Oil has touched a 3-month low and optimists have already passed the verdict that inflation has peaked. Credit rating agency Moody's on Monday said inflation may have peaked in India as is reflected by the latest moderation, even though global investment banker Goldman Sachs raised projection for the rate of price rise by 1.5 per cent to 11.5 per cent for the current fiscal.
Inflation remains at a 13-year high of 11.98 per cent for the week ended July 19. Falling crude prices and slowing down of commodity boom cycle, recovery of US dollar are the other reasons which support the optimists.Global inflationary pressure could undoubtedly subside but the domestic situation may continue to remain bleak. This was reflected in the hawkish stance of the RBI(Reserve Bank of India) at the recent monetary policy review where it raised Repo Rate by 50bps and CRR by 25bps to 9% each.Some might criticise it as a regressive step but the fact remains that inflation fears remain intact.
The inflation numbers can be expected to remain high owing to the what is called the ‘base effect’. Last year the prices had begun to moderate at this point of time. However this time they continue to remain firm .So year-on-year percentage rise in prices will be higher resulting into scary inflation numbers.
Monsoon has been erratic this year. Rainfall has been below average in key areas of Gujarat,Andhra Pradesh and Maharashtra.As a result the cash crops like groundnut could take a severe blow.Groundnut and cotton prices are expected to remain firm.Edible oil prices are already high and poor harvest may not help either.
Steel prices ,a major component of WPI (Wholesale Price Index)calculation in India ,had been kept artificially low.Steel producers had imposed a voluntary three month moratorium on prices on behest of the government.This three month deadline expires in first week of August.As global steel prices remain high domestic hike in steel prices will prevent inflation from heading south.
Globally crude prices are hovering around their 12-week low. Indeed this is good news but fuel prices were already kept low in India. So even if crude oil bubble continues to deflate domestic prices will remain intact.Moreover expecting crude oil prices to slip into double digits and hoping for a subsequent decline in fuel prices at home will be too optimistic. One more bad news from the financial markets or a fresh war of words between Israeli and Iranian governments could see the ‘black gold’ paring with the recent losses.Recent figures reveal that the demand for oil in developed world has been moderating. This is an encouraging development and will undoubtedly benefit the inflation-hit emerging economies.
Market is expecting no further cut in interest rates by US Federal Reserve in August.Even a slight hike by 25bps is a possibility, though a distant one.If this happens then crude oil will lose its appeal as hedge against the weakening dollar and a further decline in prices could be seen.
So one should not read too much into this recent stabilization in inflation.This euphoria may turn out to be a short-lived.Till then pray for a divine intervention in the form a good monsoon. It’s a shame on our policymakers that Indian agriculture is yet to witness a Promethean growth. The entire nation’s economic and monetary policy is held ransom to the performance of south-west monsoon. Everyone in this emerging economic superpower, from the ordinary farmer to the RBI Governor, looks up to the skies for relief!
Saturday, August 2, 2008
Threat to globalization goes intellectual
With American economy witnessing a downturn many economists have begun to point an accusing finger at an unlikely suspect: the free market itself. Peter Gosselin took a note of it in a recent piece in the Los Angeles Times. "The nation and its political leaders," he wrote, "have begun to sour on the notion that the current market system is the key to a fair, stable and efficient society."
Uptil recently America projected itself as the champion of free market. It democracy and free markets were the governing principles of groups like G-8,OECD. The view that markets no longer work, if true, would turn economic thought on its head and be a major intellectual victory for the American left. “Widespread acceptance of that view would have profound implications for the future of market economies and open the door to a massive expansion of government,’’ says influential commentator Kevin Hassett.
The world economy has seen globalisation collapse once already. The gold standard era came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?
Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. Dani Rodrik of Professor of Political Economy at Harvard University believes that unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded". There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.
The presidential electoral campaign in USA has highlighted the fragility of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes,believes Rodrik. Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.
The threat to globalisation is not from communism,dictatorships ,protectionists, trade unionists and protesting youth. Rather it’s the mainstream economists who are questioning globalisation's virtues.This could akin to academic blasphemy in today’s highly intedependent and competitive trade environment.
Paul Samuelson is worried that China's gains in globalisation may well come at the expense of the US. Paul Krugman, today's foremost international trade theorist has argued that trade with low-income countries is no longer too small to have an effect on inequality. Alan Blinder, a former US Federal Reserve vice-chairman, is worried that international outsourcing will cause unprecedented dislocations for the US labour force. Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, is disappointed with how financial globalisation has turned out.
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.
Howver this is not to say that globalization has no takers in the intellectual sphere. Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits.
Facts still offer an overwhelming support for the free markets. A wide body of research has developed that demonstrates the empirical relationship between free markets and economic growth. A study by Harvard University economist Robert Barro found that property rights and free markets were the most important institutional elements for promoting economic growth.
Similarly, the Fraser Institute's 2004 Economic Freedom of the World Report documented that the free-market recipe of competition, entrepreneurship and investment activity is the key to fostering economic growth. According to the study: "Countries with more economic freedom attract more investment and achieve greater productivity from their resources. As a result, they grow more rapidly and achieve higher income levels."
Studies also show the negative impact of regulation on growth. Harvard economist Silvia Ardagna and Dartmouth College's Annamaria Lusardi found that tight regulatory environments discourage entrepreneurs who are motivated by new business ideas.
We had the 1973 oil crisis, where prices quadrupled, the 1979 Iranian turmoil, which also devastated oil markets, and the savings-and-loan debacle, where more than 700 banks failed. Even the glorious Reagan revolution was marred by fluctuations: One of the deepest recessions of the postwar period happened during Reagan's first term.
Even with those setbacks, the free-market system won because other approaches didn't merely deliver fluctuations, they delivered constant misery. Free markets helped US win Cold War. Nations from Ireland to Estonia have embraced free-market ideology and seen a historically unprecedented economic transformation believes Kevin Hassett.
