Posts Tagged ‘Economic growth’

Positive effects of oil price drop should kick-in by Q2

February 8, 2016

The net effect of lower oil price has always been expected to be positive.

Although oil price gains and losses across producers and consumers sum to zero, the net effect on global activity is positive. The reasons are twofold: simply put, the increase in spending by oil importers is likely to exceed the decline in spending by exporters, and lower production costs will stimulate supply in other sectors for which oil is an input.

Since June 2014, oil price has dropped by over 70%, but the boost to the global economy has not materialised as yet. The “explanations” being produced include – but are not limited to – the turn-down in China, the collapse of various economic “bubbles”, the fear factor, the reluctance of governments (especially in Europe) of allowing a pass-through of the price reduction to consumers and  the too rapid decline of tax revenues in oil producing countries.

Oil price 8th Feb 2016 - Nasdaq

Oil price 8th Feb 2016 – Nasdaq

Certainly the “fear factor” and the reluctance of governments and private players to plan for any extended period with low prices has been a major factor. The stock markets have not hit bottom yet. But the strange thing is that the money pulled out of the stock markets has not all shifted to gold and has resulted in only a modest increase of gold price.  The other traditional safe havens of government paper are providing very low yields.

While company earnings are down they are nowhere near as bleak as the stock markets would indicate. Dividends are somewhat down but also do not match the decline in valuations. Now I see that sales volumes are also not as far reduced as the valuations and that margins are generally holding up. But the first lot of dividends I have received in 2016 convince me that while absolute values are down, the “yield” based on current valuations has actually increased.

Of course markets can still go down. But the drop in earnings will be far less than the loss of valuations that has already taken place. P/E ratios are beginning to look quite attractive and if earnings can hold up in line with sales volume, I expect that dividends will still provide a good “yield” through 2016.

As the IMF puts it:

Low oil prices provide a window of opportunity to undertake serious fuel pricing and taxation reform in both oil-importing and oil-exporting countries. The resulting stronger fiscal balances would create space for increasing priority expenditures and/or cutting distortionary taxes, thereby imparting a sustained boost to growth. In a number of low- and middle-income countries, energy sector reforms aimed at broadening access to reliable energy would have important development benefits.

Maybe I am just an optimist, but new company budgets – especially those for the year starting April 2016 – are now factoring in some of the 70% drop of oil price as being sustainable (typically an oil price of $45 as being taken as a “safe” but sustainable level). That leads me to expect a change of mood and a corresponding change in markets in the second quarter of 2016.


2013 monsoon begins withdrawal across India – Bumper crops after a “good” monsoon year

September 30, 2013

The official 4 month monsoon season ends today and the rains will withdraw across India over the next 3 months. Though monsoon statistics are usually focused on the 4 months from June to September, many parts of the country get significant rainfall during the withdrawal. For example the South-East coast will get significant rainfall during December. The entire monsoon cycle lasts about 7 months and the withdrawal has started. Over the 4 months rainfall has been 5% higher than the long term average and this would class this monsoon as a good monsoon.

Conventional wisdom has it that a “good” monsoon year adds 2% or more to GDP growth while a “bad” monsoon (>15% less than the long term average) can reduce the GDP growth by over 2%. Many industries are directly affected by agricultural growth. Not only fertlisers and pesticides but even farm vehicles and equipment. A good monsoon even impacts consumer goods which the rural population are waiting to get their hands on. With the slowdown in the economy many in the now lame-duck government are hoping for a monsoon boost without any action on their part and in time for the benefits to show before the general election next year. In any event, the monsoon or divine intervention cannot be blamed by ineffective politicians seeking reelection. But there is little doubt that a good monsoon has an enormous “feel-good” effect.

The monsoon is now withdrawing – perhaps a week or so behind its normal schedule (which means that some precipitation will continue to occur in Central India after the official season is over).

Withdrawal of 2013 monsoon September 30th source IMD

Withdrawal of 2013 monsoon September 30th source IMD

Crop yields are expected to be at record levels after this good monsoon.

Reuters: Grains production this summer is likely to be just short of an all-time high, according to a preliminary government forecast on Tuesday, leaving plenty for exports and helping to boost growth and trim inflation ahead of elections due by May. A heavy monsoon has ensured bumper harvests even though rice output could be lower than last year as rains were patchy over the rice-growing areas of some eastern states. The monsoon waters 55 percent of farmland without irrigation.

