Sun, 28th May 2017

Anirudh Sethi Report


Archives of “output gap” Tag

IMF data shows $1.1T demand shortfall for developed nations this year

The actual demand of 36 developed countries in 2014 will undershoot potential supply capacity by a combined $1.1 trillion, or 2.2% of gross domestic product, the International Monetary Fund projects.

     While the figure would amount to roughly half of the roughly $2.1 trillion output gap seen in 2009 after the Lehman shock, demand remains insufficient. This is a chief cause of persistently low inflation worldwide despite economic recovery and will likely result in central banks keeping easy monetary policies in place long-term.

     For the U.S., the demand shortage is estimated at $600 billion — more than half of the total. Demand is also slow to recover in debt-crisis-wracked eurozone, especially in the south.

     The IMF puts the Japanese figure at about 1.3% of GDP, or $68.5 billion, this year.

     The Bank of Japan found that the shortage nearly disappeared in the final three months of 2013. But there are multiple methods for calculating the output gap. The Cabinet Office put the October-December shortage at 1.6%, roughly in line with the IMF figures.

RBI releases Draft Report on Implementation of Countercyclical Capital Buffer Framework in India (Full Text )

The IWG approached the implementation framework keeping two main issues in mind. First, the structural changes that the Indian economy has been going through should be considered in calibrating the indicator/s for CCCB imposition; secondly, being an emerging economy, the maximum potential growth may not have been achieved by it so far and hence CCCB imposition should not stifle the possibility of the same.

The key recommendations of the IWG are:

  • While the credit-to-GDP gap shall be used for empirical analysis to facilitate CCCB decision, it may not be the only reference point in the CCCB framework for banks in India and the credit-to-GDP gap may be used in conjunction with other indicators like Gross Non-Performing Assets (GNPA) growth for CCCB decisions in India.

  • The CCCB decision may be pre-announced with a lead time of 4-quarters.

  • The lower threshold (or L) of the CCCB when the buffer is activated may be set at 3 percentage points of the credit-to-GDP gap, provided its relationship with GNPA remains significant and the upper threshold (or H) may be kept at 15 percentage points of credit-to-GDP gap.

  • The CCCB shall increase linearly from 0 to 2.5 per cent of the risk weighted assets (RWA) of the bank based on the position of gap between 3 percentage points and 15 percentage points. However, if the gap exceeds 15 percentage points, the buffer shall remain at 2.5 per cent of the RWA. If the gap is below 3 percentage points then there will not be any CCCB requirement. Read More 

Mid-Quarter Monetary Policy Review: September 2013-Full Text (Yes ,As Expected its Bloodbath )


 Monetary and Liquidity Measures

On the basis of an assessment of the current and evolving macroeconomic situation, it has been decided to:

  • reduce the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent with immediate effect;
  • reduce the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent; and  
  • increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.25 per cent to 7.5 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent and the Bank Rate stands reduced to 9.5 per cent with immediate effect. With these changes, the MSF rate and the Bank Rate are recalibrated to 200 basis points above the repo rate.


2. Since the First Quarter Review (FQR) in July, a weak recovery has been taking hold in advanced economies, with growth picking up in Japan and the UK and the euro area exiting recession. However, activity has slowed in several emerging economies, buffeted by heightened financial market turbulence on the prospect of tapering of quantitative easing (QE) in the US. The decision by the US Federal Reserve to hold off tapering has buoyed financial markets but tapering is inevitable.

3. On the domestic front, growth has weakened with continuing sluggishness in industrial activity and services. The pace of infrastructure project completion is subdued and new project starts remain muted. Consumption, while relatively firm so far, is starting to weaken even in rural areas, with durable goods consumption hit hard. Consequently, growth is trailing below potential and the output gap is widening. Some pick-up is expected on account of the brightening prospects for agriculture due to kharifoutput and the upturn in exports. Also, as infrastructure investments are expedited, and as projects cleared by the Cabinet Committee on Investment come on stream, growth could pick up in the second half of the year. Read More 

Indian economy is not yet out of the woods

An impressive stock market rally, a smart recovery by the rupee, the lowest trade deficit in four months, a slender improvement in industrial output, some hints of weakening consumer inflation: Is the Indian economy finally on the mend?