Although none of the intellectuals has unleashed an open tirade against globalization its clear that voices of dissent have shifted from streets to the columns of financial press.But the problem is that they are yet to come up with a better substitute-an improved economic model.
Uptil recently America projected itself as the champion of free market. It democracy and free markets were the governing principles of groups like G-8,OECD. The view that markets no longer work, if true, would turn economic thought on its head and be a major intellectual victory for the American left. “Widespread acceptance of that view would have profound implications for the future of market economies and open the door to a massive expansion of government,’’ says influential commentator Kevin Hassett.
The world economy has seen globalisation collapse once already. The gold standard era came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?
Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. Dani Rodrik of Professor of Political Economy at Harvard University believes that unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded". There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.
The presidential electoral campaign in USA has highlighted the fragility of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes,believes Rodrik. Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.
The threat to globalisation is not from communism,dictatorships ,protectionists, trade unionists and protesting youth. Rather it’s the mainstream economists who are questioning globalisation's virtues.This could akin to academic blasphemy in today’s highly intedependent and competitive trade environment.
Paul Samuelson is worried that China's gains in globalisation may well come at the expense of the US. Paul Krugman, today's foremost international trade theorist has argued that trade with low-income countries is no longer too small to have an effect on inequality. Alan Blinder, a former US Federal Reserve vice-chairman, is worried that international outsourcing will cause unprecedented dislocations for the US labour force. Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, is disappointed with how financial globalisation has turned out.
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.
Howver this is not to say that globalization has no takers in the intellectual sphere. Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits.
Facts still offer an overwhelming support for the free markets. A wide body of research has developed that demonstrates the empirical relationship between free markets and economic growth. A study by Harvard University economist Robert Barro found that property rights and free markets were the most important institutional elements for promoting economic growth.
Similarly, the Fraser Institute's 2004 Economic Freedom of the World Report documented that the free-market recipe of competition, entrepreneurship and investment activity is the key to fostering economic growth. According to the study: "Countries with more economic freedom attract more investment and achieve greater productivity from their resources. As a result, they grow more rapidly and achieve higher income levels."
Studies also show the negative impact of regulation on growth. Harvard economist Silvia Ardagna and Dartmouth College's Annamaria Lusardi found that tight regulatory environments discourage entrepreneurs who are motivated by new business ideas.
We had the 1973 oil crisis, where prices quadrupled, the 1979 Iranian turmoil, which also devastated oil markets, and the savings-and-loan debacle, where more than 700 banks failed. Even the glorious Reagan revolution was marred by fluctuations: One of the deepest recessions of the postwar period happened during Reagan's first term.
Even with those setbacks, the free-market system won because other approaches didn't merely deliver fluctuations, they delivered constant misery. Free markets helped US win Cold War. Nations from Ireland to Estonia have embraced free-market ideology and seen a historically unprecedented economic transformation believes Kevin Hassett.
Although none of the intellectuals has unleashed an open tirade against globalization its clear that voices of dissent have shifted from streets to the columns of financial press.But the problem is that they are yet to come up with a better substitute-an improved economic model.
Saturday, July 19, 2008
It's official now: The Bear is here
The Standard & Poor's 500 Index fell into a bear market on 10 July ’08 and may not stop tumbling until it reaches a level not seen since August 2004, if history is any guide. A drop in the index of another 12 percent would match the average retreat of 11 bear markets since 1946, data compiled by Bloomberg and Bespoke Investment Group LLC shows.
Shares declined for five straight weeks as more than $400 billion of bank losses, record oil prices and the fastest commodity inflation in 35 years threaten to push down earnings for a fourth quarter. S&P 500 companies are forecast to report an 11 percent decline in second-quarter profits, according to the average estimates of analysts surveyed by Bloomberg.
The S&P 500's drop has lasted 275 calendar days and wiped out a fifth of its value. In the 11 previous bear markets, the index has dropped an average of 30.4 percent over 386 days, according to Bespoke, New York-based financial research firm.
The Dow average has already slipped into a bear market in first week of July.This decline is largely blamed upon high crude prices.Crude has gained 95 percent over the past year and touched $145.85 last week.
European and Asian stock markets have fallen amid concerns about the state of the world economy and the impact slower growth will have on company earnings. Britain's top share index FTSE 100 slid 2.7 percent on 11 July’08 to hit its lowest closing level in nearly three years, as banks fell on fears of more capital raising worries. The UK benchmark index on Thursday closed in bear-market territory -- it is down 20 percent from a multi-year peak a year ago, and has fallen 17.8 percent so far this year. Analysts said Wall Street had taken heart from a fall in oil prices and from US Federal Reserve chairman Ben Bernanke's comments that the central bank might extend its emergency lending facility to 2009.
Chinese markets have been hit very badly.They have corrected 48% from their highs.Indian markets are already down 38% from their all-time highs.The 'Decoupling' myth seems to have finally gone bust.
Crude is showing no signs of weakening on tight supply and tense geo-political situation Middle East. American credit crisis could throw up few more surprises in coming days.Wall Street is anticipating a Bear Sterns from leading mortgage lenders Freddie Mac and Fannie Mae. These mortgage companies which own or guarantee almost half of all U.S. home loans are fighting a funding crisis. Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages.So their collapse will make the things worse.
However Brazil and Russia continue to put up a brave front as crude oil and commodity prices continue to remain firm.However once the commodity rally gets over with decline in demand we might see these two joining the bear market. So it seems worse is yet to come and the bottom is still not in sight.
Shares declined for five straight weeks as more than $400 billion of bank losses, record oil prices and the fastest commodity inflation in 35 years threaten to push down earnings for a fourth quarter. S&P 500 companies are forecast to report an 11 percent decline in second-quarter profits, according to the average estimates of analysts surveyed by Bloomberg.