“Growth in agriculture … will rebound this year because rains are good,” Agriculture Minister Sharad Pawar told reporters as he announced the output forecast, which is usually conservative. “Today’s estimates are the first projections for 2013/14 and invariably we have seen that final estimates are 5-10 percent higher than the first estimate,” Pawar said.

Total output of summer-sown grains is likely to be 129.3 million tonnes in the current crop year from July, Farm Commissioner J.S. Sandhu said on Tuesday, just below the record 131.3 million tonnes of 2011/12 and up 0.9 percent on last year. Bumper output should mean India can continue exporting crops such as cotton, corn, rice and sugar.

Output of oilseeds, which could trim India’s imports of edible oils, should rise around 15 percent. Production of lentils – another foodstuff that India imports – should be up 3.2 percent.

Rice production is seen at 92.3 million tonnes against 92.8 million tonnes in the previous year. That marginal fall in rice output is not a great concern as India’s stocks are 21 million tonnes, more than double its target for September 1.

The government is relying on a bumper harvest to push agricultural growth and help the wider economy, as well as provide ample supplies of rice and wheat to support food subsidy programmes and cool double-digit food inflation. …… 

Could the disaster in Japan power a wave of sustainable growth?

March 20, 2011

Natural disasters and wars are in general very bad things.

Nobody in their right minds would wish for one. But they occur anyway. Disasters and wars have an immediate cost in human life and capital destruction which can never be a chosen path for any ethical course of action. But when they do occur the long term consequences  can critically depend upon the economic environment in which they occur. It seems to me that when they occur in times of economic depression or economic stagnation they can provide the stimuli which can lift countries and whole regions onto a new path of economic growth. Of course the spending that follows does not in itself create wealth. The spending could have taken place on something else (or the wealth spent could have been saved). But it is the direction of spending and the mood of the spending which, I think, creates the potential benefit. It can create a step-change in thinking and behaviour and resolve and shift the path on which economic movement occurs.

The May 2008 earthquake in Sichuan, China killed over 80,000 and destroyed infrastructure on an unprecedented scale for modern China. Yet, the economy was not derailed and instead the massive rebuilding effort that followed added an extra 0.5% or so to the economic growth that followed. The January 1995 Kobe earthquake killed over 6,000 and wiped out the older central areas of Kobe and yet the investment that followed lifted the Japanese economy as a whole – but only for a time. A new mood was created but it was not accompanied by any real political shift. And from about 1999 onwards the Japanese economy has not only been stagnating but Japanese policies have also been stuck in a political rut. In spite of much talk about demographics and the ageing of Japan and the need for new thinking, the political inertia prevailed. This has only been exacerbated by the global financial crisis.

The dislocation to Japanese society and the economy caused by the Great Tohoku quake and tsunami will be massive. But I am quite sure that the Japanese and Japan will overcome. It will take some time but it could even break them out of the political rut and onto a quite different and much more sustainable path. If there is a fundamental shift out of the deadly political complacency which is long overdue, then the short term stimulus that rebuilding will surely bring could become sustainable and the Japanese economy could again be a major driver of global improvements.

chart of the day, japan industrial production 1995Natural disasters can give a boost to the countries where they occur

Rebuilding efforts serve as a short-term boost by attracting resources to a country, and the disasters themselves, by destroying old factories and old roads, airports, and bridges, allow new and more efficient public and private infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term.

“When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up,” says Mark Skidmore, an economics professor at Michigan State University. “Disasters help people think about things differently.”

Studies have found that earthquakes in California and Alaska helped stir economic activity there, and that countries with more hurricanes and storms tend to see higher rates of growth. Some of the most recent work has found a link between disasters and subsequent innovation.

Mark Skidmore of Michigan State, along with the economist Hideki Toya of Japan’s Nagoya City University, published a 2002 paper in the journal Economic Inquiry that mapped the disaster frequency of 89 countries against their economic growth over a 30-year period. Skidmore and Toya found that, in the case of climatic disasters – hurricanes and cyclones, as opposed to earthquakes and volcanic eruptions – the more the better: nations with more climatic disasters grew faster over the long run than the less disaster-prone.

