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Tue, 25th April 2017

Anirudh Sethi Report

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Archives of “Economy” Tag

China’s Credit Excess Is Unlike Anything The World Has Ever Seen

From a global macroeconomic perspective, we encourage readers to consider that the world is experiencing an extended, rolling process of deflating its credit excesses. It is now simply China’s turn.

For context, Japan started deflating their credit bubble in the early 1990s, and has now experienced more than 20 years of deflation and very little growth since. The US began its process in 2008, and after eight years has only recently been showing signs of sustainable recovery. The euro zone entered this process in 2011 and is still struggling six years onward. We believe China is now entering the early stages of this process.

Having said that, we believe that Chinese authorities have a viable plan for deflating their credit excess in an orderly fashion. Please stay posted as we will review this multi-pronged, market-based approach in our next column.

For now, let’s turn our attention to the size of the credit excess that China created and why we estimate it to be the largest in the world.

A credit excess is created by the speed and magnitude of credit that is created – if too much is created in too short a time period, excesses inevitably occur and non-performing loans (NPLs) emerge.

To illustrate the credit excess that has been created in China, let’s review several key indicators, including the: 1) flow of new credit; 2) stock of outstanding credit; 3) credit deviation ratio (i.e., excess credit); 4) incremental capital output ratio (efficiency of credit allocation).

The chart below shows the amount of credit created as a percentage of GDP during the five years prior to major downturns globally.

Raghuram Rajan warns of ‘policy uncertainty’ for world economy

Former RBI governor Raghuram Rajan today warned of “policy uncertainty” for the world economy due to there being a “bunch of new leaders” who need to prove they are strong, even as he exuded confidence about all large economies doing well. Without specifically mentioning India, Rajan said, “This is the first time in a long while we have seen all the big engines firing at the same time including the large emerging markets … We have seen trade picking up. “We are seeing early signs of investment intentions. Of course there are always clouds. There are clouds this time also,” he said. In an interview to CNBC, the Chicago Booth School professor and the outspoken economist also said the “good news is some of the fears about the (Trump) administration that it would move immediately to a more protectionist stance haven’t played out”.

“There have been noises but of course the strong action that some people feared against Mexico, against China hasn’t really materialised. That’s the good news,” he said while referring to Donald Trump administration in the US. Talking about the possible risks before the world economy, Rajan who served as RBI governor for three years, said, “There is lot of policy uncertainty right now because of the work the (US) administration is going to do and how much it can achieve.

“But also there is geo-political risk. We have a bunch of strong leaders around the world who are already well entrenched in their strength. “We have a bunch of new leaders who need to prove themselves that they are strong. And in that kind of environment, who has room to back off if in fact there is a confrontation. We have many areas of confrontation.” Rajan further said as the US monetary policy normalises, “we will see more stress” on heavily indebted entities.

Fed’s Yellen: US economy is ‘pretty healthy’

Yellen comments:

  • A better look at inflation is around 1.75%
  • Housing is ‘a little bit healthier than it’s been’
  • Consumer is helping economy
  • Looking forward, I think economy is going to continue to grow at a moderate pace
  • Financial system is essential for the economy
  • Distorted rewards in financial system contributed to crisis
  • “Appropriate stance of policy now is something close to neutral”
  • We think it’s appropriate to raise rates to a more-neutral level if economy continues to perform
  • Our assessment of neutral is “really not that high”
  • Although we’re close, we’re still below 2% in inflation in my assessment
  • Since the 1980s, the general expectation is the public sees it at 2% despite temporary deviations from that
  • We ‘equally’ don’t want inflation to linger below 2%

Words and actions about the equality of that inflation target don’t match.

More:

  • The fact you could create so many jobs in 2%-growth economy suggests low productivity
  • Economic potential without absorbing labor market slack is probably less than 2%
  • Output per worker has been very slow in recent years, my guess is it will pickup

2016 Debt Binge Produces (Surprise!) 2017 Inflation; Guess What That Means For 2018?

Just as everyone was finally accepting the idea of deflation and negative interest rates, inflation decides to pay a return visit. In the past week, articles with the following headlines appeared in major publications around the world:

Swiss inflation rises at highest monthly rate in 5 years

China February producer inflation fastest in nearly nine years

Year-over-year import prices at highest level in five years

ECB keeps bond-buying, rates unchanged amid inflation flare-up

Food inflation doubles in a month as UK shoppers start to feel the pinch

What happened? Well, towards the end of 2015 most of the world’s major governments apparently got spooked by deflation and decided to ramp up their borrowing and money creation. China, for instance, generated the following stats in 2016:

  • New loans totaling 12.65 trillion yuan, or $1.8 trillion.
  • M2 money supply growth of 11%.
  • Debt-to-GDP ratio jump from 254% to 277%.

In Europe, the European Central Bank ramped up its bond buying program, pumping about a trillion newly-created euros into the Continental economy:

Quick-take ECB previews from 6 banks

The European Central Bank meet Thursday, some really quick preview action from a few banks

Announcement due 1245GMT, along with President Draghi’s press conference
  • Main financing rate currently at 0%, expected to be left unchanged
  • Marginal lending facility rate currently at 0.25%, expected unchanged
  • Deposit facility rate currently at -0.4% and expected 9go on, have a guess) to be left unchanged
 
Bank of America / Merrill Lynch:
  • The truce between hawks & doves will be reflected in a dovish Draghi
  • Draghi will use extended QE as intended
Barclays
  • Expect that policy likely to be unchanged
  • Watching for any sign forward guidance on rates could be dampened
Citi
  • Despite likely much higher 2017 HICP they see no change to rates, nor to the size of QE, nor to forward guidance
  • Perhaps the balance of risks changes to neutral
Commerzbank
  • European Central Bank is in a holding mode, assessing incoming data
  • Will be no change to policy or statement
  • September will bring tapering announcement

Chidambaram questions government’s GDP figure

Former Finance Minister and senior Congress leader P Chidambaram on Friday questioned the Central Statistical Organisation’s GDP growth figure and termed demonetisation a fixed match between the government and Reserve Bank of India (RBI).