The S&P 500's drop has lasted 275 calendar days and wiped out a fifth of its value. In the 11 previous bear markets, the index has dropped an average of 30.4 percent over 386 days, according to Bespoke, New York-based financial research firm.
The Dow average has already slipped into a bear market in first week of July.This decline is largely blamed upon high crude prices.Crude has gained 95 percent over the past year and touched $145.85 last week.
European and Asian stock markets have fallen amid concerns about the state of the world economy and the impact slower growth will have on company earnings. Britain's top share index FTSE 100 slid 2.7 percent on 11 July’08 to hit its lowest closing level in nearly three years, as banks fell on fears of more capital raising worries. The UK benchmark index on Thursday closed in bear-market territory -- it is down 20 percent from a multi-year peak a year ago, and has fallen 17.8 percent so far this year. Analysts said Wall Street had taken heart from a fall in oil prices and from US Federal Reserve chairman Ben Bernanke's comments that the central bank might extend its emergency lending facility to 2009.
Chinese markets have been hit very badly.They have corrected 48% from their highs.Indian markets are already down 38% from their all-time highs.The 'Decoupling' myth seems to have finally gone bust.
Crude is showing no signs of weakening on tight supply and tense geo-political situation Middle East. American credit crisis could throw up few more surprises in coming days.Wall Street is anticipating a Bear Sterns from leading mortgage lenders Freddie Mac and Fannie Mae. These mortgage companies which own or guarantee almost half of all U.S. home loans are fighting a funding crisis. Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages.So their collapse will make the things worse.
However Brazil and Russia continue to put up a brave front as crude oil and commodity prices continue to remain firm.However once the commodity rally gets over with decline in demand we might see these two joining the bear market. So it seems worse is yet to come and the bottom is still not in sight.
Thursday, July 17, 2008
Its cheers for the bears
Markets don’t seem to be having enough of bad news.As if high crude prices weren’t enough May’08 Industrial Production(IIP) nos. will further ruin the investor sentiment. Industrial production rose 3.8% in May 2008, much lower than revised 6.2% growth in April 2008, the government data released on Friday, 11 July 2008, showed. Industrial production growth for April 2008 revised downwards to 6.2% from earlier 7%.
Uptil now only stock market was looking weak largely due to international factors like weakening dollar, American credit crisis and soaring crude oil prices.Now the domestic picture too seems to be getting worse with each passing day.Earnings have begun to take a hit as Infosys results have shown.Macro-economic picture is looking shaky if one looks at the current data. Andrew Holland of DSP Merill Lynch(India) stated last week that India has been reduced from hero to zero in just six months. Fitch has lowered India's long-term local currency outlook from stable to negative in a move that could make borrowings overseas more expensive and might also impact investment into the country. It, however, left the sovereign, local currency and foreign currency ratings at BBB-, which indicates investment grade. The foreign currency outlook was stable.
Ridham Desai, MD and Co-Head Equity, Morgan Stanley, said the markets have made lower tops and bottoms, which confirms that we are definitely in a bear market. Fundamentals have also given way. A lot of stock market drivers are taking us further into the red. The bottom may lie around 10,500. So, the markets are likely to se more downside for the next six months."
He feels that valuations have come off. "Markets are trading around 14 times forward earnings. They are still not cheap. Valuations will get attractive around 10 times earnings." According to Desai, the markets are seeing a bear market rally. "There can be an 20-40% upside in the markets, but investors should sell into it, as one will never know when bear market end. It can only be defined in hindsight." The markets may not go though a prolonged sideways move like the one in the 1990s, he said. For the markets to rise, Desai said, crude prices need to top out.
Crude is the elixir for the current woes in the market but tight supply, geo-political situation may not let the prices decline any time soon.Domestic political situation has thankfully improved.This will help the government to go ahead with reforms which have been pending of last four years.However American credit crisis could throw up few more surprises in coming days.Wall Street is anticipating a Bear Sterns from leading mortgage lenders Freddie Mac and Fannie Mae. These mortgage companies which own or guarantee almost half of all U.S. home loans are fighting a funding crisis. Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages.So their collapse will make the things worse.
High crude prices have sent inflation out of control.Fiscal deficit is widening and surged almost 50% to US $11bn for May month.So rupee is weakening against the dollar and increasing crude prices(denominated in US dollar) are giving a double whammy to Indian investors and economy as a whole. Inflation based on the wholesale price index rose 11.91% in 12 months to 5 July 2008, above the previous week's annual rise of 11.89%, government data released on 17 July 2008, afternoon showed. It was at highest level in more than 13 years. So monetary tightening becomes inevitable.This will further hit the growth.
Political analyst are skeptical about the government’s ability to prove its majority on the floor of the Lower House on July 22. Present government will take trust vote on 22 July after its Marxist allies withdrew support over Indo-US nuclear deal citing ideological reasons.
So its time to pray for a good monsoon, stable government and some really big oil discoveries to arrest this incessant decline in the markets.Till then the bear is here to stay.
Uptil now only stock market was looking weak largely due to international factors like weakening dollar, American credit crisis and soaring crude oil prices.Now the domestic picture too seems to be getting worse with each passing day.Earnings have begun to take a hit as Infosys results have shown.Macro-economic picture is looking shaky if one looks at the current data. Andrew Holland of DSP Merill Lynch(India) stated last week that India has been reduced from hero to zero in just six months. Fitch has lowered India's long-term local currency outlook from stable to negative in a move that could make borrowings overseas more expensive and might also impact investment into the country. It, however, left the sovereign, local currency and foreign currency ratings at BBB-, which indicates investment grade. The foreign currency outlook was stable.