Jesus Crespo Cuaresma, a professor of economics at the University of Innsbruck, has found some support for Skidmore and Toya’s argument. In post-disaster rebuilding efforts in developing countries  at least in wealthier developing countries like Brazil and South Africa, there is indeed a tendency to use the rebuilding process as an opportunity to upgrade infrastructure that might otherwise have been allowed to grow obsolete.

War is also a “disaster” which costs human lives and destroys capital but can have similar effects.

As Prof. Joshua S. Goldstein puts it:

War is not without economic benefits. At certain historical times and places, war can stimulate a national economy in the short term. During slack economic times, such as the Great Depression of the 1930s, military spending and war mobilization can increase capacity utilization, reduce unemployment (through conscription), and generally induce patriotic citizens to work harder for less compensation.

War also sometimes clears away outdated infrastructure and allows economy-wide rebuilding, generating long-term benefits (albeit at short-term costs). For example, after being set back by the two World Wars, French production grew faster after 1950 than before 1914.

Technological development often follows military necessity in wartime. Governments can coordinate research and development to produce technologies for war that also sometimes find civilian uses (such as radar in World War II). The layout of European railroad networks were strongly influenced by strategic military considerations, especially after Germany used railroads effectively to overwhelm French forces in 1870-71. In the 1990s, the GPS navigation system, created for U.S. military use, found wide commercial use. Although these war-related innovations had positive economic effects, it is unclear whether the same money spent in civilian sectors might have produced even greater innovation.

Overall, the high costs of war outweigh the positive spinoffs. Indeed, a central dilemma for states is that waging wars – or just preparing for them – undermines prosperity, yet losing wars is worse. Winning wars, however, can sometimes pay.

Swedish 3rd Quarter GDP growth up to “Asian” levels at 6.9%

November 29, 2010

Sweden continues to show strong GDP growth and in the 3rd quarter of 2010 was significantly higher than the 5.2% forecast earlier by the Riksbank and reached  “Asian” levels at 6.9%. Unemployment is down and expected to continue to reduce slowly and is currently at about 8%. The growth is primarily export led and exports to Asia and Latin America are particularly strong.

Freely translated from Svenska Dagbladet:

Today came the news that Sweden’s GDP landed at 6.9 percent for the third quarter of this year. The positive figure may accelerate interest rate increases. “It’s a really good figure. This is well above the Riksbank’s assessment “said Annika Winsth, chief economist at Nordea Bank. The Riksbank believed that the increase in GDP would end up at 5.2 percent for  the third quarter and Nordea’s forecast was forjust 6.2 percent. This shows that Sweden’s economy is growing across the board, among households and businesses as well as in the state, according to Nordea’s chief economist Annika Winsth. “This means that there is still so much spare capacity left in companies, that there is a belief in the future. They dare to invest, “she says.

Robert Bergqvist, chief economist at SEB was surprised at the growth figure of 6.9 percent. “It’s a long way from what we thought. What strikes me is that the sun is shining so brightly in Sweden, while many countries in Europe have huge problems to contend with. Industry and employment have recovered remarkably quickly, although we are not 100 percent back yet”, he says. The main reasons for this is, according to Robert Bergqvist, that taxes and the krona exchange rate has made household purchasing power strong, helped the export industry and given strong public finances. The latter means that Sweden can avoid drastic tax increases, he says.

According to Annika Winsth  Sweden’s economy is almost back to a “normal” economic level. “There is little left to do on the employment side “, she says. “We went  stronger into the economic crisis than many other countries, and that means that we do not get hit as hard” she says.

But Nordea’s Chief Economist worries about the the crises in a number of European countries and believes growth will be slightly weaker in 2011. “Countries with large deficits lead to our exports declining”, she said.
SEB also believes in lower growth for 2011 at around 3.5 percent. Nordea and SEB’s assessment is that the strong growth will lead to the Riksbank raising the key bank rate by 0.25 percentage points in December and again in February and April. 

“The Swedish krona will strengthen compared with current levels, and then the interest rate will have to go up. We must be prepared”, says Robert Bergqvist.

German economic motor is still running strong

October 15, 2010

The weaknesses in various Eurozone countries are depressing the value of the Euro but this is contributing to the continued strong exports from Germany. The GDP growth forecast for 2010 has been revised upwards to 3.5%. A second recession in the US and global reduction of stimulus programmes through 2011 could depress exports but the hope is that lower unemployment and wage increases would favour the strengthening domestic consumption to be able to compensate.


