The outlook for the global economy remains ambivalent with some mixed signals. While beliefs of a soft landing in the US are increasing, concerns about slowdowns in China and Europe are prevalent. The impact of aggressive monetary tightening is spreading, with the services sector joining housing, bank lending and industrial production in a loss of momentum.
The Fed has kept its major interest rate unchanged but does not rule out further rate hike possibilities. The next meeting is due on 1 Nov’23. The second estimate of the annualised quarterly change in the value of all goods and services produced by the US during Q2 climbed from 2.0% to 2.1%, below expectations of 2.4%. The latest report is on track to achieve the FOMC 2023 change in real GDP forecast of 2.1% (revised up from 1.0%). As a percentage of the labour force, unemployment in the US for August climbed from 3.5% to 3.8%, far above expectations of 3.5%. The change in the number of non-farm workers on payroll in the US for August climbed from 157K (revised down from 187K) to 187K, above expectations of 170K. Over the previous nine months, unemployment has been moving sideways with a low of 3.4% and a high of 3.8%. Over the previous three months, unemployment has been steady but recently jumped higher.
While a positive development happened that Eurozone inflation dropped to 4.3 per cent in Sept’23 compared to 5.2 per cent in Aug’23, however wages remain sticky and energy prices remain volatile, especially amid recent oil price upsurge.
The ADB has marginally lowered the growth estimate for the developing Asia at 4.7%, while maintaining positive views amid emerging risks. The growth forecast for 2024 is unchanged at 4.8%. Inflation in developing Asia is forecast to decline from 4.4% last year to 3.6% in 2023 and 3.5% in 2024. Much of this year’s decline will be driven by the People’s Republic of China (PRC), where the inflation forecast is revised down to 0.7%.
Downside risks to the outlook have strengthened. A close watch is needed on the weaknesses in the PRC’s property sector. Across the region, authorities will need to take policy steps to ensure that supply disruptions and the wide-ranging effects of El Niño do not raise food security challenges. Financial stability risks require continued vigilance in vulnerable economies as the era of easy money ends. On a positive note, a faster-than-expected decline in inflation in the United States could boost global prospects.
The Bank of Japan has kept its policy rate unchanged (a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank). Further, the Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent. The Bank will continue to allow 10-year JGB yields to fluctuate in the range of around plus and minus 0.5 percentage points from the target level, while it will conduct yield curve control with greater flexibility, regarding the upper and lower bounds of the range as references, not as rigid limits, in its market operations. The consumer price inflation in Japan remains flat at 3.1% during Aug’23.
A new risk to global financial stability stems from the commodity markets as crude prices ruling above US $ 90 per barrel challenge 10-month highs due to Saudi Arabia and Russia extending voluntary production cuts to the end of 2023. Global inflation is once again under siege as deep deficits in global oil balances become persistent unless global demand is hit by a sharp economic downturn.
Despite the global doldrums, the Indian economy remains relatively resilient. The Indian economy grew at 7.8% in Q1 of FY 24 propelled by domestic demand, investments in infrastructure and real estate sectors, strength of the service sector and the overall positive sentiment. PMIs are at a 13 year high. E-way bills generated, growth in passenger traffic and household credit exhibiting sustained double-digit growth bodes well. The growth in passenger vehicle sales has, however, been moderated.
Rural demand is also increasing with higher tractor, fertilizer and two-wheeler sales, though there has been an increase in people demanding work under MNREGA from June 2023 onwards. Demand for electricity in August 2023 was up 16% vis-à-vis August 2022. With short term wholesale power prices also increasing sharply, electricity supply would be an area that would require the close attention of policy makers.
Infrastructure and real estate sectors are doing well as reflected in the growth of IIP for Infra, cement and steel consumption and prioritizing spending towards infrastructure development by the Government. Even though credit creation for manufacturing continues to be muted, gross fixed capital formation as a percentage of GDP has increased.
Going forward, though market expects that Fed has reached the rate hike limit, another hike is most likely before the expected rate cut not before March 2024 provided inflation remains range bound. In India, the RBI is likely to maintain a pause due to the data-dependant understanding of the lag impact of the rate hike, and as the recent inflationary tendency is largely a price upsurge of vegetables. For India, a big positive is the inclusion of India in JP Morgan GBI-EM index which will be effective from 28th Jun’24. India will get a weight of 10 per cent in the GBI-EM Global Diversified Index. After Russia’s exclusion from the index due to its invasion to Ukraine; China, Indonesia, Thailand, Malaysia, Brazil, Mexico and South Africa, had a 10 per cent weight each. India will enter the 10 per cent club by March 2025 with an expectation of $22-25 billion foreign funds to flow in a staggered manner after this inclusion. Nevertheless, the fund inflow must be aligned with strong macroprudential policies.
Vipin Malik, Chairman & Mentor Infomerics Ratings.
Sankhanath Bandyopadhyay, Economist, Infomerics Ratings.