Tue, 01st December 2015

Anirudh Sethi Report


Archives of “Economy” Tag

ALERT-Brazil’s Q3 GDP looking ugly

Brazil is due to release third quarter GDP data on December 1. And the numbers are expected to be pretty ugly if a proxy index published by the country’s central bank is anything to go by.

The Central Bank of Brazil’s IBC-Br index, a monthly proxy for gross domestic product, showed economic activity fell by 6.2 per cent in September from the same period a year earlier.

That’s the biggest year-on-year drop on record, according to Capital Economics, and points to a third quarter contraction of nearly 5 per cent.

Month-on-month, the proxy index fell 0.5 per cent in September compared to August, and points to a 1.2 per cent quarter-on-quarter GDP contraction for the third quarter.

The IBC-Br tracks activity in manufacturing, services and agriculture and is generally seen by investors as a reasonably reliable indicator of overall GDP.

Bruno Roval, an analyst at Barclays, described the IBC-Br index as being in “free fall mode”, as the fallout from the collapse in global commodity prices and the Petrobras scandal ripples across the economy.

Japan data – Industrial production (September, final) +1.1% m/m (prelim +1.0% )

Industrial production, capacity utilization and Tertiary Industry Index, live on ForexLive!

Industrial Production for September m/m (final): +1.1% m/m

  • the preliminary was +1.0%
  • prior (August) was -1.2%

Industrial Production (final, September, D’uh 😀 ) y/y:  -0.8% y/y

  • preliminary -0.9%
  • prior -0.4%

Capacity Utilization m/m for September: +1.5% m/m (highest since January)

  • prior -0.9%

September Tertiary Industry index: -0.4% m/m … finally! “Source released data 4 minutes later than scheduled”

  • expected +0.1%, prior was +0.2%, revised from +0.1%

India can effectively replace the ailing Chinese economy as a new global growth locomotive are likely to be disappointed: BNP Paribas

India is quietly assuming the mantle of fastest-growing major emerging-market economy, but it is too small on economic parameters to replace China as a new global growth locomotive, a new report says.

According to global financial services firm BNP Paribas, the hope that India can replace China as a key locomotive of global demand is “misplaced”.

China posted a 6.9 per cent GDP in the third quarter of this year to register its weakest growth since the 2009 global financial crisis. India is projected to grow faster than China in the near future.

As per Moody’s Analytics, India’s GDP grew in September quarter by 7.3 per cent, while for the full fiscal it would be 7.6 per cent. India’s GDP grew by 7.3 per cent in FY15.

“Those hoping that a more buoyant India can effectively replace the ailing Chinese economy as a new global growth locomotive are likely to be disappointed, however, at least for the foreseeable future,” BNP Paribas said in a research note.

Q3 2015 US GDP advance 1.5% vs 1.6% exp q/q annualised

US economic expansion slowed sharply last quarter, though the resilience of consumer spending suggests the dip may prove fleeting.

The economy grew at a 1.5 per cent pace annualised pace in the three months to September, down from 3.9 per cent in the second quarter.

Expansion was depressed as companies expanded stockpiles at a slower pace and a stronger dollar took the shine off exports.

Despite those headwinds, consumer spending proved resilient. Household spending grew 3.2 per cent in the quarter, which was just shy of the 3.3 per cent forecast.

The economy’s weaker showing will have been expected by Federal Reserve policymakers and is unlikely to prompt alarm.

Their latest official assessment of the economy released on Wednesday was at pains to stress to sceptical investors that the Fed could still raise its key interest rate in December.

The relative strength of consumer spending last quarter sharpens the focus on the monthly jobs reports for October and November.

Steady improvement in the labour market has helped give consumers the confidence to spend, but the pace of job creation has flagged in recent months.

Average monthly job gains slowed to 167,000 last quarter from 231,000 in the second quarter.

Breaking-Federal Reserve leaves rates on hold

Highlights of the October 28, 2015 FOMC interest rate decision:

  • The line that warned global developments may restrain growth was removed
  • US economy ‘has been expanding at a moderate pace’
  • Lacker dissents

The line was put in last month and removed this month: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

Chinese Economists Have No Faith In 7% Growth “Target”

Earlier today in “The Truth Behind China’s GDP Mirage: Economic Growth Slows To 1999 Levels”, we pointed out that Beijing may be habitually understating inflation for domestic output, which has the effect of making “real” GDP less “real” than nominal GDP.

This is what we’ve called the “deficient deflator math” problem and it raises questions about whether China is netting out import prices when they calculate the deflator. If they’re not, then the NBS is likely overstating GDP during periods of rapidly declining commodities prices. 

