Tag Archives: India

Economy in Digits – 02/01/2014

In the past couple of weeks I didn’t see any significant economic indicators in the news. However, we got a lot of data over last week.

United States

Driven by the fastest consumer spending in the last three years and a rise in exports, US GDP increased by 3.2% year-over-year in the 4th quarter.The calculations also showed a 1.9% increase in GDP across all of 2013, compared to 2.8% the previous year. The 2013 figures showed that a significant decrease in government spending due to the shutdown in October had dragged GDP figures down when compared to last year. That was of course accompanied by the extreme cold temperatures in the winter which also hampered the economy. However, the numbers are still positive and despite the continuation of tapering by the FED, the US still remains the safest economic harbor right now. As we’ll discuss soon, Emerging Markets are not doing too well right now.

united-states-gdp-growthTurkey and India

Both the Turkish Central Bank and the Indian Central Bank resorted to drastic interest rate hikes. In Turkey, a corruption probe against government officials had led to the resignation of various cabinet ministers. The following levels saw the Turkish Lira lose significant value and brought the Turkish Lira/US Dollar spot rate to unprecedented levels. To stop the devaluation, the Turkish Central Bank sold parts of its foreign reserves but it was to no avail. Finally, the Central Bank had enough and they raised interest rates sharply. The benchmark interest rate was raised from 4.5% to 10% and the over night lending rate was hiked from 7.5% to 12%. Following the rate hike, the Turkish Lira gained 4% against the US dollar. However, the crisis is yet to be averted. Even though the Lira gained in value after the Central Bank’s decision, the sell off creeped in again. This decision is surely to slow Turkish economic growth and that could prove crucial to determining the outcome of the upcoming local elections in March.

tlusd

On to India, another country that required a rate hike this past week. As I stated in an earlier post, India is struggling with high inflation and lackluster growth and just like Turkey, they will be having elections this year. However, the Indian Central Bank let everyone know that they are serious about battling inflation when they increased the repo rate by a quarter point to 8% and announced that they plan to reduce the inflation rate to 6% by 2016. As you can see from the graph below, the latest inflation figure in India is over 11%.

indiainflationGreat Britain

Another GDP figure came from Great Britain as GDP growth was announced to be 0.7% in the 4th quarter of 2013 and by 1.9% in 2013 overall.That figure might seem as slow as Shaq running down a basketball court however that is the fastest growing quarter that Great Britain has had since the 2008 economic crisis. The main force behind the growth was the services and the manufacturing sectors and evidences that slowly, eventually and oh so gradually, the British economy is picking itself up.

Historical Data Chart

EU

The Eurozone had been battling a rather unfamiliar problem, deflation, which is the opposite of inflation. To battle the deflation, the European Central Bank had decided to lower interest rates last month. However, we got new inflation figures from the Eurozone which don’t look so bright. Consumer price inflation across the Eurozone fell from 0.8% in December to 0.7% in January.. Even though the worst of the European debt crisis is behind us, deflation means that firms and individuals are more likely to hold off on spending money until the future, which could take a toll on growth. Even though I see it to be unlikely, European Central Bank officials stated that if matters get worse, they could resort to negative deposit rates for banks’ deposits at the European Central Bank.

Historical Data Chart

That was what made economic headlines this week. Stay tuned for more economic news in Economy in Digits in the following weeks.

“Economics is extremely useful as a form of employment for economists.”
-John Kenneth Galbraith

Advertisements

Upcoming Emerging Market Elections

The geopolitical stage is typically divided into two camps: the Developed Markets (such as USA, the EU, Japan, England) and the Emerging Markets (such as China, Russia, Brazil, India, Turkey). Developed Markets are countries that have stable financial markets and political systems. Their economies are powerful but have developed to the point where they can now only grow at a slow and steady pace. On the other hand, Emerging Markets are the new players on the global stage. Their economies have grown rapidly over the past several years and they appear to have promising futures. However, their financial systems still need improvement and their political systems are still unstable. If the two groups could be visualized as Hollywood actors, the Developed Markets would be Liam Neeson.

