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Geoeconomics Round-up

Global GDP growth has steadily declined in the past few years. Which country can be the engine of global growth? This is a round-up of how different economies are performing.

By Anupam Manur (@anupammanur)

Source: The Economist

Source: Economist.com

Global GDP growth as measured by various international agencies has constantly decreased in this decade falling from about 5% in 2010 to just around 3% now. A 2 percentage points drop in global growth is quite a huge fall, which has alarmed many economists, who are now searching for new sources of global growth. The traditional forces seem to be fading and there hasn’t been any new economic power house to pull the global economy forward.

China has been the engine of global growth for quite some time now. It has consistently managed to grow at around 10% for an impressive 30 years. For the first 20 years, the impressive growth rates were achieved through genuine economic reforms when China moved away from a completely state-run economy to a more liberal, private sector led economy. The next 10 years, roughly the decade of 2000s, saw China post impressive growth rates again (as high as 14% in 2007). However, this time, the growth was unsustainable and was mainly powered by huge borrowings. In the past few years, the unsustainability of the debt fueled growth has begun to show up and China has considerably slowed down. China posted 6.9% in the last quarter of 2015, the lowest growth rate in a long period.

What’s even more worrying is that the Chinese debt burden is manifesting in structural flaws in the economy. Total Chinese debt – government + non-financial corporate + financial institutions + households – account for as high as 282 percent of GDP. In 2001, it was 121 percent of GDP and  158 percent in 2007. Again, the debt problem is compounded by the fact that the Chinese economy is slowing down. This has led to a bond market bubble, a stock market correction, decreased foreign exchange reserves and increased borrowing costs for China.

China is due to slow down further in the coming years and it might not be able to rebound to its previous high rates of growth any time in the near future. Further, China is aiming to reorient its economy from an export oriented, manufacturing dominated economy to an internal consumption led, more balanced one. This can have severe implications for the world economy. Chinese manufacturing accounts for a huge portion of global industrial and manufacturing base. It was a fuel guzzler and was a voracious importer of commodities. Given the slowdown in Chinese manufacturing, not only has the world seen a dip in global index of industrial production, but has also witnessed a massive drop in commodities and fuel prices.

The European Union is now slowly crawling back to positive growth territory. Since the financial crisis, the Euro Area underwent a prolonged recession, with devastating consequences for many of its individual country members such as Greece, Spain, Ireland and Portugal amongst others. The Euro Area posted around 1.5% GDP growth in the last quarter of 2015, largely led by a German revival. However, the Euro Area is faced with some deep structural problems, such as an ageing population and the perennial debt problem (of many of its members). Further, the loose monetary policy maintained by the ECB currently is not sustainable in the long run. Japan is in an even bigger doldrum, with GDP growth rate hovering around 0%. The lost decade of the 1990s has now spilt over for two more decades.

The United States still remains the leading engine of global growth. Though it slowed down considerable after the crisis, it has bounced back gradually. Unemployment rates have been falling and the economy is seeming healthy. It is still the source of most innovations and technological development in the world. Remember, the US economy still accounts for nearly 30% of global GDP and thus, a 2-3% growth of the US economy can be significant for the world.

Most emerging markets have faltered in the changing economic landscape. Commodity exporters like Venezuela, Brazil, South Africa and Russia have been adversely affected by the falling crude oil and commodity prices. The growth rates in these countries have dropped drastically in the past year, with some of  them even facing a contraction of output. The South-East Asian economies are performing moderately well and may continue to do so in the short to medium run.

Finally, India has been seen as the new leader of global growth. Many economists, including our RBI Governor Raghuram Rajan, has commented that India will be the next engine of global growth. However, this must be taken with a pinch of salt. Though it is the fastest growing economy in the world presently, the size of its economy is still too small to make a significant impact on global growth levels. Compare India’s two trillion dollar economy to China’s $12 trillion and US’s $17 trillion economies (nominal GDP). Further, India’s other domestic growth indicators have not been exactly encouraging. IIP numbers have been unimpressive, the size of corporate debt is worrying, the banking sector has been plagued with bad loans, and no significant structural reforms have been implemented in the last few years.

The 3% growth for the global economy should be viewed as the new normal and even for that to remain sustainable requires most of these countries to outperform.