Ridham Desai, MD and Co-Head Equity, Morgan Stanley, said the markets have made lower tops and bottoms, which confirms that we are definitely in a bear market. Fundamentals have also given way. A lot of stock market drivers are taking us further into the red. The bottom may lie around 10,500. So, the markets are likely to se more downside for the next six months."
He feels that valuations have come off. "Markets are trading around 14 times forward earnings. They are still not cheap. Valuations will get attractive around 10 times earnings." According to Desai, the markets are seeing a bear market rally. "There can be an 20-40% upside in the markets, but investors should sell into it, as one will never know when bear market end. It can only be defined in hindsight." The markets may not go though a prolonged sideways move like the one in the 1990s, he said. For the markets to rise, Desai said, crude prices need to top out.
Crude is the elixir for the current woes in the market but tight supply, geo-political situation may not let the prices decline any time soon.Domestic political situation has thankfully improved.This will help the government to go ahead with reforms which have been pending of last four years.However American credit crisis could throw up few more surprises in coming days.Wall Street is anticipating a Bear Sterns from leading mortgage lenders Freddie Mac and Fannie Mae. These mortgage companies which own or guarantee almost half of all U.S. home loans are fighting a funding crisis. Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages.So their collapse will make the things worse.
High crude prices have sent inflation out of control.Fiscal deficit is widening and surged almost 50% to US $11bn for May month.So rupee is weakening against the dollar and increasing crude prices(denominated in US dollar) are giving a double whammy to Indian investors and economy as a whole. Inflation based on the wholesale price index rose 11.91% in 12 months to 5 July 2008, above the previous week's annual rise of 11.89%, government data released on 17 July 2008, afternoon showed. It was at highest level in more than 13 years. So monetary tightening becomes inevitable.This will further hit the growth.
Political analyst are skeptical about the government’s ability to prove its majority on the floor of the Lower House on July 22. Present government will take trust vote on 22 July after its Marxist allies withdrew support over Indo-US nuclear deal citing ideological reasons.
So its time to pray for a good monsoon, stable government and some really big oil discoveries to arrest this incessant decline in the markets.Till then the bear is here to stay.
Friday, June 6, 2008
STAGFLATION FEARS LOOM LARGE OVER EUROPE AND ASIA
The OECD's early warning signal is pointing towards clear signs of economic weakness across the world, with mounting evidence that China, India, and Brazil may soon succumb to the downturn.The closely-watched gauge -- known as the Composite Leading Indicators (CLI) -- has picked up a sharp deterioration in the eurozone in March, notably in Italy and France where the advance signals are falling even faster than in Britain. The measure tends to anticipate the industrial cycle by about six months. While growth continues to power ahead in most emerging markets, rampant inflation is starting to damage business confidence. "The latest data point to a potential downturn in Brazil, China, and India," said the OECD, the club of rich nations.
Russia is the only country still in full boom among the so-called BRIC quartet of rising powers, but the country's inflation rate reached 14.3pc in April as oil and gas wealth the flooded the economy. Price pressures across the emerging world are reaching levels that may soon threaten stability unless governments jam on the brakes. Inflation rates have reached: Venezuela (22pc), Vietnam (21pc), Latvia (18pc), Qatar (17pc), Pakistan (17pc), Egypt (16pc) Bulgaria (15pc), The Emirates (11pc), Estonia (11pc), Turkey (9.7), Indonesia (9pc) Saudi Arabia (9.6pc), Argentina (8.9pc), Romania (8.6pc), China (8.5pc), Philippines (8.3pc), India (8.1pc).Many of these countries are now suffering the worst prices spiral in thirty years, setting off widespread riots. India's government has suspended futures for a clutch of key commodities as states resort to draconian measures.
While the soaring cost of food and energy is the key driver for the poorest countries, others are ensnared by their own currency pegs. Most Gulf states are linked to the dollar, forcing them to shadow the US Federal Reserve's super-loose interest rate policy, with inevitable over-heating. China operates a semi-fixed rate.Stock markets have already fallen sharply in China, India, and Vietnam as the authorities rein in credit. Morgan Stanley has advised clients to cut their holdings of emerging market stocks, warning that surging prices have started to queer the pitch -- at least in the "near term".Europe faces an incipient "stagflation" as inflation of 3.3pc combines in a nasty cocktail with slowing growth. The mix poses an acute dilemma for the European Central Bank. It fears that 1970s-style inflation could become lodged in the system as workers push for higher wage deals.
Jean-Claude Trichet, the ECB's president, warned of a return to "mass unemployment" if Europe repeats the errors of first oil shock. "We would make an enormous mistake, which is precisely the mistake we made in the first oil shock. We are calling on all economic agents, whether corporate or social partners, to be as responsible as possible," he said.Industrial output fell in Italy, France, and Spain in March. April manufacturing orders fell at the fastest rate since the dotcom bust in Italy and Spain.
It is understood that the meeting broke down into a fierce exchange of national views, ignoring the EU treaty requirement that the ECB focus on the eurozone as a whole. EU officials have begun to ask whether Mr Weber is committed to monetary union. A senior German advisor told a closed group of investors in London last week that "it wouldn't matter in the least if Spain left the euro".David Bloom, currency chief at HSBC, said the single currency was likely to fall from near record highs as investors woke up to the realities in the South."The euro has been trading on the German export story. The market has conveniently ignored the collapse in Spain, and the near recession in Italy," he said.
Critics say the ECB has been fretting too much about inflation and not enough about the risk of a severe slowdown later this year and into 2009 if monetary policy is kept too tight. The bank has held rates at 4pc since the credit crisis began, even though its own credit survey points to a lending squeeze.
US is already in a slowdown and dollar weakness has seen the US CPI increase to uncomfortable levels. According to The Economist, CPI inflation over the past year has risen from 2.6 per cent to 3.9 per cent in the US. US Federal Reserve in May cut its 2008 US economic growth forecast and signaled that mounting concerns over inflation. Top American bankers have hinted towards a slowdown and a huge spike in inflation.
