve education—big, expensive projects that would provide value while soaking up excess savings. A favorite line: “The United States right now has the lowest infrastructure investment rate that it has had since the second world war.” On the savings side, he favors, among other things, changing the tax code to get more money into the hands of lower-income and middle-class families who’d spend rather than hoard it.

This, of course, sounds a lot like the agenda Obama has been pushing unsuccessfully for the past eight years. “To me, it looks like an opinion masquerading as a theory,” Arnold Kling, a former Fed economist, wrote on his blog in 2014. Congress shows no interest in any measure that smells like fiscal stimulus—especially now, with lawmakers hiding under their desks until after the election. Summers responds that his prescription is separable from his diagnosis; conservatives might prefer to fix the problem with, say, export promotion, the elimination of wasteful regulations, and big tax cuts to induce companies to build factories.

Summers has been getting more of a hearing from central bankers around the world. His message to them: Think bigger. The Fed traditionally restricts itself to managing the “business cycle”—fluctuations of output around a supposed long-term upward trend. Summers questions the very existence of a business cycle, an inherently optimistic concept implying that what goes down must come up. When output declines, his research shows, it never quite gets back to its original trajectory. Productive capacity suffers lasting damage, in part because laid-off workers lose skills. That makes it imperative to avoid a recession whenever possible. Yet Summers says the odds of a U.S. recession in the next three years are “significantly better than 50-50.”

Lately, he’s added the idea that secular stagnation is infectious, spreading between countries by trade and investment flows. A stagnant country can try to cure its unemployment problem by pushing down the value of its currency and running a big trade surplus; that worsens unemployment in its trading partners, which suffer trade deficits, according to recent work by Eggertsson, Summers, and others. Beggar-thy-neighbor trade theory, in other words, is alive and well.

Summers argues that central bankers should stop focusing on the business cycle, stop jealously guarding their independence, and work with other institutions to solve the deep problems that have gotten the economy into this condition. “Central banks like to say…‘Well, yeah, productivity growth’s a problem. That’s not our problem, though.’ ‘Inequality’s a problem. That’s not our problem, though,'” Summers said in a question-and-answer session after his Peterson talk. “I would suggest that no major central banker in the world is seriously engaged with this as an issue.”

The Federal Reserve System employs more Ph.D. economists than any other organization in the world, so it would seem to be an ideal place to bang out big ideas about secular stagnation. But Fed economists tend to focus on short-term forecasting and the mechanics of monetary policy, says Peterson’s Posen. Yellen can’t afford to indulge in blue-skying. Her most important job is to move the rate-setting Federal Open Market Committee along by baby steps, maintaining as much of a consensus as possible among hawks and doves and being careful not to surprise the financial markets. “If you’re a member of a central bank committee, let alone the chair, every word gets scrutinized,” Posen says.

On the narrow question of where rates are headed, the Fed is gradually drifting in Summers’s direction. The median projection by rate setters of where the federal funds rate will eventually settle has come down a full percentage point, to 3.25 percent, since the Fed began releasing projections in 2012. But Yellen, unlike Summers, isn’t calling on Congress to amp up stimulus. In a speech in November at the Banque de France, she said contractionary tax-and-spending policy was “hardly ideal,” but gave fiscal authorities an out by saying they had to take long-term sustainability into account.

Yellen has tiptoed around secular stagnation, referring to the theory but not endorsing it. Her right-hand man, Vice Chair Stanley Fischer, who taught Summers, Bernanke, and European Central Bank President Mario Draghi at MIT and once ran Israel’s central bank, seems more open to the idea that something fundamental has changed. Speaking to academic economists in San Francisco in January, he referred to “the secular stagnation hypothesis, forcefully put forward by Larry Summers in a number of papers.” He agreed that interest rates will likely “remain low for the policy-relevant future.” He even entertained one of Summers’s solutions for the savings/investment imbalance: government spending on long-term projects. Says Summers: “Even people who don’t like to use the term ‘secular stagnation’ are accepting new realities of excess saving relative to investment, very low rates, and chronic demand shortfall.”

One big fact is hard to square with Summers’s idea that the economy suffers from a shortfall in demand—namely, the 5 percent U.S. unemployment rate. If Americans spend a lot more, as he desires, there might not be enough workers available to handle the demand. The result could be a bidding war for talent, climbing wages, and unacceptably high inflation.

Princeton’s Alan Blinder, a former Fed vice chairman, is one of a group of economists who argue that economic stagnation emanates from weak supply, not weak demand. “When I go to sleep at night worrying about the economy, I’m never worrying that Americans won’t spend enough,” he says. Robert Gordon of Northwestern University similarly says growth is impeded by a lack of innovation—a supply-side explanation.

Summers, no surprise, has an answer to those objections. He says there may be more slack in the labor market than is sometimes recognized. And he says the demand-side and supply-side explanations for stagnation aren’t mutually exclusive: Weak demand growth can itself damage the supply side of the economy—i.e., the people and machines who make stuff. Unemployment causes workers’ skills to atrophy; companies stop investing in equipment and software.

Strengthening demand can turn that vicious circle around and gradually raise the economy’s productive potential, Summers says. Far from crowding out private investment, government spending could induce more of it.

When interest rates can go negative, all of the verities in economics are up for grabs. Economists joke that the questions on their doctoral exams haven’t changed in 50 years, but the answers have. The joke “captures a truth,” Summers says.

He seems to relish being in the midst of the upheaval. “That’s the effect of living backwards,” the White Queen told Alice in Wonderland. “It always makes one a little giddy at first.”