Liam-Neeson-9421118-1-402

No matter what movie it is, you know for a fact that if Liam Neeson is in it, he is going to dominate that role and he is going to be a total badass as he trains Batman, saves his daughter, releases the Kraken, etc. Much like Liam Neeson, Developed Markets shape the context of the globe and have established themselves as the leaders of the world. On the other hand, Emerging Markets are James Franco.

MV5BMTIyOTc0MjE5NV5BMl5BanBnXkFtZTcwNjgyODQwMg@@._V1_SX640_SY720_

You can tell James has a lot of potential. He’s had some great movies such as 127 Hours, the Spiderman series and Pineapple Express. But let’s be honest, he’s been in some lousy movies too. Have you seen Your Highness? No you haven’t; and neither has anyone else. So you know Franco is a great actor but you can’t tell if his next movie is going to break box office records or totally fall flat and bomb. Similar to Franco, Emerging Markets have potential and may even become one of the world’s leading nations in the future. However, they are unstable and have their internal problems, much like Franco’s problem to keep his eyes fully open.

After the financial crisis of 2008, Developed Markets suffered greatly. Their economies were in shambles. These nations responded by lowering interest rates to stimulate demand. Thus, investors moved their money to Emerging Markets to seek higher returns on higher interest rates. After 2009, Emerging Market economies skyrocketed. From 2010 to the end of 2011, most Emerging Market economies grew somewhere between 6-11%. For example, in 2011, the Chinese economy grew by 9.2% and the Turkish economy grew by 8.5%. Following these developments, everyone believed that the time of Emerging Markets had come and that they would lead the world out from pits of the financial crisis.

However, in 2013, as central banks around the world such as the FED started talking of taking their foot of the pedal and slowing their support of their economies, interest rates rose in the developed world. 2013 was also the year when political upheaval broke out in certain Emerging Market countries, the US economy continued to recover at a steady pace and the EU saw the worst of its crisis pass. All of these factors caused investors to put their money back into the Developed Markets. As the cheap money was pulled away from Emerging Markets, their economies slowed down and their currencies lost value against Developed Market currencies.

In case you don’t believe me, here is a finance professor from George Washington University discussing how Emerging Markets fared in 2013.

Now in 2014, many Emerging Markets will go to the polls and determine their leaders in elections. These elections will shape the political sphere in those nations for the next several years and will definitely effect not only their national economies but ultimately the global economy. So, along with a graphic from the Wall Street Journal, here is a breakdown of upcoming Emerging Market elections in 2014.

MI-CA487_YEFRAG_G_20131231130906

Brazil

Brazil’s economy is highly dependent on commodity exports. Thus, a fall in commodity prices, excessive government spending and a social upheaval against the government in the summer all proved troublesome for the Brazilian economy. The general election in October will decide if President Dilma retains her position or replaced by the opposition.

South Africa

In South Africa, the African National Congress party has won every election after the apartheid era. But they are now being challenged by the Democratic Alliance which won 16% of the votes in the 2009 elections and has grown in popularity ever since. Come election time in April, the ANC’s hegemony over South African politics may come to an end.

Turkey

Recep Tayyip Erdogan and his AK Party have dominated every local and national election since they first came to office in 2002. During their term in power, they have further liberalized and grown the Turkish economy and have also increased Turkey’s influence on the global stage. However, resentment against Erdogan’s authoritarian tendencies and his party’s encroachment on personal freedoms exploded this year during the nationwide Gezi Park protests. Furthermore, a recent corruption scandal charged against several AK ministers have led to their resignation and has made the AK Party lose even more of its influence. The AK Party is still highly popular throughout Turkey, but it will be interesting to see the effect of recent events on the local elections in March.

India

The Indian economy currently faces stagflation as it is stuck in a state of high inflation and below average growth. Incumbent president Manmohan Singh has stated that even if his United Progressive Alliance party wins, he will not be president for a third term. Investors are hoping for a victory by pro-reformist Bharatiya Janata Party. Only time will tell the outcome of the general elections in May.

Indonesia

In July, whoever wins the Indonesian general election to replace outgoing two-term president Susilo Bambang Yudhoyono will have a full plate. Growth has slowed, politically popular fuel subsidies are draining the treasury and corruption remains rife.