It now appears that we are entering a new inflationary, and according to some economists, potentially hyperinflationary phase. This was not fully captured in CPI data since the price of commodities rose even as the price of manufactured goods declined consequent to productivity gains arising from the integration of China and India in the global market for goods and services. The price of non-fuel primary commodities that showed an average annual decline of 2.7 per cent between 1989 and 1999 rose by 9.4 per cent annually between 2000 and 2006. Oil prices that declined by 1.2 per cent annually between 1989 and 1998 rose on average by 20 per cent annually between 1999 and 2006.
This sharp increase in commodity prices was fuelled by hypergrowth in emerging and developing economies whose real GDP growth spurted from an average of 3.8 per cent between 1989 and 1998 to 6.2 per cent between1999 and 2006. Advanced economies continued to average annual growth rates of below 3 per cent over both these periods. Commodity price inflation was exaggerated by the steep fall in the international value of the dollar, the currency in which commodities are traded internationally.
Excessive monetisation was inherent in the manner in which the fundamental global imbalance, which saw developing countries run huge current account surpluses, has played out. Emerging market and developing economies taken together, but excluding the newly industrialised Asian economies, still ran a current account deficit of $21.2 billion as late as 1999. This deficit was turned around dramatically into an annual surplus of $544 billion by 2006. Their cumulative surplus in the seven years from 2000 to 2006 was $1.43 trillion. These surpluses led to counterpart capital flows to developing countries; but instead of letting their currencies appreciate as a consequence, their central banks bought up these flows as part of their strategy of export-led growth. This released a tsunami of domestic currency into the system, only part of which could be sterilised. The weighted average of broad money growth in emerging and developing economies consequently rose from 15-16 per cent between 2000-03 to about 20 per cent in 2005 and 2006, way above their average nominal GDP growth of 13 per cent.
A loose monetary policy in emerging and developing countries was supplemented by a loose monetary policy in advanced countries, especially the US, which accounts for about one-fifth of global demand.So solution lies in a prudent economic policy of the likes of Paul Volcker which sucks out excessive liquidity.Policy action should also stimulus to increasecommodity production.Else stagflation could become a reality and world may see a re-run of the 1970s crisis. And this time even Milton Friedman is not around.
Russia is the only country still in full boom among the so-called BRIC quartet of rising powers, but the country's inflation rate reached 14.3pc in April as oil and gas wealth the flooded the economy. Price pressures across the emerging world are reaching levels that may soon threaten stability unless governments jam on the brakes. Inflation rates have reached: Venezuela (22pc), Vietnam (21pc), Latvia (18pc), Qatar (17pc), Pakistan (17pc), Egypt (16pc) Bulgaria (15pc), The Emirates (11pc), Estonia (11pc), Turkey (9.7), Indonesia (9pc) Saudi Arabia (9.6pc), Argentina (8.9pc), Romania (8.6pc), China (8.5pc), Philippines (8.3pc), India (8.1pc).Many of these countries are now suffering the worst prices spiral in thirty years, setting off widespread riots. India's government has suspended futures for a clutch of key commodities as states resort to draconian measures.
While the soaring cost of food and energy is the key driver for the poorest countries, others are ensnared by their own currency pegs. Most Gulf states are linked to the dollar, forcing them to shadow the US Federal Reserve's super-loose interest rate policy, with inevitable over-heating. China operates a semi-fixed rate.Stock markets have already fallen sharply in China, India, and Vietnam as the authorities rein in credit. Morgan Stanley has advised clients to cut their holdings of emerging market stocks, warning that surging prices have started to queer the pitch -- at least in the "near term".Europe faces an incipient "stagflation" as inflation of 3.3pc combines in a nasty cocktail with slowing growth. The mix poses an acute dilemma for the European Central Bank. It fears that 1970s-style inflation could become lodged in the system as workers push for higher wage deals.
Jean-Claude Trichet, the ECB's president, warned of a return to "mass unemployment" if Europe repeats the errors of first oil shock. "We would make an enormous mistake, which is precisely the mistake we made in the first oil shock. We are calling on all economic agents, whether corporate or social partners, to be as responsible as possible," he said.Industrial output fell in Italy, France, and Spain in March. April manufacturing orders fell at the fastest rate since the dotcom bust in Italy and Spain.
It is understood that the meeting broke down into a fierce exchange of national views, ignoring the EU treaty requirement that the ECB focus on the eurozone as a whole. EU officials have begun to ask whether Mr Weber is committed to monetary union. A senior German advisor told a closed group of investors in London last week that "it wouldn't matter in the least if Spain left the euro".David Bloom, currency chief at HSBC, said the single currency was likely to fall from near record highs as investors woke up to the realities in the South."The euro has been trading on the German export story. The market has conveniently ignored the collapse in Spain, and the near recession in Italy," he said.
Critics say the ECB has been fretting too much about inflation and not enough about the risk of a severe slowdown later this year and into 2009 if monetary policy is kept too tight. The bank has held rates at 4pc since the credit crisis began, even though its own credit survey points to a lending squeeze.
US is already in a slowdown and dollar weakness has seen the US CPI increase to uncomfortable levels. According to The Economist, CPI inflation over the past year has risen from 2.6 per cent to 3.9 per cent in the US. US Federal Reserve in May cut its 2008 US economic growth forecast and signaled that mounting concerns over inflation. Top American bankers have hinted towards a slowdown and a huge spike in inflation.
It now appears that we are entering a new inflationary, and according to some economists, potentially hyperinflationary phase. This was not fully captured in CPI data since the price of commodities rose even as the price of manufactured goods declined consequent to productivity gains arising from the integration of China and India in the global market for goods and services. The price of non-fuel primary commodities that showed an average annual decline of 2.7 per cent between 1989 and 1999 rose by 9.4 per cent annually between 2000 and 2006. Oil prices that declined by 1.2 per cent annually between 1989 and 1998 rose on average by 20 per cent annually between 1999 and 2006.
