Tuesday, April 18, 2023

It’s a long global recession



On depressed global growth, the IMF outlook focuses on short-term causes ignoring long-term weaknesses



The World Economic Outlook released in time for the recently concluded spring meetings of the World Bank and the IMF presents a gloomy picture. Global GDP growth is expected to fall from 3.4 per cent in 2022 to 2.8 per cent in 2023, and recover only marginally to 3.0 per cent in 2024. Advanced economies are expected to experience a more pronounced growth slowdown, from 2.7 per cent in 2022 to 1.3 per cent in 2023.

These projections have to be seen in the context of a long and deep recession that has afflicted the global economy since the North Atlantic financial crisis of 2008. According to the IMF, there were two years when global economy registered negative growth rates and contracted by 2.02 per cent in 2009 and by 3.22 per cent in 2020 when Covid-19 struck (Chart 1).


Despite minor differences, estimates of annual global GDP growth rates from the two Bretton Woods institutions have been in close correspondence. This means the twins share a common understanding on how the world economy has been performing.

Between these two negative growth years, while there was a return to positive rates, the recovery did not take the world economy back to the trajectory it was on prior to 2008. That hypothetical trajectory can be captured, for example, by computing the trend rate of growth of constant price GDP (in 2015 US dollars) in the World Bank’s World Development indicators over the five-year period 2002 to 2007 (4.1 per cent), and using that figure to extrapolate the GDP in 2007 for the years up to 2024.

Chart 2 compares the trajectory reflecting these projected GDP numbers and the actual constant price GDP for the world economy available from the World Bank for the years to 2021.

Chart 3 on the other hand compares the projections using the computed trend rate of growth with GDP figures reflecting the annual GDP growth rates for the world economy provided by the IMF, including the IMF’s growth rate projections for 2022 to 2024.

Low growth path

What these charts indicate is that the world economy has slipped onto a low growth trajectory following the Global Financial Crisis. The “actual” trajectory of GDP in both calculations is consistently below the trajectory reflecting the persistence of growth at the 2002-2007 trend rate. Moreover, the gap between the two trajectories — projected and actual — has widened in both sets of comparisons. In fact, if the IMF’s most recent projections for growth in 2023 and 2024 hold, the divergence between projected and actual trajectories would increase.

In recent times, the seriousness of this long-term growth crisis has been underestimated by attributing it to external or exogenous factors and/or shocks. First, slow growth was blamed on the uneven recovery from the Great Recession across countries and continents. Then, slow growth was attributed to the impact of the Covid pandemic and the sudden and repeated stops to economic activity it resulted in.

Recovery from that downturn was seen as having been weakened by the inflation that followed the onset of war in Ukraine, which forced advanced economy central banks to raise interest rates rather quickly with adverse effects on consumption and investment expenditures. And now, the expected slowdown is being attributed to the banking stress that has resulted from the hike in interest rates.

This tendency to treat the long-term slowdown as consisting of a series of short-term events and attribute each of them to specific, transient causes is not without intent. It helps divert attention from the fundamentals that underlie the long-term slowdown.

The pre-2007 growth trend, which provides the benchmark for our analysis of the slowdown, it is widely acknowledged, rose on a credit bubble, which was confined not just to the housing sector. It was the unwinding of that unsustainable, credit-fuelled spiral that triggered the financial crisis and the Great Recession. In the absence of a similar bubble, capitalism seems to have lost the dynamism it displayed in the two decades following the end of the Second World War.

And with a distaste for fiscal activism, aggravated by the fear of inflation, characterising macroeconomic policy, governments in the advanced countries have lost any ability to pull their economies out of the depressed growth the system seems trapped in. Cycles resulting from factors like the Covid pandemic are superimposed on this low growth trajectory, worsening each such downturn.

While transient reliance on fiscal stimuli helped some countries like the US to pull themselves out of the deep troughs into which they had fallen, monetary policy instruments have become the staples for macroeconomic management. The severe crisis in banking and the real economy led to exceptional or “unconventional” monetary policies involving quantitative easing or the infusion of large volumes of liquidity into the system as well as near zero interest rates.

This was in essence an effort to set off another round of credit-fuelled growth. But the evidence shows is that it did not work. While the abundance of cheap liquidity helped banks stave off insolvency and triggered speculative investments in financial assets that set off a boom in stock and bond markets, it did not revive the real economy. Households burdened with debt accumulated in the run up to crisis were clearly unable to obtain more credit or unwilling to increase their indebtedness. In the event, the recovery was weak and growth stayed well below pre-2008 levels.

When the pandemic struck, the resulting economic contraction occurred in this context of slow growth. The economic setback was therefore severe. Fiscal stimuli were initially resorted to, in an effort to pull economies out of the depths of the crisis.

