US economy needs more fiscal pump priming

KUALA LUMPUR: The US economy is in need of more fiscal pump priming, said New York University professor Robert Fry Engle III, also the 2003 Nobel Laureate for Economics.

“I think that the US economy needs the type of fiscal stimulus that (president-elect Barrack) Obama is talking about, I think it is going to be well received by the financial markets but of course, there are a lot of details to be sorted out and we are going to have to see how that works out,” Engle told reporters at the sidelines of the Bridges – Dialogues Towards a Culture of Peace event here yesterday.

Robert Fry Engle III

He said the US government had done “as much as it could” with monetary policy through the cutting of interest rates. “And it’s not had a very big effect,” he noted.

Earlier, in his presentation entitled Why is global financial volatility so high?, Engle said volatility was the “natural response” of financial markets to new information.

“In bear markets, we see high volatility which is a natural consequence of rational behaviour by economic investors,” he said.

Separately, Malaysian Institute of Economic Research (MIER) executive director Datuk Dr Mohamed Ariff Abdul Kareem, who was also present at the event, reiterated that MIER was likely to revise downwards its gross domestic product (GDP) forecast for 2009 to around 3% from its earlier prediction of 3.4%, based largely on a slowdown in exports.

“If growth slows down in China, our exports to China will also suffer, (and) China is precariously dependent on the US market,” he said.

Ariff said there was a 40% chance of Malaysia slipping into a technical recession next year and 30% chance of it entering into a real recession.

“Much depends on what the Government does,” he said.

To a question, Ariff said the unemployment rate next year could be 4.5%.

“This is quite high by Malaysian standards. It used to be about 2% to 2.5%,” he said.

The Star