What's Happening in the Global Economy_IMI_May 2013

8/13/2019 What's Happening in the Global Economy_IMI_May 2013

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Whats happening in the Global

Economy?

Rajeev Anantaram

Professor of EconomicsInternational Management Institute


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Points for Discussion The nature of the global crisis: why was this recession

different?

Are the green shoots of recovery in the US for real, this

time? Whats up with Europe?

Japans recovery---too little too late?

China and India---new engines of global growth.

An emerging market perspective


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Some basic economic concepts What is aggregate demand? Sum total of economic

activity in a country (GDP)

Consumption: stable element of aggregate demand

Investment: rocket fuel for the economy. Also the morevolatile component.

Government spending: needed to back up the economyduring a downturn

Net Exports: Exports - Imports


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Nature of the Global Crisis Originated in the US in 2007-08: system was taking on an

unacceptable level of risk.

Gradual withdrawal of institutional regulation and

oversight, beginning the 1980s (Reagan-Thatcher) Europe while better regulated had different problems

largely due to the periphery (Southern Europe)

Japan has been moribund for 2 decades following thecrash of the asset bubble.

China and India have weathered the crisis but thats notenough.


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The United States: Are the GreenShoots for real?

Problems began with the housing sector and then spread tothe entire financial sector via sub-prime mortgages.

Recession formally ended in 2009, but recovery has been

very slow. Quantitative easing (QE1, QE2, QE3). Unemployment rate has dropped from 9% to 7.7%, but

many have stopped looking for jobs. Also recovery in thelabor market is taking a lot longer than other recessions.

High public debt: 100 per cent of GDP.

GDP growth increasing to 1.5% but it needs to be at least3 %. Will the American innovative capability help?


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United States (Contd.) US economy gradually on the mend. Fiscal contraction

has not had the same negative impact on economic growth

as expected.

Discovery of shale oil and gas has really helped pump upthe US economys prospects.

Job growth remains slowwhich is why there is doubt on

how quickly the US may actually end its stimulus package

(QE3)

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Europe: whats up? EU was designed to be a powerhouse like the US.

Problem was that there was a monetary union butuncoordinated fiscal policies.

Core (Germany, France) are shouldering much of the burden ofthe union.

Fiscal irresponsibility is responsible for southern Europesproblems: used cheap capital for consumption rather thaninvestment.

Austerity programs only making things worse. Germany will have to spend more, but its own economy is

slowing down.


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Europe (contd) Recovery still too tepid. The UK has barely avoided a

recession and even in the continent things are getting

better at a rate far too slow for comfort.

Unemployment (especially for those b/w 15 and 24) isabout 50 per cent, especially in Southern Europe. They

are already talking of a lost generation in Spain,

Portugal, Italy and Greece.

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Japan: Debt Crisis and Liquidity

trap Japanese economy has been zero growth for two years

following an asset bubble crash in the 1980s.

Plaza Accord (1985) led to yen appreciation and madeexports non-competitive.

High public debt (225% of GDP)worst in OECD. Liquidity trap? Investment does not respond to interest

rates. Led to a carry trade in yen.

Fukushima disaster has not managed to stimulate theeconomy like expected.

Abenomicsaggressively pumping money into theeconomy and devaluing currency could lead to problems.

Japanese companies have lost their mojo.


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China: the new Juggernaut China is the worlds second largest economy ($7 trillion)

Economic growth based on huge investments and exports.

Government is trying to shift to consumption based

approach that is more environmental and resourcefriendly.

Shift is towards innovation led growth and away frommass manufacturing.

Exports have slowed down too. Total trade is $2.5 trillionper year.

Growth slowdown has impact on commodity prices.


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India: Slow and Steady or just too

slow? Economy has grown at average of 6 % over two

decadessecond only to China. Indias GDP todayis $2 trillion (at market exchange rates) and $5 trillionin PPP terms.

More balanced economy than Chinaconsumptiondriven.

4thlargest producer of steel, 5thlargest producer ofcars, 2ndlargest producer of cement.

Second largest producer of rice, wheat, cotton, fruitsand vegetables. Largest producer of milk.

Needs to raise its level of physical and human capital.


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Emerging Market Perspective What are emerging markets?

Emerging markets are characterized as countries with

rapid expansion of social and economic activity.

In general, they are characterized by intermediate income(10 to 75 % of the EU median income),brisk economic

growth(that has considerably narrowed the income gap

with the developed countries), institutional development

that has enabled them to rapidly globalize.

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Emerging Markets (contd..) Examples of emerging markets are China, India, Brazil,

Russia, South Africa (BRICS), Mexico, Turkey,

Indonesia.

Each of these countries had rapid episodes of growthbetween 2000 and 2010 mostly fuelled by a flush of

global liquidity that emerged in developed countries.

Many of these countries managed to weather the financial

crisis of 2008 better than their peers, but have sloweddown considerably since 2010.

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Emerging Markets: what happened in

individual countries Indonesia:

Once the fastest growing large economy after China and India.

Today growth has massively slowed.

High Fuel subsidies (therefore high fiscal deficit) Restrictions on food imports (therefore high food inflation; overall

inflation is 9%)

Rupiah has depreciated to its lowest.

Government paralysis and endemic corruption.

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Thailand Has slipped into genuine recession (GDP fell for twosuccessive quarters).

High levels of household debt (many fear default)

Current account in deficit (despite Thailand being amongthe worlds largest commodities exporters).

Government is criticized for spending too little on

infrastructure and public works.

Nationalization of rice trade means a drain on the treasury.

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South Africa Once the star of the African continent, now the slowestgrowing nation among the BRICS (annual GDP growth

rate less than 1 %).

Inflation is very high and CAD (6% of GDP) largely dueto a collapse of the mining industry.

Fiscal deficit (5% of GDP)

Rand lost 16% of its value in 1 year and stock market

index is one of the worst performing in the world.

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Brazil Once flying high on the commodity boom, now in thedepths of despair.

Real down by 15 % in less than one year.

High inflation and fiscal deficit.

Endemic corruption means several government projects

are delayed.

Political protests have much to do with the economic

anxiety all over.

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Turkey Once the poster country of the West and the IMF and theWorld Bank because it was secular despite being a

Muslim country, progressive. Today it is a sad

reminder of the past. Inflation is at 9% of GDP, the current account deficit

funded by hot money is 6% of GDP.

Exports have dropped, so the government is raising

interest rates to prop up the lira that has fallen 10 per centthis year.

Do the street protests seen have anything to do with it?

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Thank you for your time andAttention!!!!

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