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Fri, 24th February 2017

Anirudh Sethi Report

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Archives of “economic growth” Tag

Satyajit Das Warns Financial Engineering “Has Masked The Global Economy’s Precarious Health”

Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.

Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital.

Mergers and acquisitions as well as various types of corporate restructurings (such as spin-offs and carve-outs) have been used to create “value.” Given the indifferent results of many such transactions, the major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.

Share buybacks and capital returns, sometimes funded by debt, have been used to support share prices. In January 2008, prior to the global financial crisis, U.S. companies were using almost 40% of their cashflow to repurchase their own shares. Ominously, that position is similar today.

Not just execution, note ban idea itself was wrong :Rajiv Bajaj

With the adverse impact of note ban continuing to hamper two-wheeler sales, Bajaj Auto Managing Director Rajiv Bajaj on Thursday said the idea of demonetisation was itself “wrong” and it is incorrect to blame only the execution side of it.

“If the solution or the idea is right, it will go like a hot knife through butter…If the idea is not working, for example demonetisation, don’t blame execution. I think your idea itself is wrong,” Bajaj said at the annual Nasscom leadership forum here.

Prime Minister Narendra Modi had on November 8 last year scrapped all the Rs 500 and Rs 1,000 notes, with a view to check the black money.

Massive cash rationing was introduced as the new replacement notes were in short supply. The ban on 86 per cent of the total currency worth Rs 15.55 trillion in circulation impacted economic activity across sectors with the consumption-driven ones being the most affected.

Notably, the two-wheeler sales are yet to recover from the impact of demonetisation and industry data releases over the last two months have been showing a slump. The industry was looking forward to better sales on the back of good monsoon and an acceleration in rural economic growth, which drives consumption.

India’s GDP growth to slow to 5.7% in Q4: Nomura

India’s economic growth is likely to remain muted in the first quarter of this calender year with the GDP likely to grow at 5.7% in the January-March period amid subdued activity, says a report.

According to the global financial services major Nomura, following subdued growth in the first quarter, a V-shaped recovery is on the cards due to remonetisation, wealth redistribution and the lagged effects of lower lending rates.

“We expect growth to remain subdued in the first quarter of 2017 as the activity level remains below its recent peak,” Sonal Varma chief India economist at Nomura said in a research note. Nomura expects economic growth to remain in a downtrend.

As per the report, from 7.3% GDP growth in the July-September 2016, the October-December 2016 quarter GDP growth is likely to slow to 6% and further to 5.7% in the first quarter of 2017 (January-March).

“We expect GDP growth to slow from 7.3% in Q3 2016 to 6.0 % in Q4 and 5.7% in Q1 2017,” it said.

Bank of England decision day – ‘Super Thursday’ preview

Bank of England announces
  1. Its interest rate decision
  2. The minutes from the policy meeting
  3. And the Quarterly Inflation Report
A three-in-one, that’s why its called Super Thursday.
  • All three come at 1200GMT
  • Governor Carney’s press conference follows at 1230GMT
1. On interest rates – the Bank is pretty much unanimously expected to keep rates unchanged (0.25%) and the asset purchase target at £435bn (I have seen just one analyst expect the target to lower).
It is worth noting the UK economy is showing better than expected signs:
  • Growth is stronger than it was expected to be after the yes vote on Brexit. There are plenty of expectations around for slower growth ahead as the impacts of Brexit become clear, but these have not been evident in the official data. I’ll admit to being in ‘you are all doomed, just you wait’ camp, but the evidence so far has been opposite this (i.e. don’t listen to me!). Yesterday I posted the view of the UK’s National Institute of Economic and Social Research – they are pretty much of the same view as me, & they’ve been eating humble pie too: NIESR has progressively revised up its short-term estimates for British economic growth since the referendum, thanks in large part to consumers who kept on spending
  • Unemployment is falling (at an 11-year low if I recall correctly)
  • Inflation is ticking higher, and will perhaps overshoot the topside target (2% is the target). BoE Governor Carney is on record as saying the bank will not be overly tolerant of an inflation overshoot.
Despite these better signs the Bank is expected to be remain in ‘wait and see’ mode, watching more data, especially on business activity and consumer spending. In November Governor Carney said the Bank had a neutral policy bias, so I’d expect a clear indication of a shift in the bias before any policy move on rates or QE. This (a shift in policy bias) is something to watch for from the Bank today.
 