Inflation pain

But in time the main instruments relied upon were monetary, which limited the recovery. More recently, to the surprise of policymakers in the advanced nations, inflation that emerged as the pandemic waned and was attributed to the clogged supply chains, has persisted. Speculation-induced price increases that followed the invasion of Ukraine only aggravated the situation. Responding in panic to persistent inflation, central bankers hiked interest rates repeatedly.

Banks that had diverted some of the surplus liquidity accumulated during their quantitative easing years to bonds that seemed riskless, found the value of those assets falling inflicting real or notional losses. Stress because of such factors associated with the interest rate hikes, is seen as limiting credit flow and affecting investment and consumption demand.

But lowering interest rates again is not seen as an option because of the fear of fuelling further inflation. Policymakers in the advanced nations have lost the only means they think they have to address the next crisis.

The problem of tepid growth in the long run is now being transformed into one of stagflation reminiscent of the decades that followed the end of the Golden Age of capitalism in the 1970s.



Wednesday, April 12, 2023

Credit Growth March 2023

 Banks have been raising deposit rates to make them more attractive to customers. But an anticipated shift in deposits from debt mutual funds after tax change could see lenders raising rates at a slower place,


India’s decision to tax returns from fixed-income mutual funds is set to bolster its lenders’ efforts to lure deposits for financing a resurgent credit growth and boost profits.


The nation scrapping tax incentives for some debt mutual funds has paved the way for banks to garner as much as $36 billion in deposits from the asset managers, according to Sunil Mehta, chief executive officer of Indian Banks’ Association, a lenders’ lobbying body.

The move comes as a respite for the financiers as the widening gap between credit off-take and deposits has sparked risks of asset-liability mismatches and pushed up funding costs. Rising loan demand from companies and consumers has buoyed annual credit growth to 15.7% as of March, compared to a five-year average of 10.3%, according to Reserve Bank of India data.

However, the deposit collection has failed to keep pace and is currently a little more than 10%, pushing bankers to look for ways to lure funds. Deposit collections by Indian banks have lagged as investors parked funds with more attractive asset classes such as debt mutual funds, which gave better yields owing to the favorable tax regime. With inflation at 6.44% in February, according to the government, real returns on bank deposits, which in most cases is at about 7% annual interest rate for two years, remains low.

The removal of tax incentives on some debt fund investments will place a roadblock for the much needed development of the nation’s bond market

Lenders have been raising deposit rates to make them more attractive to customers, posing risks to profits. State Bank of India has increased the interest rates on some deposit plans by more than 100 basis points in the last year, data available on its website shows.

Banks are likely to see a slower rise in the cost of deposits as the increase in deposit rates would be gradual now


Credit offtakes reached at a 11-year high in FY23 despite high Interest Rates.

 Driven by strong demand for personal loans, NBFC growth and liquidity crunch, credit offtake grew by 15 per cent yoy in India in March. With this, India witnessed the sharpest rise in borrowings in last eleven years

Riding on the back of robust demand for personal loans, NBFCs growth, and higher working capital requirements due to inflation, credit offtakes reached at a 11-year high in FY23. Also, as per CARE Edge report, the offtakes has overcome the Covid-induced lag Relative to deposit growth. Additionally, it has remained strong even amid the significant rise in interest rates, and global uncertainties related to geo-political, and supply chain issues. 

As per the report, credit offtake rose by 15 per cent year-on-year for the fortnight that ended March 24, 2023. However, the data shows an increment in borrowings throughout the year in FY 22-23. Credit offtake increased by 17.8 lakh crore to 136.8 lakh till March 24, 2023, from March 2022, said the report.

Despite consecutive Repo rate hikes, borrowings increased by 15 per cent yoy till March 2023. The increase in borrowing within a year has set the record of being the longest annual jump in credit offtake within the last eleven years. 

In contradiction to the rise in credit offtake, there was a slump in deposit growth. India witnessed a slower deposit growth at 9.6 per cent yoy compared to credit growth for the fortnight that ended on March 10, 2023.

There are expectations of a further rise in deposit rates due to high policy rates and growing competition between banks for raising deposit rates to meet strong credit demand. Other factors like a widening gap between credit and deposit growth and lower liquidity in the market will also play a key role in boosting deposit rates.

Key drivers behind strong credit growth

As per the report, strong credit growth in FY23 was the result of the lower base of the last year, unsecured personal loans, housing loans, auto loans, etc. Higher demand from NBFCs also played a key role in boosting the credit demand. Apart from that inflation-induced high working capital requirements in selected industries, and the falling value of the Indian Rupees compared to its global peers also affected the credit growth.

The credit growth saga remained protected from global uncertainties like supply-chain issues and geo-political situations.

The report also drew attention to a large number of issuance of Certificates of Deposits (CD). The rise in the issuance of CDs was the result of a widening gap in credit and deposit growth, a liquidity crunch, and strong credit demand.

