Wed, 27th July 2016

Anirudh Sethi Report


Archives of “Economy” Tag

Reforms in India not fast enough, says IMF

IMF flags decelerating pace of reforms in IndiaListing out as many as six core areas that need further reforms in India, International Monetary Fund (IMF) said in a ‘Note on Global Prospects and Policy Challenges’ that headwinds from weaknesses in the country’s corporate and bank balance sheets, decelerating pace of reforms and sluggish exports may weigh on its economic growth.

The IMF, which recently lowered its gross domestic product growth projection for India to 7.4% in the current financial year, said the country’s economy is on a recovery path, helped by lower oil prices, positive policy actions and improved confidence.

The note has been prepared for the two-day meeting, ending on Sunday, of the G20 Finance Ministers and Central Bank Governors’ Meetings being held in Chengdu, China.

The IMF, which has also lowered its global economic growth forecast for 2016 and 2017 by a marginal 0.1% to 3.1 and 3.4% respectively, recommended six ‘reform priorities’ for India, which is higher than the same for several other emerging markets including China, Brazil and South Africa.

Forget 7-8-9 % Growth ! Irish tell a tale of 26.3% growth spurt

The Irish have written some notable works of fiction — James Joyce and Flann O’Brien produced imperishable classics. Now there is a new addition to the national oeuvre — the official narrative of the country’s economy. According to data released on Tuesday, it grew by 26.3 per cent last year.

That is the highest level of growth for decades and far outstrips the original estimate of Irish economic activity last year, which the official Central Statistics Office had put at 7.8 per cent. A growth rate of more than 26 per cent is nearly three times the highest level recorded during Ireland’s Celtic Tiger boom years in the early 2000s

The figures were met with a mix of bafflement and scorn. “Leprechaun economics,” tweeted Paul Krugman, the Nobel Prize-winning economist. Tom Healy, director of the Nevin Economic Research Institute think-tank, said: “I don’t know if even Soviet Russia in the 1930s exceeded these figures.”

The official explanation was that the surge in gross domestic product was caused by “inversions”, in which companies move their assets or their domicile to Ireland to avail of its super-low 12.5 per cent corporate tax rate; companies moving intellectual property to Ireland for the same reason; and corporate restructurings. In other words, it has only a tenuous relation to activity in the real economy and tangible things such as the creation of jobs.

Irish economic data are volatile because of the nature of the economy — small, open, dominated by foreign direct investment — particularly from Silicon Valley and global pharmaceutical companies — and influenced to a greater or lesser extent by its tax regime, which attracts that multinational activity. That leads to constant revisions of official data, to the frustration of economists and investors.

This latest revision is the most extreme by far. “This revision primarily reflects statistical reclassifications relating to the treatment of inversion deals involving US multinationals, purchases by aircraft leasing firms and companies relocating assets to Ireland,” said Philip O’Sullivan, an economist at Investec Ireland.

The data are likely to reinforce Irish cynicism about its much-touted recovery from the worst financial crisis in the country’s history. If that recovery exists, it is concentrated mainly in Dublin, and even there mainly in the FDI sector rather than in domestic industries such as services, agriculture and small and medium enterprises.

BREAKING : Japanese PM Abe confirms further economic stimulus on the way 11 July

  • will instruct econ minister Ishihara tomorrow to compile econ stimulus package
  • will implement economic measures to support domestic demand
  • economic steps to encourage future investment
  • will issue construction bonds to fund stimulus package, first time in 4 years
  • economic steps to encourage  21st century infrastructure
  • “let’s make most of zero interest rate environment”
  • will proceed with labour reforms
  • global economy faces various risks
  • must strengthen global co-ordination to address uncertainty and support world growth
  • will accelerate exit from deflation as much as possible
  • will consider scale of economic measures from here on
  • doesn’t think LDP constitutional draft will pass unchanged

Moody’s: Political contagion across European Union is greatest Brexit risk

The British electorate’s vote to leave the European Union (Aaa stable) will likely result in a shock to confidence that will curb UK (Aa1 negative) economic growth. Nevertheless, absent political contagion, global spillovers are likely to be limited.

Moody’s has reduced its growth expectation for the UK to 1.5% in 2016 and 1.2% in 2017, from 1.8% and 2.1% previously, according to the report, “EU Political Contagion Represents the Greatest Risk to Otherwise Muted Global Impact from Brexit.”

Moody’s has also lowered its euro area growth expectations to 1.5% for 2016 and 1.3% for 2017, from 1.7% and 1.6% previously, reflecting country-specific developments combined with limited spillovers from Brexit.

Uncertainty around the future of the UK outside of Europe’s common market will likely dampen business investment and consumer spending in the UK, as companies hold back on hiring and long-term investments and consumers postpone large spending decisions. The direct impact on growth in the EU will be less significant, due to limited EU exposure to direct economic and trade linkages.

Great Recession 2.0: Global Investment Skid to a Halt Signaling Crisis

Those with money are opting to keep it in their pockets these days out of concern for the world’s economic and political stability, but such fear means fewer things made, fewer factories built, and fewer jobs available to the average worker.

Global investment banking activity fell by nearly a quarter in the first half of 2016 compared to a year earlier according to Thomson Reuters data released on Monday. The softness in the financial sector means suggests that the world’s markets are perilously susceptible to capsizing as post-Brexit market volatility sets in.

Global fees collected for mergers and acquisitions consulting and capital market underwriting fell 23% to $37.1 billion at the end of June, the slowest first half for fees since 2012. The collapse of new investment activity is a leading indicator showing that the world’s economy is set for a rough landing in late-2016.