Anupam Manur is a Policy Analyst at the Takshashila Institution. 


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Taking Advantage of Lower Commodity Prices

By focusing on those industries that rely on oil as a producion import, India can take maximum advantage of falling global commodity and oil prices. 

The biggest headlines in the economic world over the past year has been news of slowdown in the Chinese economy and the resultant fall in commodity prices. The slowdown in China, which has been the engine of growth in the past decade, has had significant impact on most other economies. China has been the biggest consumer of commodities and oil and thus, a slowing Chinese economy will import lesser amounts and this reduced demand leads to a fall in prices. Commodity prices have fallen by over 40% since their peak in the early part of this decade. Apart from oil, copper, iron ore, zinc, and many metal prices have been declining consistently. Price of energy related commodities, such as coal, has also significantly dropped. The reduced prices have hit many commodity and oil exporting countries. Brazil, Russia, South Africa and many other emerging markets have had severe declines in their exports and consequently in their GDP growth.

Commodity prices have fallen by 40% since their peak.

Commodity prices have fallen by 40% since their peak.

How is India poised? Is it going to be hurt by the Chinese slowdown or can it be a tailwind to increase growth?

First, the negatives: Indian apparel and yarn exports have declined considerably. China has been a big importer of Indian textile products and its decreased pace of income generation has meant lesser demand for Indian exports. Further, with China devaluing its currency considerably as a means to improve their trade, Indian competitiveness has been further eroded. India’s exports have fallen in every single month from April to November 2015 in comparison with the same month a year ago.

However, with India being a net importer of oil and commodities, it should really focus on taking advantage of the lower global commodity prices and falling oil prices. Here’s a few things that India can focus on:

1. With oil prices set to decline further in the first half of 2016, this is the time for India to seriously consider building a large enough strategic oil reserve.

2. India should get its current account balance in line. The rupee has also been declining significantly and if India can increase its exports, and with a reduced import bill, the current account deficit can be corrected to an extent.

3. Lower oil prices will imply smaller oil, petroleum and fuel based subsidies. This should be a golden opportunity for the government to get its fiscal accounts in check.

4. A lower import bill will also have positive effects on inflation and inflation expectations. This should give more room for a more accommodative monetary policy.

5. Most importantly, the government should focus on those industries that uses imported material, commodities and oil, as raw materials for production. The Indian auto industry should get a considerable fillip due to lower input prices. If policy can be more accommodative, the auto industry can soar. Other industries that rely on oil, such as, plastic industries including pipes, chemicals and resins selectively, paints, footwear manufacturers etc can really benefit from oil prices and the government should focus on creating a friendly climate for these industries. Apart from oil, reduced price of iron-ore, copper and even coal should help a large number of Indian industries by lowering input costs.

6. Finally, since India’s nearest peers – Brazil, China, South Africa, and many other EMs – not faring well in terms of economic opportunities, it is poised to receive a lot more of global funds, both FII and FDIs. The next round of liberalising reforms cannot come soon enough to attract global capital into India.

After the stagflationary episode in 2010-12, India is finally getting back to the higher growth track and global conditions seem to be favouring India. It should do all that it can to take advantage of these conditions and accentuate the positives.

Anupam Manur is an economics Policy Analyst at the Takshashila Institution. Connect with him on Twitter @anupammanur


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Brazilian Economy in the Doldrums

By Anupam Manur

Brazil is staring at a lost decade of economic output, with political upheavals, domestic economic crisis of falling output, debt and inflation and a stagnant external sector due to falling commodity prices internationally.

While the world is gripped with stories of Chinese slowdown, another economy is staring down the barrel of deep economic and political crisis and faces the possibility of a lost decade for economic growth. Brazil has had another contraction in the previous quarter and according to The Economist, by the end of 2016, the Brazilian economy may be 8% smaller than it was in the first quarter of 2014. The Economist’s GDP forecast for 2016 is particularly dire for Brazil, the largest economy in the downside projections, with over 2% contraction in real GDP.

The last time that the Brazilian economy saw positive growth was in the first quarter of 2014. So, Brazil is officially in a recession in 2015, going by the NBER definition of recession as contraction of output for two consecutive quarters.


Brazil's GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Brazil’s GDP growth rate has been negative for the past 7 quarters and is expected to fall further in 2016.