2. The minutes will be scoured for hints of how the Monetary Policy Committee members voted and reasoned, looking for signs for the future direction on rates and QE
3. The Quarterly Inflation Report will be a big key focus. It will include the BoE’s latest forecasts for growth & inflation. The most recent Bank update to these forecasts was way back in  November;
  • the GDP forecast was 2.2% for 2016
  • 1.4% 2017
  • 1.5% 2018
  • 1.6% 2019

Rating agencies follow ‘poor, inconsistent’ standards: Arvind Subramanian

Arvind SubramanianChief Economic Advisor Arvind Subramanian on Tuesday slammed global rating agencies for following “inconsistent” standards while rating India vis-a-vis China, saying they have not taken into account reforms measures like GST, which is a “poor” reflection on their credibility.

He said India has taken reform initiatives like FDI liberalisation, bankruptcy code, monetary policy framework agreement, GST and Aadhaar Bill.

“Despite all these achievements, it is very interesting that the rating agencies have not reflected this… We have shown (in Survey) what kind of inconsistent standards the rating agencies have.

“We call these poor standards because S&P said last year that there is no way they could upgrade India because of GDP and fiscal deficit,” Subramanian said.

US-based Standard & Poor’s (S&P) in November ruled out an upgrade in the country’s rating for some considerable period, citing India’s low per capita GDP and relatively high fiscal deficit.

“The actual methodology to arrive at this rating was clearly more complex. Even so, it is worth asking: are these variables the right key for assessing India’s risk of default?” the Economic Survey asked.

Bank of Japan seen bullish on GDP after eventful 2016

The Bank of Japan is poised to upgrade its three-year economic growth outlook in the final days of January in light of strong recent indicators, though stronger inflation forecasts will be a harder sell.

The central bank will compile its quarterly outlook on economic activity and prices at a two-day policy meeting beginning Monday. The report will outline the BOJ’s forecast for each of the three years through fiscal 2018,

 The last report, released in November, pegged gross-domestic product growth at 1% for fiscal 2016, 1.3% for fiscal 2017 and a slim 0.9% for fiscal 2018. Discussions this time are expected to center on the first two years, with the fiscal 2017 growth forecast thought to be headed for the mid-1% range.

Signs for an upgrade are strong. The BOJ in December boosted its outlook for Japan’s economy as a whole for the first time in 19 months. Such goods as smartphone parts and automobiles are driving up exports and industrial production, while consumer spending on durable goods such as cars is on the rebound as well. Changes made late last year to the GDP calculation method will also give the figure a boost: companies’ research and development spending, which has shown consistent growth over the years, now counts as investment.

BOJ Gov. Haruhiko Kuroda said at a World Economic Forum panel discussion Jan. 20 that he expects Japan’s economy to grow by around 1.5% in fiscal 2016 and fiscal 2017, significantly exceeding the country’s potential growth rate.

Fiscal deficit target of 3% for 2017-18 stiff at this juncture: Crisil

Fiscal deficit target of 3 per cent for 2017-18 looks difficult as the debt dynamics of the country show “stickiness”, rating agency Crisil said on Saturday. “Three per cent looks like a stiff task at this juncture for fiscal deficit. When the economy needs help, we need to move to a range that is going to provide the government some flexibility,” D.K. Joshi, Chief Economist at Crisil, told BTVi in an interview.

“The debt dynamics show stickiness. We have not been able to bring down the debt-GDP ratio, which is quite high for India. It complicates matters,” Joshi said. The economist said that the government needs to come up with substantial steps to push up the revenues to maintain fiscal prudence for the next two to three years.

The borrowing target, however, he said is not expected to be very large and in line with the fiscal deficit target. “The borrowing will not be too large if fiscal deficit target is three per cent. I don’t see borrowings as significant or at the level that would spook the stock market and reverse the gains.”