Investment market activity has also been crushed by a slew of major mergers cancelled at the last second as investors began to get skittish about the safety and security of leading Western economies. The collapse is particularly disappointing in light of the fact that 2015 set a record for mergers and acquisitions. 

US Treasuries Near Historic Highs as Investors Run for Safety

Investors are buying into US governmental bonds, pushing their value up and depressing the yield, resulting in lower market volatility and profitability, with the yield curve showing pre-recession dynamics for the first time since late 2007.

 The US Treasury

Amid the post-Brexit turmoil in global markets, investors have been overwhelmingly putting their capital in haven assets, including US governmental bonds. This has the effect of pushing the value of Treasury notes up, whilst at the same time pushing the yield down, which then renders market volatility lower. As the $13.4 trln Treasury market rallies, the profitability of investments in financial assets is declining. However, after the initial shock triggered by Britain’s parting ways with the EU, oil prices and FX rates of sterling and emerging market currencies have stabilized, easing Brexit concerns somewhat.

Whilst Treasury notes are expected to extend gains above their historic highs, it is a broader economic uncertainty and the closing business cycle in the US which are pushing haven assets higher rather than the effects of Brexit.

UK growth could cool to 0.2% amid Brexit jitters – Markit

Britain’s services sector recovered slightly last month after an index measuring activity hit a 38-month low in April but the rate of growth was still one of the weakest seen over the last three years, according to a closely-watched survey.

The latest purchasing managers’ index for the UK’s dominant services industry edged up to 53.5 from 52.3 the previous month, which was the lowest reading since February 2013. May’s outcome was also better than the forecast of 52.5 expected by economists.

But Markit, which produces PMI survey, said the pace of growth remained “subdued” and provides further evidence that economic growth in the UK is likely to have cooled significantly in the second quarter, to just 0.2 per cent, as uncertainty around the outcome of the EU membership referendum puts the brakes on investment. The UK economy expanded by 0.4 per cent in the first quarter, which was itself a slowdown in growth from the pace of 0.6 per cent recorded in the final three months of last year.

Tokyo’s plan to spark growth could prove a flash in the pan

The government’s plan to kick-start Japan’s sputtering economy by using stimulus and delaying a tax hike is expected to provide a short-term boost, but the effort is less likely to change a consumer tendency to save that has intensified amid worries over the nation’s finances.

Smoothing out growth 

 SMBC Nikko Securities forecasts passage of a 5 trillion yen ($45.6 billion) supplementary budget that will lower real economic growth by 0.4 percentage point this fiscal year but lift it by 0.8 point in fiscal 2017. The brokerage expects Japan’s economy to recover gradually into next fiscal year.

The postponement of the consumption tax increase slated for April 2017 means that demand will not swell in the preceding months as had been expected. And with the supplementary budget seen doing little this fiscal year, growth likely will fall short of current estimates.

The full impact of the tax-hike delay will be evident in fiscal 2017. Households will not be burdened by the higher levy, and demand will not drop off without the previously expected surge. The economy also will start to derive benefits from the stimulus measures to be laid out this fall.

The size of the stimulus has not been settled, with views in the government ranging from 5 trillion yen to 10 trillion yen. A 10 trillion yen package likely would lift growth in fiscal 2017 by as much as 1.5 percentage points, according to the Dai-ichi Life Research Institute.

Japan, US reaffirm G-7 role in driving global economy

Japan and the U.S. agreed Wednesday to strive for an early ratification of the Trans-Pacific Partnership regional trade pact while emphasizing the need for the Group of Seven to spearhead strong, sustained growth in the global economy.

“I will take responsibility for getting the TPP ratified this fall or thereafter,” Japanese Prime Minister Shinzo Abe said in a meeting with U.S. President Barack Obama. Obama also vowed to reach a domestic conclusion for the deal by the end of his term. 

Japan and the U.S. account for roughly 80% of the total gross domestic product of the 12 TPP signatories. It is imperative that the two countries ratify the deal in order to put the trade pact into effect.

But Tokyo decided to shelve TPP-related legislation this Diet session amid a gridlock over disclosing information on the negotiation process, among other issues. There is even more uncertainty in Washington, where Obama aims to clear the deal through Congress immediately after the U.S. presidential election in November. Presumptive Republican nominee Donald Trump has slammed the TPP, and other candidates may also turn their backs on the deal if they win the race.

Despite such odds, Abe and Obama agreed to get the TPP ratified as soon as possible. They are likely hoping to build momentum toward an early implementation of the trade pact during the two-day G-7 summit starting here Thursday, while stressing how major trade deals involving G-7 members can strengthen the global economy.

G7 Summit: Japanese summary says uncertainties in global outlook have increased

Hosts Japan with their G7 summary from Sendai meeting 21 May 2016

  • shock of potential Brexit could complicate global economic environment
  • G7 discussed how to employ balanced policy mix of mon pol, fiscal structural steps to strengthen global demand, address supply constraints
  • mon pol will continue to support economic activity and ensure price stability consistent with central bank mandates
  • important to implement our fiscal strategies flexibly, advance structural reforms to boost productivity
  • G7 re-affirmed its existing exchange rate agreements inc not to target FX rates and that excess volatility  and disorderly FX moves can have negative effect on economy
  • G7 underscored importance of all countries to refrain from competitive devaluation

Footnote: Reuters also report that this summary was prepared by Japan to facilitate media and does not officially represent G7 consensus.