Did someone say crisis?

The $77 trillion world economy is said to grow by 2.5-3% by 2017 and world trade by 2-3%. According to economist Shankar Acharya, hovering slightly above a 2% growth rate makes the world economy highly susceptible to a recession. Many economists believe that the world economy is already reeling under a recession, with Brazil’s currency collapse, South Africa’s cronyism, Russian oil slump, US’ sustained slowdown and China’s cave in. Contrary to this, some believe that economies are gradually moving out of the rubble of the 2008 sub-prime crisis into more optimistic waters.

Let me put into perspective a few economies and one can decide whether we already are reeling under another global economic crisis or not.

BRAZIL – “Rich world problems on poor country’s budget”

Brazil’s GDP grew by 7.5% in 2010 and avoided collapse during the 2008 housing crisis (with an annual % increase in GDP 5.1%) –one of the reasons it was chosen for the 2016 Rio Olympics. However, the scenario is very different today. The economy shrank by 4.5% in the third quarter (of 2015) and the budget deficit doubled to 6.75% in 2014, post re-election of Ms Dilma Rousseff. Under her first tenure, inflation fell from 6.64% to 5.4%, but GDP growth was the lowest amongst the BRICS countries. Brazil crawled to grow at a rate of only 0.87% in 2012.

Economic and political instability has hit the commercial banking sector. Several international counterparts have questioned the feasibility of their operations. As the central bank loosened the reins on fiscal policy in 2011-2012, inflation soared through the roof. It was higher than the target of 4.5% and the government’s benchmark (upper) of 6.5%. Post this, in 2015 Banco Central Do Brazil hiked interest rates to 14.25% to contain soaring inflation. Aside from soaring inflation, red tapism, high president disapproval ratings (two digit figures) and unemployment have hit the economy hard. Currently, at 10.5%, unemployment has been predicted to increase even further in 2016.

Joaqium Levy, Brazil’s newly appointed Finance Minister quit recently, with Fitch (a credit rating agency) reducing the country’s status to junk. As the economy prepares to shrink by 3% this year, a giant dark cloud of economic instability and health hazards (Zika Virus) looms over the much anticipated Olympic Game in Rio.

UNITED STATES OF AMERICA

The US economy has not been able to recover from the 2008 housing crisis yet and there seems to be no signs of significant progress. The economy was dubbed the “lonely locomotive” for it grew the fastest among developed economies in 2014 and reduced unemployment to 5.6%. However, lag effects of the crisis have caught up with it. With the rapid growth which added 3 million jobs in 2014, the dollar appreciated drastically which severely hit the economies exports. The trade deficit in March 2015 was $50 million and the corporate profits fell by 1.6%.

The dip in oil prices due to excess supply was another blow to the world’s largest economy. “The Prize”, Daniel Yergin quotes:

“Oil producers were committing ‘hara-kiri’ by producing so much oil. All saw the remedy but would not adopt it. The remedy was, of course, a reduction in the production.”

The plummeting of oil prices by 28% coincided with stock market crashes which further aggravated the situation. JPMorgan states that GDP would oscillate between -0.3% and 0.1% considering America is a large producer and consumer of oil. Furthermore, the dip in interest rates in developed nations directed funds towards emerging markets creating a lending bubble. This has led staggering corporate debts, from 50% of GDP in 2008 to 75% of GDP in 2014.

The New Year has not been very welcoming for US stock markets. The annual “growth” of the economy was finalised at 0.7%, accompanied with a 6% fall in stock markets. The economist charts out three plausible reasons:

“The slowdown has three causes. Two are familiar: exports, which are being made more expensive by a strong dollar, are shrinking; and oil and gas firms are reducing their investment in response to cheap oil. The third is new. Until recently, decent consumer-spending growth had kept things moving. Now consumer spending has decelerated too, dragging growth down.”

Presently, unemployment is at 5%, but if you account for those who have given up on the futile activity of looking, the number is 10%. The biggest worry however, is the 1.4% appreciation of the dollar at the start of year.

Slowdown

CHINA

China has been reeling under its economic crisis for a while now; this has been accompanied by the 2015 Stock Market crash. With massive speculative trading taking place, people were borrowing indiscriminately and investing in companies they knew nothing about! Investors made margin calls which eventually drove the economy to the ground.

China’s working population peaked in 2012 and with the one-child policy (initially) less migration translated into higher wages. China is a relatively poor nation with a GDPPC which is 1/3rd of South Korea and 1/4th of Japan. As the Chinese population ages, there are fears surrounding the expenditure on eldercare.

China usually grows at a rate of 10% annually, but the growth target for 2015 was reduced to 7%. This is 1% less than the IMF prediction. Another perspective which uses the law of large numbers states that the bigger an economy gets, the tougher it is to expand further. As the technology gap between rich countries and China gets narrower, room for growth reduces significantly. Growth at 7% will generate more additional output as compared to growth at 14% in 2004, states The Economist.

However, at the same time Chinese debt has increased to 250% of its GDP and the real estate sector which constitutes 15% of its economic growth is set to contract. This will send major shocks through the $10.4 trillion economy and presumably the world.

EUROPE

Europe is suffering from a mammoth refugee influx, raising questions regarding employment, rehabilitation, pensions etc. This has been accompanied by a near economic stagnation, 0.3% in the third quarter of 2015. The fall in oil prices however, has boosted consumer spending which has been considered as a factor for recovery. Quantitative easing by the European Central Bank has led to availability of easy money for buying assets. An excerpt from The Economist, highlights the situation with regard to trade:

On the one hand, the slowdown in China and emerging economies, which account for a quarter of euro-zone exports, will hurt exporting companies. Germany will be particularly affected since the Chinese market has been a lucrative one for its exports of investment goods and luxury cars. Already, German industrial orders have been falling while industrial production declined in the third quarter. On the other hand, the European Central Bank is poised to loosen monetary policy still further when its governing council meets in December. And spending on refugees, especially in Germany, will provide a modest fiscal stimulus.”

This post thus far screams, “YES!” in response to the question, are we reeling under a global economic crisis. Most people may agree, but there is one nation that is “rising above”.

India is showing robust growth trajectories (being the fastest growing economy) and strong fiscal prudence. India projections for 2015-2016 are 7.3% by IMF with the next fiscal growing at 7.5%, which in the face of other economics paints a decent picture. With the latest budget foraying into the scene, the government’s commitment to realising a fiscal deficit of 3.5%. The budget focuses heavily on increasing tax revenues (and the tax base) and the growth “GRID”- Governance, Reforms, Social Infrastructure and Investment and Fiscal Discipline. Th budget emphasises heavily on rural growth, universal electrification, social infrastructure, agricultural push (via direct cash transfers in place of subsidies for fertilizers), universal and efficient identification by the Adhaar card and the start-up culture. Albeit, there is disappointment regarding certain initiatives, the budget surely is a step in the right direction.

 

Advertisements

One thought on “Did someone say crisis?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s