He said demonetisation has interrupted India’s economic story and “to recover from this, it would take between 12-18 months, maybe right up to the end of 2017-18”.

“Look at the CSO’s numbers, it seems nothing has happened to the economy. The dazzle of the number cannot hide the fact that crores of people in the country have been devastated,” said Chidambaram.

“The government has changed the methodology. The Gross Value Addition (GVA), when they add taxes to it and subtract subsidies, they arrive at the GDP,” he added.

Chidambaram further said: “The additional tax revenue is not a reflection of growth. Equally being stingy on subsidies doesn’t impact growth.”

Giving out quarter-wise GVAs of three years, Chidambaram said: “In 2014-15, quarter-wise GVAs were 7.26, 7.91, 6.29 and 6.19 per cent. There is no particular trend. It went up and came down. In 2015-16, the numbers are 7.75, 8.44, 6.95 and 7.42 per cent. Again it doesn’t show any trend.

Moody’s raises outlook on Russia rating to ‘stable’

Moody’s on Friday became the latest ratings agency to lift its outlook on Russia’s credit rating, upgrading it from ‘negative’ to ‘stable’, citing both a fiscal strategy — that is expected to lower the country’s dependence on energy and replenish its savings — and the gradual economic recovery.

The ratings agency had confirmed Russia’s Ba1 rating, which is one notch below investment grade, in April 2016, but assigned it a negative outlook at the time to reflect an erosion of the government’s fiscal savings amid a downturn in crude prices. But on Friday, it said the recovery in the country’s economy following a nearly two-year long recession, alongside the fiscal consolidation strategy, have eased the risks that it had identified last year.

Russia’s deficit-to-GDP ratio is now forecast to narrow by roughly one percentage point per year between 2017 and 2019 and Moody’s said this new target was “achievable” because the government’s “oil price and revenue assumptions are sufficiently conservative”.

Moody’s now believes that the downside risks identified in April 2016 have diminished to a level consistent with a stable outlook. The stabilization of the rating outlook partly reflects external events, and in particular the increase in oil prices to a level consistent with the government’s budget assumptions. The stable outlook also reflects the plans the government has put in place to consolidate its finances over the medium term, and the slow recovery in the economy following almost two years of recession.

Rival raters S&P and Fitch have also boosted their outlook on the country in recent months, as external risks to the oil-producing nation ease.

Greek unemployment sticks at 23% amid escalating bailout row

Still no respite for Greece.

Amid a fresh escalation in a row over its bailout conditions, Greece’s stubbornly high unemployment rate is showing no sign of improvement.

The country’s jobless rate – which is the highest in the eurozone and has been above 20 per cent for six years – stuck at 23 per cent in November despite a general uptick in its economic prospects at the end of 2016.

The IMF has been accused by Athens and Brussels of an “overly pessimistic” view on the Syriza government’s ability to hit a 3.5 per cent budget surplus target over the next decade, which has led it to a wrong-headed forecast on Greece’s “explosive” debt dynamics.

The Fund’s latest report on the Greek economy suggest its debt-to-GDP mountain could reach 275 per cent over the next two decades without major debt restructuring. Unemployment meanwhile will only fall to 21.7 per cent this year, while the country’s long-term growth rate was downgraded to 1 per cent, IMF economists predict.

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.

Overnight US Market :Dow closed -72 points

The Dow Jones industrial average erased its gain for the year on Thursday, part of a pullback for stock indexes as Treasury yields continued their upward march.

The Dow Jones industrial average fell 72 points, or 0.4%, to 19,732.40. That puts the Dow down about 32 points for the year and will makes this the fifth straight day of losses. The Standard & Poor’s 500 index fell 0.4% to 2,263.69. The Nasdaq composite fell 0.3% to 5,540.08.

Four stocks fell for every one that rose on the New York Stock Exchange.

Stocks have slowed in 2017 following an electrifying jump higher since Election Day. Investors are waiting to see what a Donald Trump presidency will really mean for stocks. They’ve already seen the optimistic case, as shown in the nearly 6% jump for the S&P 500 since Donald Trump’s surprise victory of the White House, propelled by expectations for lower taxes and less regulation on businesses.

But on the possible downside, increased tariffs or trade restrictions could mean drops in profits for big U.S. companies.

Bond yields continued their march higher, and the 10-year Treasury yield rose to 2.47% from 2.43% late Wednesday. Yields have generally been climbing since Election Day on expectations that President-elect Donald Trump’s policies will spur more inflation and economic growth. The 10-year yield is still below its perch above 2.60% that it reached in mid-December, but it’s well above the 2.09% yield it was at a year ago.

Reports have shown that the U.S. economy has been improving recently, and the latest on Thursday showed encouraging signs for the housing and labor markets. The fewest number of workers sought unemployment claims last week in 43 years, a sign that corporate layoffs are subsiding.