Amidst the economic downturn, Brazil is also facing a political upheaval. Dilma Rousseff  and many of her party members, who are part of parliament, face very serious corruption charges against them and are presently being investigated. They are alleged to have accepted billions of dollars in bribes in exchange for bloated contracts with Petrobras, the State controlled oil and gas company. Also, Joaquim Levy, the Finance Minister who was known to bat for greater fiscal austerity and structural reforms resigned last week. When the need of the hour is urgent economic reforms and a plan to kickstart the economy, the Parliament Is obsessed with the impeachment of President Rousseff. This implies that Rousseff does not enjoy the political capital to initiate any reform agenda, assuming she has one, to get the economy back on track.

Falling commodity prices have a big part to play in Brazil’s misfortunes. Brazil’s commodity exports, and with it, its GDP, had a spectacular rise along with China’s growth story. However, with China slowing down, demand for commodities has fallen and so have its prices. Oil, iron ore and soy beans account for more than half of the Brazil’s export basket and their prices have been depressed for quite some time now. Brazilian commodities index has slumped 41% since 2011, according to Credit Suisse. The average price that Brazil used to receive for a ton of iron ore has slumped from about $125 in 2011 at its peak to about $40 currently. Among the big commodities exporters of the world, Brazil has been hit the hardest.

While it may be convenient for Brazilian administration to blame global conditions for their weak economic performance, a closer look will establish Brazil’s home grown problems as the chief culprit. Australia is a bigger commodity exported and relies heavily on Chinese manufacturing industry for its GDP growth. The share of exports in Brazil’s GDP is 11.5 per cent while Australia’s is much higher at 21 per cent. Despite this, Australia is slated to grow at a 2 percent this year. Other major commodity exporters in Latin America such as Chile and Peru are also affected by the declining prices, but are yet slated to grow at 2-3 percent this year.

The reason for this is Brazil’s structural problems. While Australia handled the global 2008 recession with caution, Brazil followed an excessively loose monetary policy and uninhibited fiscal expansion. Brazil has been spending indiscriminately: the estimate of budgetary deficit for 2015 was 10 percent of GDP. The debt to GDP ratio in July 2015 was already 65 percent and was set to touch 70 percent by end 2015. Further, the government is running a primary deficit of $13.9 billion or roughly equivalent to 2.5 percent of GDP. Primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments, and excludes interest payments. This implies that Brazil is adding to the total debt at a far greater rate than it can afford to do. Rating agencies such as S&P and Fitch have already downgraded Brazil’s debt instruments to junk bond status, which will translate into even higher costs of borrowing.

Corporate debt has been on the rise as well for the past decade. It is presently as much as 63 percent of GDP. It does not help the government that much of this is from either state owned companies such as Petrobras or other companies who have the implicit backing of the Brazilian government.

Quite unfortunately for Brazil, the usual routes for recovery from a recession are unavailable to them. As aforementioned, public debt is far too high to accommodate a fiscal push to the economy. The need of the hour is, in fact austerity, but that is bound to depress the economy further.

Monetary policy does not have too much wiggle room either and the central bank is in a real fix. The SELIC rate, Brazil’s policy interest rate is at 15%. With 150,000 jobs being shed in the formal sector every month, there is a real clamour for reducing the rates. However, this might fuel inflationary pressures, which are already quite high and high inflation will drive away the investors further. The consumer price inflation is hovering around 10 percent and the real has been steadily depreciating.

Raising taxes is also going to be extremely difficult, as Mr Levy  found out. Part of the reason for him quitting the cabinet as Finance Minister was the political opposition both from the opposition and within his own party to raising taxes, cutting federal spending and general fiscal adjustment.

The only way out is unlikely to be popular. Ms. Rousseff needs to come out with a credible new plan for restructuring the economy. This will involve painful cuts to pensions and other social security measures along with slight increases in the tax rates. Finally, Brazil also has to look at improving its business environment. It is currently placed at 120th out of 189 countries in the Ease of Doing Business Report by the World Bank. Though it is definitely going to be a tough period for Brazil in the next few years, it must aim to reduce the duration and severity of the problem by following sound economic policies.

Anupam Manur is a Policy Analyst at the Takshashila Institution and tweets @anupammanur

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