Wednesday, 28 December 2011

Crouching Tiger, Hidden Growth

India’s economy is currently a wounded animal. Blackened by the lack of global demand for its goods, bruised from a manufacturing slowdown and beaten by the whip of high inflation. Growth, in the country seen as the main long term rival the China, has slowed from the high levels of 9-10% talked about in the early spring to 6.9% in late 2011. Policymakers in the Asia’s third largest economy have reached a crossroads. After increasing the interest rate 13 times since the start of 2010 to combat soaring inflation levels, the slowing of growth has led to calls for a reverse in the Central Banks actions. Economists have even begun questioning whether India still has its snarl or whether it has simply retreated back into the jungle of economic underperformance.

Firstly it must be remembered that it is all fast growing emerging economies, not just India, that are suffering from capacity constraints, volatile capital flows and a slowdown in external demand (due to the Debt crises in the euro zone and the US). However the slowing of India’s economy has mainly been put down to the suffering of the country’s manufacturing and mining sectors.  With growth in the former sector slowing to 2.7% in the three months to September, compared to the 7.8% rate a year ago. And with the sector contributing to around 16% of the nation’s gross domestic product, its demise is hurting India. Combine that with the continuing problems in the euro zone, which are hurting export levels, and deteriorating domestic demand due to the month-on-month increase in the interest rate by the Reserve Bank of India (RBI). The continuing lack of demand in India’s overall economy is worrying and shows not immediate sign of improving.

Inflation levels has been hurting India and shaping its policymaker’s decisions for well over a decade now. The current administration of Manmohan Singh has been unable to tame near double digit levels despite the RBI’s implementing contractionary monetary policy, with the rate reaching 9.7% in October. The fall in the Rupee against the other major currencies, with it reaching a historic low against the Dollar in December, is the main reason for the high price level. The costs of importing many goods, services and raw materials have risen, because of the weakness of India’s currency, and it’s leading to increased prices for India’s consumers. Privately there are fears from within Singh’s administration that fear that India could return to ‘Hindu’ growth levels (of around 5%) unless they can stop the economic rot, and stop it soon.

The tiger has fought back however. With the Indian cabinet agreeing to a key reform which will lead to increased Foreign Direct Investment into the retail sector and the RBI leaving the interest rate unchanged, demonstrating a change in their policy targets of putting growth before inflation. However the success of the opening up of the retail sector is still very much in the balance with coalition allies and the opposition challenging the ruling. Moreover forecasters are warning that India face a tough fiscal year with a cocktail of domestic and global challenges. So as India lies injured trying to lick its wounds, the challenge to its policymakers to revive high levels of growth in 2012 are great. While the current rates of growth for India are not necessarily alarming, there is the real prospect of the high growth rates which the Asian country has become accustomed to could become extinct.  

Author: Thomas Viegas

Monday, 19 December 2011

2012: The End of the World

The year of 2012 is often depicted by Hollywood as the year the world ends. Many a film producer has depicted 2012 as the year in which there is the death of civilisation and total devastation and destruction across the globe. With the ‘dreaded’ year nearly upon us, the likelihood of simultaneous global earthquakes and tsunamis look improbable. However what is certain is that the year will see western nations struggle to unshackle themselves from immense amounts of debt, the potential disintegration of the euro and the global economy grinding to a halt. The prospects of the international economy in 2012 look bleak.

Despite various summits, no credible plan to save the euro has been produced by any of the European leaders. The survival of the single currency and market, as we know it, look increasingly unlikely going into the New Year. This view is one shared by ratings agency Fitch has recently stated that they believe that a comprehensive euro zone deal is now “beyond reach”. In fact even the ECB president, Mario Draghi, has breached the taboo of the potential reduction of the zone by warning that the potential breakup could have severe costs throughout Europe and consequently the world. The Organisation for Economic Co-operation and Development (OECD) has already warned of a recession in the euro zone in the first half of 2012, and downgraded its growth forecast for the year in zone from 0.3% to 0.2%.

The current path the majority of western nations have followed to reduce debt levels by implementing contractionary fiscal policies to result in growth is one that will only lead to low levels, if that, of growth. The prospect of a UK recession is looking very likely, according to the OECD. With unemployment hitting record highs and showing no signs of slowing, along with contractions in the manufacturing sector and the government admitting it will not hit its target of balancing the government's budget by the end of 2015. The French economy is also under pressure following fresh doubts over its ability to survive potential European defaults. With French banks such as BNP Paribus and Credit Agricole being downgraded due to their difficulties in borrowing money ,because of the amount of Greek debt they hold, the likelihood of the French holding on to its coveted triple A credit rating is looking increasingly improbable. Even India and China are both having difficulties with their growth rates, the former still struggling with inflation and the latter trying to revive decreasing exports.

Many economists have warned that the year of 2012 will be one of the most difficult and that no country is immune from increased global risks. The most pressing concern of a euro zone break up is one that is already being factored into many countries plans. With the Bank of England producing contingency plans in case of the zone imploding and the Germans, reportedly, have started to re-print Deutsche Marks in fear of the extinction of the euro. So even if 2012 doesn't bring rising waters, inhabitable lands and crushing winds, it could bring the earthquakes in the financial sector, droughts in the manufacturing sector and the downfall of Europe leading to devastation across the continent and the globe. The new year could bring the end of the financial world as we know it.