This sharp increase in commodity prices was fuelled by hypergrowth in emerging and developing economies whose real GDP growth spurted from an average of 3.8 per cent between 1989 and 1998 to 6.2 per cent between1999 and 2006. Advanced economies continued to average annual growth rates of below 3 per cent over both these periods. Commodity price inflation was exaggerated by the steep fall in the international value of the dollar, the currency in which commodities are traded internationally.
Excessive monetisation was inherent in the manner in which the fundamental global imbalance, which saw developing countries run huge current account surpluses, has played out. Emerging market and developing economies taken together, but excluding the newly industrialised Asian economies, still ran a current account deficit of $21.2 billion as late as 1999. This deficit was turned around dramatically into an annual surplus of $544 billion by 2006. Their cumulative surplus in the seven years from 2000 to 2006 was $1.43 trillion. These surpluses led to counterpart capital flows to developing countries; but instead of letting their currencies appreciate as a consequence, their central banks bought up these flows as part of their strategy of export-led growth. This released a tsunami of domestic currency into the system, only part of which could be sterilised. The weighted average of broad money growth in emerging and developing economies consequently rose from 15-16 per cent between 2000-03 to about 20 per cent in 2005 and 2006, way above their average nominal GDP growth of 13 per cent.
A loose monetary policy in emerging and developing countries was supplemented by a loose monetary policy in advanced countries, especially the US, which accounts for about one-fifth of global demand.So solution lies in a prudent economic policy of the likes of Paul Volcker which sucks out excessive liquidity.Policy action should also stimulus to increasecommodity production.Else stagflation could become a reality and world may see a re-run of the 1970s crisis. And this time even Milton Friedman is not around.
Wednesday, June 4, 2008
CRUDE COULD STALL GLOBAL GROWTH ENGINES
“We face the most serious recession of our lifetime” said George Soros, the man who broke the Bank of England. In short, his feeling is that the United States and Britain are facing a recession of a scale greater than the early-1990s, greater even than the 1970s. With crude at US $ 135, we have no reason to disagree with Soros. Already Yankees remain the world's biggest consumers (also polluters) and have a strange fetish for everything big-from Big Mac to the giant Limousines. I might sound like a grand old Green Nanny but its the bitter truth. Already unrelented spending has left US with a huge fiscal deficit which has played a crucial role in tumbling of the dollar. Sub-prime mortgage crisis and the subsequent FED rate cut by 3.25% has made the problems worse for the dollar. This contagion can spread to markets all over the world.
Weakness in dollar has seen the prices of crude oil and other essential commodities skyrocketing. This spike in metal and food prices has caused food riots in several countries; something the world had not heard for last few years since promethean growth of the developing world in the last few decades.
However the source of worry continues to be crude oil. Its one major factor which can bring the world economic growth to a grinding halt in coming decade. f Arjun Murti of Goldman Sachs is to be believed we are already on our way to see crude trading at US$200.One wants but cannot ignore them. They were the ones who predicted crude at US$100 per barrel while we just ignored them as doomsayers.
India imports about three-quarters of its crude oil, and our oil bill accounts for a third of the total value of all imports. India's crude basket stands at US$120 which is extremely high. Rupee has begun to weaken against dollar adding to our inflation woes. With inflation hitting 8.1 per cent (actual figures could be as high as 10 per cent!) bad news seems to be coming from all fronts In such an environment how will the big companies & SMEs (small and medium enterprises) survive. Their margins could suffer so would their expansion plans as interest rates are already too high and may not soften in near term. This slowdown was reflected in recent IIP nos. which put down growth at 3% as against 8.6% in Feb'08.Even FY'08 industrial growth was lower at 8.1% v/s 11.6%in FY'07.These poor stats are enough for the entire country to sit up and take notice.
Crude prices may not decline to desired levels in near term and will definitely hit the profit margins of every business in the country. Record wage hikes we have seen in past few years could become a story of the past. This could bring down the consumption of various products mainly consumer goods, automobiles and real estate. Real estate companies are already feeling the heat as is reflected in their share prices which have taken the worst beating.
Government too is in a strange dilemma. They don't want to be seen doing nothing specially when there are assembly elections in key states. General elections too aren't far away either. Oil PSUs will continue to bleed as they will be sacrificed at the altar of aam-admi politics. But this move will backfire as their capability to secure crude oil and oil blocks abroad for future will take a beating thus endangering our oil security. Already our desperate politicians are taking steps, which they should avoid, like banning futures trade in few commodities and curbing steel price hikes. However everything may not be over as of yet.Q4 GDP growth for India stood at 8.8% slightly higher than expected 7.93%.
Inflation could come down if we get a good monsoon and a bumper crop thereafter. These are tough times for economists, Government and common man alike. Macro picture for India doesn’t look all that bright either. During the fiscal years 1980-81 to 1990-91, the average GDP growth rate was 5.38 per cent (Source: Handbook of Statistics, RBI). In comparison, the average growth rate between 1990-91 and 2006-07 was 6.23 per cent, an increase of less than one percentage point. On the other hands reforms in China have put it on a double digit growth trajectory. Agricultural growth decelerated from an average of 3.39 per cent in the pre-reform period to 2.77 per cent. Even the industry didn't really do too well. The average growth rate was lower by nearly 0.57 per cent, as it decelerated from 6.72 per cent to 6.15 per cent. The saving grace, not surprisingly, was the service sector as its average growth rate increased by more than 1.48 percentage points, from 6.33 per cent to 7.81 per cent. In fact, had it not been for the service sector, reforms would have earned the dubious distinction of having pulled down the economic growth of India.