There has been a distinct buzz of optimism over the past two weeks as if the dramatic events of July and August are but distant memories. Much of the recent optimism is premature. It is quite likely that India will end the fiscal year with a lower current account deficit as well as more muted inflation, but a vigorous resurgence in economic growth is nowhere on the horizon.
Let us consider inflation first. The large negative output gap that has opened up—because the Indian economy is growing below its potential—will necessarily be disinflationary. The past few months have already seen a sharp fall in wholesale price inflation. Consumer prices continue to gallop as close to double-digit rates, however. The prospect of a bumper year for farm output will hopefully put a lid on food prices. So inflation should continue to gradually cool down unless a war in West Asia sends global oil prices sky high. Read More 

China’s producers trapped in deflation

graph of China PPI July  2013

Fresh data confirm China’s economy remains hamstrung by overcapacity.

Producer prices in the world’s second-largest economy were a bit worse than anticipated, indicating the economy continues to struggle with a large output gap.

The PPI fell 0.3 per cent in the month of July, pushing the year-to-year change to -2.3 per cent, versus expectations that it would moderate to -2.1 per cent from June’s -2.7 per cent print.

Falling prices suggest China’s producers are unable to raise prices because of slowing demand. Read More 


We expect market volatility to remain high in the coming months and have moved to a more cautious stance. However, volatility creates opportunity for active fund managers, so we are remaining vigilant for mispriced investment opportunities to exploit when markets overshoot in either direction.

Looking ahead into the remainder of 2013 our central expectation is that the US will continue to slowly accelerate and exit so-called ‘stall-speed’ growth. Banks have been loosening their credit standards, companies are increasing their capital expenditure and the house prices are starting to accelerate. There has already been a shift in the Federal Reserve’s thinking due to the gradual economic improvements – away from Quantitative Easing and towards tapering – and this has caused a great deal of market volatility.

Elsewhere, the story is less positive. In China, for example, data suggests that economic activity resulted in an investment splurge following the credit crisis of 2008, leading to over-investment across sectors such as infrastructure and export companies.  In our view this has resulted in overcapacity. Furthermore, this over-investment was funded by debt, resulting in rising levels of household and corporate debt. Indeed, data suggests Chinese households have never been so indebted. However, much of this has been priced into market valuations so we are not too negative on China from an investment perspective. In addition, the government is making the longer term outlook more promising by putting its emphasis on encouraging quality of economic growth, rather than quantity by enacting policies that focus on moving the economy from being export-driven to a more consumption-based model. Read More 

JIM O’NEILL: I Don’t Feel Good About What’s Next For The Stock Market

U.S. economic data has been improving notably.  And the U.S. stock market is near its all time high.

 However, Goldman economist Jim O’Neill is getting increasingly concerned that the stock market is getting expensive.

In the near-term, he thinks momentum could drive stocks higher.  But we warns that valuations are getting rich.

From his latest Viewpoints note:

The strength of last week’s US data is leading the consensus to revise upwards their forecasts for 2013 real GDP. Having been notably higher than the consensus since autumn 2012, GSAM is rather pleased about that as a number of investment strategies have prospered from it. Of course, and as I discussed last week and in recent Viewpoints, this is despite the ongoing and sometimes unchosen fiscal tightening in the US, and is a marked contrast to Europe. Not surprisingly, all of the US bond, equity and currency markets are reacting accordingly. I am not that confident about what happens next and as to whether all these trends are going to continue, not least because May is now less than two months away and the infamous “Sell in May and go away, come back on St Leger’s Day” (which I am physically actually going to be doing post retirement, of course!). US equities seem set to strengthen further in the near term, given the momentum in the data, but as page 47 shows, they are hardly bargain basement these days from a CAPE perspective. As for bonds and the Dollar, the market is adjusting its future profile for the Fed and starting to think that the Fed will have to change its own views, but I am not sure, in light of the actual (and prospect of more) fiscal tightening means the Fed will jump too soon, especially given their output gap views and the strength of conviction of their leading players. Of course, if this data improvement continues, then the Fed will have to adjust. Read More 