Author: Thomas Viegas

Tuesday, 13 December 2011

Bad for Britain? Interest-ting

The return of David Cameron from Brussels was greeted by the clinking of glasses by conservative backbenchers at a pre-arranged party at Chequers. He was the man who had finally said 'No' to Europe. He hadn't blinked, and in doing so had protected the 'national interest'. He was the saviour of British sovereignty! Or was he? Outside of the country home, however, the rest of country woke with the realisation that their relationship with Europe had now changed. Predominantly for the worse.

The failure to reach an agreement at the summit of EU leaders over closer fiscal integration, is one that has several implications for both going forward. Firstly Britain will now have to sit on the sidelines and watch the rest of Europe decide their (far from certain) fate. The French President, Nicolas Sarkozy, claimed after the summit that Brussels had seen the emergence of "two Europes", one made up the 26 EU nations and the other including Britain alone. This is dangerous for the latter. Europe's survival is of extreme importance for the short and medium prosperity of Britain. Currently Ireland, Spain, France and Germany are all some of Britain's main trading partners (with all being in the UK's top 10 export partners in 2009) and so their economic demise would hurt, and hurt hard. It would take several years for the UK to strengthen trading ties with its other rapidly growing partners such as India and China. With no significant internal growth on the horizon and the vision of the current government to be an 'exporting nation', the need for export led growth for Britain has never been greater.

Mr Cameron cited the failure to reach an agreement was down to his decision to protect Britain's 'national interest', in which he was referring to protecting the financial sector (the 'City') from a potential collective European regulatory and taxation system. Now while it is widely known that the prosperity of the UK before the Great Recession of 2007-20008 was largely down to the 'city'. The failure by regulators and the government to see that the sector had become to bloated and its failure would put the whole economy at risk. I site that we unfortunately witnessed.

A European call for tax on financial transactions, a so called "Robin Hood" tax by fans, should be implemented on the City of London, something so far the coalition government has resisted. (It is understandable on the conservative side considering around 50% of its funding comes from people who work in the 'City') Despite the scaremongering of the 'City' that a tax would lead to devastation for the sector, the figure mooted by other economists of only around 0.005% would raise around £11 billion for the British government. And with budgets being slashed throughout the economy, the 'city' should share some of the pain.  After all we are "all in it together", according to Mr Cameron.

So as Cameron and his backbenchers wake up from the night before, hung over and dazed. One can only hope that realisation that Britain's relationship with Europe has changed, and not for the better , will have a sobering effect.

Author: Thomas Viegas

Monday, 12 December 2011

Problem solved?

While the rest of the world looked on with hope that the summit in Brussels would result in a credible solution to the debt crisis and to preserve the euro, one thing became apparent. Why were we so optimistic?

The deal agreed by European leaders (except Britain who vetoed the changes as it was supposedly in 'their interests') will lead to closer fiscal integration for the single market and, according to prominent euro-zone figure, hopefully lead to the restoration of confidence in the euro. It is the belief by the newly name duo 'Mercozy' that the introduction of  a 'Golden rule' into euro zone's members budgets, together with automatic sanctions for stepping out of the fiscal line, will show investors that the future of the euro is secure. However government deficits are only part of the problem of the current crisis, in which the future growth of the single market is rapidly becoming the main cause for concern.

Growth is sluggish throughout Europe and shows no signs of improving any time soon. With unemployment rising to 10.3% in October, the manufacturing sector contracting and the prospect of a recession in 2012 looking even more likely, stimulating growth should have been high on the agenda of the leaders. Alas not. The dominant view that austerity is the way forward across Europe is one that is likely to do more damage then good. Reductions in public sector spending will not solve the problem's of the overspending of the past, it will only push economies further adrift from prosperity.

Furthermore it is well known in that to pay debts you need to be receiving an income (or by borrowing even more!). And without growth leading to job creation and increased tax revenues, where will governments get this income to pay off their debts?

The answer is a growing private sector, according to many dealing with the crisis. However leaders must also remember that it wasn't just governments overspending that got us into this predicament but the private sector as well  Before the crisis hit, the Spanish and Irish governments were running budget surpluses and had low debt levels. But the flow of private money into private banks fed to to them running large current account deficits which further inflated housing bubbles in both countries. The collapse of which has left both countries in ruin with the former being bailed out to the sum of £77 billion and the later hit with unemployment levels reviling that of the Great Depression, with youth employment over the 40% mark. The need to focus on current account surpluses is one that would prove difficult on the ideological grounds the euro was built on . As it would put government's in a position in which it would have to judge which capital flows are 'good' and 'bad', unthinkable for for the EU's free market advocates

There are many reasons to for us to still be worrying about the survival of the euro. The stance of the European Central Bank (ECB) being one of them. The continued refusal to be the 'lender of last resort' for euro-zone countries is one that continues to result in market instability. While the president of the Bank, Mario Draghi, announced this week that the ECB would continue to help banks to try and restore lending. He ruled out the bank bailing out any troubled state, causing stocks to tumble again.

A credible solution to the crisis does not appear to be reached any time soon, with the survival of the euro still hanging in the balance. What does appear certain however is that the path 'Mercozy' have decided to put Europe on will be a harsh and painful for all nations involved. The time of austerity awaits...

Author: Thomas Viegas