All of these countries require the implementation of unpopular but important reforms to aid their economies and remedy social issues. However, because of upcoming elections, ruling parties are unfortunately likely to delay these reforms till after the elections are over.

“Emerging markets are hugely important.”
-James Dyson

The Economy in Digits – 12/21/2013

Welcome to Economy in Digits, my new weekly segment that briefly covers significant economic indicators released in the past 7 days. Initially, I didn’t want to write a post for every single indicator that makes the headlines. That would mean that I would have to bombard this blog with post after post of statistical data, which is not why I created this blog. I created it in order to inform my readers about significant global issues AND also keep it interesting and enjoyable at the same time. However, economic indicators are significant and sometimes we receive data that hints where a nation’s economy is headed. Thus, I decided to sum up indicators released in the prior week in a single post.

United States

In the United States, November industrial production, which measures output in the utilities, mining and manufacturing sectors rose 1.1% from the prior month. That was the biggest increase over the last year and brought total US industrial output to its pre-recession levels. The manufacturing sector increase 2.9% from a year earlier thank to rising automobile sales. Meanwhile, the utilities sector expanded by 3.9% due to increased demand in the winter for heating and output in the mining sector increased by 1.7% as several oil rigs that were closed last month due to tropical storm Karen reopened. The graph below depicts total US industrial output for the last 10 years.

fredgraph

Again in the United States, 3rd quarter GDP growth rates, was revised upward from its initial figure of 3.6% to 4.1% from a year earlier.The revision came mostly due to the adjusted increase in consumer purchases. The graph below depicts quarterly US GDP growth rate over the past 10 years.

fredgraph (1)

Both the industrial production and the revised GDP figures prove that the American economy is hastening on the road to recovery. The fact that these figures are coming out shortly after a period of fiscal instability is also impressive. However, we also have to see the effects tapering of QE by the FED will have on the economy.

Japan

Despite the push by Prime Minister Shinzo Abe to devalue the Yen and drive exports up, Japan’s trade deficit increased as exports fell by 0.2% and imports rose by 3.5% month on month. When a nation devalues its currency, its exports are supposed to increase and its imports are supposed to decrease. However, there are two possible reasons for Japan’s widening trade deficit. The first reason is due to a concept in economics called the J-Curve, which states that devaluing a national currency will initially increase the trade deficit because trade contracts set in place cannot be adjusted during the short run. Once old contracts are expired or cancelled, new trade agreements will be made given the devalued currency. Another possible reason for Japan’s trade deficit is that Japan closed almost all of its nuclear power plants following the Fukushima disaster in 2011. Thus, Japan imports almost all of its energy now. A devalued currency means that Japan must now pay more to import its energy from abroad.

United Kingdom

In the UK, inflation fell to 2.1% from 2.2% last month due to steady food and energy prices, which bring the figure to its lowest since November 2009. Just two days later, it was also announced that the unemployment figure in the third quarter fell to 7.4%, down from 7.7% in the second quarter. Following the recession, the Bank of England promised to leave interest rates at record low levels until unemployment dropped to 7% and promised to bring inflation down to 2%. Over the past few years, it was failing to achieve both targets. But these two indicators prove that the UK economy is improving and is nearing its twin targets. If inflation and growth follow the same trajectory, we could see a hike in interest rates by the BOE sometime in 2014.

India

In India, wholesale inflation increased by 7.52% from a year earlier, compared to a 7% increase in October. The expected rate by a survey of economists was 7%. Inflation is becoming a serious issue in India where consumer prices also increased by 11%  last month from a year earlier. An even bigger problem is that inflation is being coupled with a slowdown in growth. The RBI predicts India’s economy will expand 5 percent in the 12 months through March 31st, the same pace as the last fiscal year, which was the weakest in a decade. If the RBI hikes interest rates to battle inflation, they will reduce the GDP growth rate even further. High inflation and weak growth can only mean one thing. STAGFLATION

That is all for this week. Tune in next Saturday for the upcoming week’s economic indicators.

Economics is a subject that does not greatly respect one’s wishes
-Nikita Khrushchev