BOJ’s Shirakawa – press conference

  • rising wages and rising growth expectations are ideal way to achieve inflation
  • cannot reach 2% inflation quickly simply by narrowing output gap
  • Japan headed in right direction to end deflation
  • Board member Shirai’s call for more easing is aimed at clarifying BOF stance on boosting economy
  • falling yen and rising stocks helping to improve sentiment in Japan
  • CB’s independence must be preserved to ensure fiscal discipline ( message to Abe there ???)
  • if BOJ is seen monetising govt debt , could hurt real economy through long-term rate hikes
  • no comment on BOJ’s nominees views on mon pol
  • BOJ aiming for sustained growth while examining imbalances in economy
  • achieving 2% inflation primarily via  higher inflation expectations could result in higher bond yields and hurt financial system
  • uncertainty remains high on situation surrounding economy
  • too early to say if world economy has shaken off impact of economic bubbles

Recap Of BOJ’s Sato’s Speech

Recent yen declines have buoyed Japanese equities and may help spur price rises driven by economic growth, a Bank of Japan policymaker said, stressing that he will continue to seek ways to indirectly affect exchange-rates through monetary policy.

But Takehiro Sato, a former economist who joined the board in July last year, dismissed calls for the BOJ to buy more risky assets, warning that doing so could expose its balance sheet to huge losses and hurt market confidence in the yen.

The yen has fallen to a nearly three-year low against the dollar, bolstering Tokyo share prices, on expectations that the BOJ will embark on bold stimulus measures when incumbent Governor Masaaki Shirakawa steps down in March.

The sharp decline has sparked fears of a global currency war as other major exporting nations seek to keep their goods competitive amid a backdrop of still sluggish international demand. Policymakers in South Korea, Germany and elsewhere have expressed concern over the potentially destabilising global impact of the BOJ’s decision to quicken the pace of money-printing.

“Asset markets have been buoyant after a long period of inactivity … as the yen’s over-appreciation is being corrected,” Sato said in a speech to business leaders in Maebashi, a city in eastern Japan’s Gumma prefecture, on Wednesday. Read More 

RBI-Macroeconomic and Monetary Developments : Third Quarter Review 2012-13

The Reserve Bank of India today released the Macroeconomic and Monetary Developments Third Quarter Review 2012-13. The document serves as a backdrop to the Third Quarter Review of Monetary Policy Statement 2012-13 to be announced on January 29, 2013.


Overall Outlook

Balance of macroeconomic risks suggests monetary policy needs to be calibrated in addressing growth risks as inflation turns sticky

  • Growth in 2012-13 is likely to fall below the Reserve Bank’s baseline projection of 5.8 per cent. However, output gap may start closing in 2013-14 although at a slow pace on the back of some revival in investment and consumption demand.

  • Inflation is likely to moderate below the Reserve Bank’s baseline projection of 7.5 per cent. However, suppressed inflation continues to pose a significant risk to the inflation in 2013-14. As some of the risks materialises, inflation path may turn sticky.

  • Various surveys show that business confidence remains subdued. Survey shows that forecasters outside the Reserve Bank anticipate growth to recover from 5.5 per cent in 2012-13 to 6.5 per cent in 2013-14. Average WPI inflation is expected to moderate from 7.5 per cent in 2012-13 to 7.0 per cent in 2013-14.

Global Economic Conditions

Unconventional monetary policies reduce stress, but risks remain ahead

  • Fiscal risks are likely to keep global recovery muted in 2013. While the immediate risk of the fiscal cliff in the US has been averted, risks to global growth emanating from euro area remain significant. There are some signs of growth bottoming out in Emerging Market and Developing Economies (EMDEs).

  • Global inflation scenario may stay benign as demand in advanced economies (AEs) remains weak. Improved supply prospects in commodities like oil and food are likely to restrain commodity price pressures. However, upside risks persist, with possible recovery in EMDEs and large quantitative easing in AEs.

Indian Economy Read More