India's deficit is the highest among those in major emerging markets and about 2-3 times that of major developed economies as a percentage of GDP. This deficit has constrained government's spending on productive areas such as infrastructure, education, health and welfare .The government's average annual development expenditure growth rate plummeted by more than 6 percentage points, falling from an average 15.97 per cent during 1980-81 to 1990-91 to an average of 9.75 per cent during the post-reforms period.
High growth, recorded during the last few years, seems to be more cyclical in nature than structural. Strong global growth, benign inflationary situation and ample liquidity sloshing around caused by a loose monetary policy, both globally and in India, led to this strong growth. With the American economy slipping into recession and inflation becoming a major concern world-wide, India is on the verge of a slowdown. We are now seeing the decoupling theory giving way to the 'recoupling' theory. India does not seem to have reached a stage where continued high growth will not trigger inflationary pressure, unlike China which sustained a scorching pace for a much longer period of time on the back of clearly improving productivity. India does not seem to have gained much by way of improving productivity that would have ensured sustained high growth. A mere five-year-long high GDP growth is seemingly choking the economy via inflation.
Productivity is showing little signs of rising as agriculture sector continues to be a laggard with investment remain at historical lows. Industry continues to suffer from infrastructural bottlenecks. Higher cost of credit will slowdown their expansion plans. SEZ policy is yet not clear. Road and port modernization is behind schedule. Corruption and red-tapism makes things worse. Quite naturally, India ranks a dismal 120 (despite improvement) in the list of 178 countries ranked by World Bank in terms of the best places to do business. So high inflation may continue for some time to come and its time we brace ourselves for a long battle against it.
Weakness in dollar has seen the prices of crude oil and other essential commodities skyrocketing. This spike in metal and food prices has caused food riots in several countries; something the world had not heard for last few years since promethean growth of the developing world in the last few decades.
However the source of worry continues to be crude oil. Its one major factor which can bring the world economic growth to a grinding halt in coming decade. f Arjun Murti of Goldman Sachs is to be believed we are already on our way to see crude trading at US$200.One wants but cannot ignore them. They were the ones who predicted crude at US$100 per barrel while we just ignored them as doomsayers.
India imports about three-quarters of its crude oil, and our oil bill accounts for a third of the total value of all imports. India's crude basket stands at US$120 which is extremely high. Rupee has begun to weaken against dollar adding to our inflation woes. With inflation hitting 8.1 per cent (actual figures could be as high as 10 per cent!) bad news seems to be coming from all fronts In such an environment how will the big companies & SMEs (small and medium enterprises) survive. Their margins could suffer so would their expansion plans as interest rates are already too high and may not soften in near term. This slowdown was reflected in recent IIP nos. which put down growth at 3% as against 8.6% in Feb'08.Even FY'08 industrial growth was lower at 8.1% v/s 11.6%in FY'07.These poor stats are enough for the entire country to sit up and take notice.
Crude prices may not decline to desired levels in near term and will definitely hit the profit margins of every business in the country. Record wage hikes we have seen in past few years could become a story of the past. This could bring down the consumption of various products mainly consumer goods, automobiles and real estate. Real estate companies are already feeling the heat as is reflected in their share prices which have taken the worst beating.
Government too is in a strange dilemma. They don't want to be seen doing nothing specially when there are assembly elections in key states. General elections too aren't far away either. Oil PSUs will continue to bleed as they will be sacrificed at the altar of aam-admi politics. But this move will backfire as their capability to secure crude oil and oil blocks abroad for future will take a beating thus endangering our oil security. Already our desperate politicians are taking steps, which they should avoid, like banning futures trade in few commodities and curbing steel price hikes. However everything may not be over as of yet.Q4 GDP growth for India stood at 8.8% slightly higher than expected 7.93%.
Inflation could come down if we get a good monsoon and a bumper crop thereafter. These are tough times for economists, Government and common man alike. Macro picture for India doesn’t look all that bright either. During the fiscal years 1980-81 to 1990-91, the average GDP growth rate was 5.38 per cent (Source: Handbook of Statistics, RBI). In comparison, the average growth rate between 1990-91 and 2006-07 was 6.23 per cent, an increase of less than one percentage point. On the other hands reforms in China have put it on a double digit growth trajectory. Agricultural growth decelerated from an average of 3.39 per cent in the pre-reform period to 2.77 per cent. Even the industry didn't really do too well. The average growth rate was lower by nearly 0.57 per cent, as it decelerated from 6.72 per cent to 6.15 per cent. The saving grace, not surprisingly, was the service sector as its average growth rate increased by more than 1.48 percentage points, from 6.33 per cent to 7.81 per cent. In fact, had it not been for the service sector, reforms would have earned the dubious distinction of having pulled down the economic growth of India.
India's deficit is the highest among those in major emerging markets and about 2-3 times that of major developed economies as a percentage of GDP. This deficit has constrained government's spending on productive areas such as infrastructure, education, health and welfare .The government's average annual development expenditure growth rate plummeted by more than 6 percentage points, falling from an average 15.97 per cent during 1980-81 to 1990-91 to an average of 9.75 per cent during the post-reforms period.
High growth, recorded during the last few years, seems to be more cyclical in nature than structural. Strong global growth, benign inflationary situation and ample liquidity sloshing around caused by a loose monetary policy, both globally and in India, led to this strong growth. With the American economy slipping into recession and inflation becoming a major concern world-wide, India is on the verge of a slowdown. We are now seeing the decoupling theory giving way to the 'recoupling' theory. India does not seem to have reached a stage where continued high growth will not trigger inflationary pressure, unlike China which sustained a scorching pace for a much longer period of time on the back of clearly improving productivity. India does not seem to have gained much by way of improving productivity that would have ensured sustained high growth. A mere five-year-long high GDP growth is seemingly choking the economy via inflation.