In FY17, spectrum or excise duty on oil that has led to revenue windfall are all temporary measures and may reverse in the coming fiscal.  Joshi said that the concern is to improve the tax-GDP ratio in the next 2-3 years.  “Let’s see how creative the Budget is in extracting higher compliance from individuals. Though there is not much scope to raise the tax-GDP ratio in the short run,” he said. “In terms of Income Declaration Scheme (IDS), I don’t see much cushion coming from these schemes. They can’t continue for ever, they should be leveraged for increasing compliance,” he added.

Coming Week : US GDP, earnings, Brexit ruling

With Donald Trump sworn in as the 45th president of the United States, investors will have their eyes peeled next week for more concrete details on his policies. The UK will also be in the spotlight as the Supreme Court rules on the government’s Brexit appeal.

Here’s what to watch in the coming days.

Brexit ruling

“We look for the court to rule that Parliament must vote to trigger Article 50, but any rally in [the pound] should be limited and short-lived,” strategists at TD Securities, said.

US GDP

In the US, the latest snapshot of US GDP remains the big ticket item on investors’ agenda. The data, scheduled for Friday, are expected to show that economic growth slowed in the last three months of the year. Growth is expected to have cooled to 2.2 per cent in the fourth quarter, from the previous quarter when it expanded by 3.5 per cent.

10 takeaways from Xi’s Davos speech

Chinese President Xi Jinping delivered a keynote speech on Tuesday at the opening plenary of the 2017 annual meeting of the World Economic Forum in the Swiss town of Davos.

Here are 10 quick takeaways from the 50-minute address, which touched upon globalization, protectionism, world economy and China’s development among other subjects.

1. Many of the problems troubling the world are not caused by economic globalization. Just blaming economic globalization for the world’s problems is inconsistent with reality, and it will not help solve the problems.

2. Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks is simply not possible. Indeed, it runs counter to the historical trend.

3. At present, the most pressing task before us is to steer the global economy out of difficulty.

4. Lack of robust driving forces for global growth makes it difficult to sustain the steady growth of the global economy; inadequate global economic governance makes it difficult to adapt to new developments in the global economy; uneven global development makes it difficult to meet people’s expectations for better lives.

5. The world should develop a dynamic, innovation-driven growth model; pursue a well-coordinated and inter-connected approach to develop a model of open and win-win cooperation; develop a model of fair and equitable governance in keeping with the trend of the times; and develop a balanced, equitable and inclusive development model.

6. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war.

7. The Paris Agreement is a hard-won achievement which is in keeping with the underlying trend of global development. All signatories should stick to it instead of walking away from it as this is a responsibility we must assume for future generations.

8 people have same wealth as world’s poorest half -Oxfam

Eight men now own the same amount of wealth as the poorest half of the world. A top corporate CEO earns as much in a year as 10,000 garment factory workers in Bangladesh. And the world’s 10 biggest corporations together have revenue greater than the 180 poorest countries combined, according to a study published Sunday by Oxfam.

The report, An economy for the 99%, was released as global leaders and the business elite traveled to Davos, Switzerland, for the annual meeting of the World Economic Forum, a conference partly aimed at eliminating extreme income inequality. The study found that the richest eight people on the planet have net wealth of $426 billion — equivalent to what’s held by the bottom half of the world’s population.

“From Nigeria to Bangladesh, from the U.K. to Brazil, people are fed up with feeling ignored by their political leaders, and millions are mobilizing to push for change,” British-based Oxfam said in a statement. “Seven out of 10 people live in a country that has seen a rise in inequality in the last 30 years.”

The study is the latest in recent years by Oxfam, an international poverty-fighting group, to campaign for ways to reduce the growing gap between the rich and poor. Oxfam called on President-elect Donald Trump, world leaders and the international business community to “take urgent action to reduce inequality and the extreme concentration of wealth by ensuring that workers are paid a decent (salary) and by increasing taxes on both wealth and high incomes.”

“It is mind-boggling that just eight men own as much wealth as the poorest half of the world’s population, but that’s the sobering reality of 2017,” said Paul O’ Brien, Oxfam America’s vice president for policy and campaigns. “Such dramatic inequality is trapping millions in poverty, fracturing our societies and poisoning our politics.”

Oxfam based its calculations on data from Swiss bank Credit Suisse’s 2016 Global Wealth report and Forbes’ billionaires list of the world’s richest people.