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.
Friday, June 6, 2008
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.
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