Productivity is showing little signs of rising as agriculture sector continues to be a laggard with investment remain at historical lows. Industry continues to suffer from infrastructural bottlenecks. Higher cost of credit will slowdown their expansion plans. SEZ policy is yet not clear. Road and port modernization is behind schedule. Corruption and red-tapism makes things worse. Quite naturally, India ranks a dismal 120 (despite improvement) in the list of 178 countries ranked by World Bank in terms of the best places to do business. So high inflation may continue for some time to come and its time we brace ourselves for a long battle against it.
Tuesday, May 13, 2008
WHY CRUDE COULD BE SO RUDE..DUDE?
The crude is hovering at an all time high.Toyota has reduced the discount on its hybrid vehicle Prius as the waiting time increases.This very piece of news reflects the sea change American consumerism is undergoing.With crude @ US $ 126 , the average American is getting ready to take on the challenge.Very soon we may see the sales of Hummer and other gas guzzling vehicles coming down.Its time for the yankees to contain their wasteful consumerism and behave in a more responsible manner.Already they are the world's biggest consumers and have a strange fetish for everything big-from Big Mac to the giant Limousine.I might sound like a grand old Green Nanny but its the bitter truth. Already unrelented spending has left US with a huge fiscal deficit which has played a crucial role in tumbling of the dollar.Sub-prime mortgage crisis and the subsequent FED rate cut by 3.25% has made the problems worse for the dollar.
Weakness in dollar has seen the prices of crude oil and other essential commodities skyrocketing.This spike in metal and food prices has caused food riots in several countries ;something the world had not heard for last few years since promethean growth of the developing world in the last few decades.
However the source of worry continues to be crude oil.Its one major factor which can bring the world economic growth to a grinding halt in coming decade.If Goldman Sachs is to be belived we are already on the path to see crude trading at US$200.One wants but cannot ignore them.They were the ones who predicted crude at US$100 per barrel while we just ignored them as doomsayers.
India imports about three-quarters of its crude oil, and our oil bill accounts for a third of the total value of all imports.India's crude basket stands at US$120 which is extremely high.Rupee has begun to weaken against dollar adding to our inflation woes.In such an environment how will the big companies & SMEs(small and medium enterprises) survive.Their margins could suffer so would their expansion plans as interest rates are already too high and may not soften in near term.This slowdown was reflected in recent IIP nos. which put down growth at 3% as against 8.6% in Feb'08.Even FY'08 industrial growth was lower at 8.1% v/s 11.6%in FY'07.These poor stats are enough for the entire country to sit up and take notice.
Crude prices may not decline to desired levels in near term and will denitely hit the margins of the businees in the country.Wage hikes we have seen in past few years could stop and this undoubtedly bring down the consumption of goods mainly consumer goods,automobiles and real estate.Real estate companies are already feeling the heat as is reflected in their share prices which have taken the worst beating.Government too is in a strange dilemma.They don't to be seen a doing nothing specially when there are assembly election in key states.General elections too aren't far away either.Oil PSUs will continue to bleed as they will be sacrificed at the altar of aam-admi politics.But this move will backfire as their capability to secure oil blocks abroad will take a beating endangering our oil security.Already our desperate politicians are taking steps ,which they should avoid,like banning futures trade in few commodities and curbing steel price hikes.
At the personal level its time for us to use oil much more responsibly.Inflation could come down if we get a good monsoon and a bumper crop thereafter.These are tough times for economists,government and common man alike.Till then don't mind taking a bus to the office and avoid those long drives at the weekend with our girlfriend.Instead buy her a popcorn at a theatre near you.
Weakness in dollar has seen the prices of crude oil and other essential commodities skyrocketing.This spike in metal and food prices has caused food riots in several countries ;something the world had not heard for last few years since promethean growth of the developing world in the last few decades.
However the source of worry continues to be crude oil.Its one major factor which can bring the world economic growth to a grinding halt in coming decade.If Goldman Sachs is to be belived we are already on the path to see crude trading at US$200.One wants but cannot ignore them.They were the ones who predicted crude at US$100 per barrel while we just ignored them as doomsayers.
India imports about three-quarters of its crude oil, and our oil bill accounts for a third of the total value of all imports.India's crude basket stands at US$120 which is extremely high.Rupee has begun to weaken against dollar adding to our inflation woes.In such an environment how will the big companies & SMEs(small and medium enterprises) survive.Their margins could suffer so would their expansion plans as interest rates are already too high and may not soften in near term.This slowdown was reflected in recent IIP nos. which put down growth at 3% as against 8.6% in Feb'08.Even FY'08 industrial growth was lower at 8.1% v/s 11.6%in FY'07.These poor stats are enough for the entire country to sit up and take notice.
Crude prices may not decline to desired levels in near term and will denitely hit the margins of the businees in the country.Wage hikes we have seen in past few years could stop and this undoubtedly bring down the consumption of goods mainly consumer goods,automobiles and real estate.Real estate companies are already feeling the heat as is reflected in their share prices which have taken the worst beating.Government too is in a strange dilemma.They don't to be seen a doing nothing specially when there are assembly election in key states.General elections too aren't far away either.Oil PSUs will continue to bleed as they will be sacrificed at the altar of aam-admi politics.But this move will backfire as their capability to secure oil blocks abroad will take a beating endangering our oil security.Already our desperate politicians are taking steps ,which they should avoid,like banning futures trade in few commodities and curbing steel price hikes.
At the personal level its time for us to use oil much more responsibly.Inflation could come down if we get a good monsoon and a bumper crop thereafter.These are tough times for economists,government and common man alike.Till then don't mind taking a bus to the office and avoid those long drives at the weekend with our girlfriend.Instead buy her a popcorn at a theatre near you.
Subscribe to:
Posts (Atom)