“Banks are keeping their CD issuance elevated to meet short-term requirements amid lower liquidity and focusing on shoring up the deposits to meet robust credit demand. The outstanding CDs stood at 3.0 lakh crores as of March 24, 2023, as compared to Rs.1.5 lakh crore a year ago," said Care Ratings in its report.

Further, CARE Edge's note highlighted that credit offtake at 15% for FY23 —  has overcome the Covid-induced lag Relative to deposit growth. Additionally, it has remained robust even amid the significant rise in interest rates, and global uncertainties related to geo-political, and supply chain issues. 

Going ahead, the rating agency expects credit growth to be in sync with the GDP growth in FY24. However, it added, slowdown in global growth due to rising interest rates, and rate hikes in India could impact credit growth.

Tuesday, April 11, 2023

US banking crisis not over, inflation likely to continue in developed economies, feels economist Nouriel Roubini

 Noted economist Nouriel Roubini thinks that the United States banking crisis is not over and inflation is likely to continue in developed markets.

Speaking to CNBC-TV18 on April 11, Roubini spoke on inflation and deflation concerns and where to invest in a stagflation scenario — recommending inflation index bonds and gold as investment options; and spoke about his outlook on India as a rising economy and big beneficiary of friend-shoring.

Friend-shoring is when countries or governments manufacture and/ or source from countries that are their geopolitical allies.

US Banking Crisis

Roubini is of the opinion that the US banking crisis is not over. He said: “I see more financial institutions in trouble. The recent problems of US banks have come from duration risk. We are going to go from market risk to credit risk in US; and as credit crunch increases, there will be a recession in the US. Then, once there is a recession in US, there will be more non-performing loans (NPLs), and more defaults.”

He also noted that the “tight” labour market implies that wage inflation is “still too high in the US”.

The economist believes that the US Federal Reserve (Fed) has to increase interest rates even more to achieve its 2 percent inflation target. He added that if the Fed raises rates, “there can be a recession and financial instability in the US.”

He was also of the opinion that there is a contradiction between achieving price stability, maintaining growth and financial stability. “If the Fed blinks, then there will be a de-anchoring of inflation expectation in US,” he added.

On the rate decision, Roubini thinks that the central bank will pause on cuts and hikes – “like most major central banks”. He added that the consequences of going back to 2 percent inflation will be “economic and financial instability in the US”; and that “we will have a repeat of the 1970s when inflation got out of control”

IMF says global economy heading for weakest growth since 1990

 

IMF says global economy heading for weakest growth since 1990

The International Monetary Fund on Tuesday released its weakest global growth expectations for the medium term in more than 30 years.

The D.C.-based institution said that five years from now, global growth is expected to be around 3% — the lowest medium-term forecast in an IMF World Economic Outlook since 1990.

"The world economy is not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic," the Fund said in its latest World Economic Outlook.

Consumers are pulling back sharply on goods spending, Barclays says

 

Consumers are pulling back sharply on goods spending, Barclays says

Consumers are pulling back sharply on goods spending in what could be a troubling signal for the U.S. economy, according to Barclays.

For the first time since 2021, aggregate spending growth on a year-on-year basis in the Barclays U.S. credit card spending database fell below zero, analyst Renate Marold wrote to clients in a Tuesday note. It's been on the decline since the start of this year.

The biggest contraction in credit card spending comes from goods spending. While consumers across all income levels are lowering their spending, the sharpest pullback comes from higher income shoppers.

"[Goods] spending by high-end consumers is falling fastest, with current goods spending nearly 10% below last year's level," Marold wrote. "This may suggest that the higher-income consumers are feeling the pinch in their wallets from inflation and are in the position where reduced discretionary spending on goods is possible."

What's more, the decrease is not due to a smaller set of credit card users as the data had been corrected for any changes, read the note.

"Instead, it could be a more ominous sign for the US economy," Marold wrote.

S&P 500 is little changed as investors await March inflation report: Live updates

 The S&P 500 was little changed Tuesday as investors look toward the release of economic data later this week for insight into the pace of future interest rate hikes. 

Investors are anticipating the March readings of the consumer price index, due Wednesday, and the producer price index, out Thursday. Both inflation metrics could give further clarity into how the Federal Reserve might proceed on its rate-hiking campaign.

"The data coming forward this week is important in that it will be one of the last sets of data to inform the May 3rd Federal Reserve meeting. And, as the Federal Reserve evaluates their battle against inflation and the appropriate pace of monetary policy, market conditions have already begun to lean back towards an additional rate increase at the next meeting," U.S. Bank Wealth Management's William Northey said.

"This set of data will certainly provide context for the Federal Reserve to evaluate where they are in that battle," Northey added.