If Beijing is indeed understating the deflator it’s not entirely clear that it’s their fault, as robust statistical systems take time to implement, especially across an economy the size of China’s. That said, there are plenty of commentators who believe that the practice of overstating GDP is policy and exists with or without an understated deflator. Put simply: quite a few people think China is simply lying about its economic output.

To be sure, there’s ample evidence to suggest that Beijing’s critics are right.

After all, the Li Keqiang index doesn’t appear to be consistent with the numbers coming out of the NBS and the degree to which the data tracks the Communist party’s “target” is rather suspicious (and that’s putting it nicely). 

October 2015 German ZEW economic sentiment 1.9 vs 6.0 exp

Highlights of the October 2015 German ZEW data report 13 October 2015

  • Prior 12.1
  • Current conditions 55.2 vs 64.7 exp. Prior 67.5
  • Eurozone ZEW economic sentiment 30.1 vs 33.1 prior

Very soggy numbers for Germany

ZEW comments;

  • that the German domestic economy is still good
  • VW scandal and EM weakness is weighing on the German growth outlook         

China’s slowdown may not be good news for India: Raghuram Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajanon Tuesday said a slowdown in China wasn’t necessarily good news for India, as it would lead to global demand being squeezed further. “No country’s adversity in this inter-connected world can be an unmitigated blessing for us. So, I don’t think China slowing down is necessarily good news for us,” he said in an interview to television channel India Today TV.

He, however, added a further slowdown in China would have a silver lining in that it might lead to more foreign investment into India. “But in general, in a global environment of weak demand, one major economy slowing further and providing even less demand is not good news for anybody,” he said.

Rajan said that there were some ‘green shoots’ in the economy, with greater public investment in road infrastructure and a pick-up in consumption. “But the key missing factor in stronger and sustainable growth is private investment has not picked up,” he added. The reason for this, he said, was the external environment was still weak. “We essentially export and import goods and services north of 50 per cent of GDP (gross domestic product) and, therefore, a weak global environment means a number of industries are being affected because there is not enough global demand for their products.”

He said industry should take more risks, as a lot of regulatory and administrative processes had been eased. “One of the things we have to be careful about is suddenly demanding a Scandinavia-like business environment in India overnight. That is not going to happen…or a US-style business environment. And, our industrialists have invested in much tougher environments than we have today.”

Treasury’s Lew: Debt ceiling to be hit by October 17

Collecting BucketThe US will reach its spending limit in less than a month if leaders are unable to come to agreement on a new debt ceiling, according to Treasury Secretary Jack Lew.

In a letter sent to Congressional leaders, Mr Lew estimated the Treasury would exhaust all of its funding abilities no later than October 17, and called the potential impact “catastrophic”.

The White House is determined not to compromise when negotiating a rise to the $16.7tn limit, which it had in 2011 to avert a shutdown.

If an agreement is not reached before October 17, Mr Lew estimates the Treasury will have less than $30bn to use to cover expenses, below the $60bn in outlays it pays on same days, potentially leading to the first default by the US on its debt obligations.

From his letter:

The debt limit impasse that took place in 2011 caused significant harm to the economy and a downgrade to the credit rating of the United States. The drawn-out dispute caused business uncertainty to increase, consumer confidence to drop, and financial markets to fall. If Congress were to repeat that brinksmanship in 2013, it could inflict even greater harm on the economy. And if the government should ultimately become unable to pay all of its bills, the results could be catastrophic.

A focus for the RBI

It needs a well-defined objective and policy instrument.

In his maiden monetary policy announcement, RBI Governor Raghuram Rajan unveiled a mix of easing and tightening measures. He raised the repo rate and lowered the bank rate. In July, the RBI had suddenly raised rates to defend the rupee. Since then, the bank rate, or the MSF rate, has become the operational policy rate, the rate at which commercial banks borrow from the RBI. It is too high for the economy today and needs to be reduced even further.

The decision to cut the MSF rate was obvious. That was the easy part. Rajan also raised the repo rate, which used to be the policy rate before the RBI’s actions to defend the rupee in July. This was supposed to indicate the RBI’s intent to target inflation by lowering inflationary expectations. Bringing such expectations down is a difficult task for any central bank. For the RBI, the problem is even more difficult since it must balance multiple objectives, has numerous instruments and is not independent.

Rajan will have to work hard to build the RBI’s credibility as an inflation targeter. He will need to get rid of its multiple objectives and many instruments. He will have to focus on defining the objective of monetary policy and its instrument clearly, building credibility, being consistent and communicating his policy stance to the public. The success of his term will be measured by how well he is able to anchor inflationary expectations and bring down consumer price inflation. The growth slowdown and high food inflation will make inflation forecasting and targeting difficult. So far, the RBI has not managed to communicate clearly because it has too many instruments and unclear objectives. Read More