Exports helped  the German economy rebound quickly

Exports helped the German economy rebound quickly


Deutsche Welle: German economy on course for strongest growth in decades

Five leading think tanks have predicted that the German economy will grow by 3.5 percent in 2010, up from a more modest prediction of 1.5 percent earlier this year. Unemployment is expected to drop below three million. In their twice-yearly report, Germany’s five leading economic think tanks also included ….. a sharp increase in exports in the first half of the year (which has) fuelled the rebound from the deepest recession since World War II.

“The upturn is stable,” said Kai Carstensen from the Munich-based Ifo institute, one of the think tanks involved in the report. “In Germany, it looks good. The risks are above all overseas.” In Germany, Berlin plans to bring the country’s finances back into shape by cutting back on government spending. The move could lead to the deficit falling below three percent of gross domestic product, the ceiling set out for Euopean Union countries that use the euro currency.

And Der Spiegel points out that

the DAX, Germany’s stock exchange index, topped 6,400 on Wednesday, reaching a level not seen since just days before the collapse of the US investment bank Lehman Brothers.

The report also indicated that climbing tax revenues will result in a 2011 budget deficit of just 2.7 percent, below the 3.0 percent maximum allowed by European Union rules. German wages are forecast to rise by up to 2.8 percent in 2011. The economic experts who authored the report anticipate that domestic consumption will continue to be strong next year as a result.

The report, which is used by the German government to develop its own economic forecasts, was not without warnings. A renewed recession in the US remains possible, the report warns, as does a massive correction in the overheated Chinese real estate market.

Can growth in India and China prevent the double-dip?

September 13, 2010

Chinese factories increased production in August and money growth easily topped analysts’ expectations, according to data on Saturday, showing that the economy remained buoyant despite government efforts to clamp down on bank lending and property speculation. Inflation in China sped to its fastest pace in 22 months, though the bulk of price rises stemmed from higher food costs, which analysts have said should be transitory after a spell of bad weather this summer.


Indian shares have risen to their highest level in more than two and a half years after data showed industrial output rose faster than expected. Figures released after Friday’s market close showed July’s factory output was up 13.8% compared with a year ago. India’s benchmark Sensex index rose 322 points, or 1.7%, to 19,122, its highest since January 2008. Banks led the gains as investors expect demand for loans to rise on the back of an expanding economy. Shares in State Bank of India, the country’s largest lender, were up 4.3%. ICICI Bank shares rose 3.5%, while HDFC Bank was 1.1% higher.

With a good monsoon this year inflation in food prices in India should now reduce sharply and if industry and manufacturing maintain their spurt, a total 10%+  GDP growth for 2010 -11 becomes probable.

Most Asian stocks too gained momentum on Monday. At 11.20 am today, the Sensex was trading up 293.53 points or 1.56% at 19,093.19, while Nifty was trading higher by 85.90 points or 1.52% at 5,725.95.

Europe and the US will continue to experience a prolonged period of low or choppy economic growth but this will have little impact on the growing domestic consumption of China and India. Companies selling into these nations are experiencing buoyant trading conditions.

This should be sufficient to mitigate the risks of a prolonged double-dip recession in Europe and the US  but will not be enough to avoid it.

Indian monsoon has been “good”: 10%+ growth possible

September 12, 2010

The Indian monsoon season officially lasts from June to September. When average rainfall over these 4 months is close to or slightly above the long term average ( from about -5% to about +10%), the monsoon can be termed to be “good”.

With 3 weeks to go rainfall is running at 1% above the long term average and has been reasonably uniform over the whole country.

Despite a steady decline in the share of agriculture and allied activities in GDP to about 14.6 percent, it continues to be the mainstay of majority of the population, of about 52 percent of the work force, and remains critical from the point of view of achieving the objectives of food security and price stability.

In 2009-10, there was a poor monsoon with rainfall being about 22% less than the long term average. Consequently the Agricultural growth rate was less than 2% (1.86%). The total GDP growth was held back to around 6%. The difference between a good monsoon year and a poor year is thought to be around 2% points for GDP:

For this year the pre-monsoon forecast was for 98% rainfall but with the La Niña conditions now prevailing, this has increased. Currently Agricultural growth (April – June  2010) is at 2.78% and the “good” monsoon is likely to see this increase sharply through the rest of the year.

Currently GDP is running at over 9% with industry and manufacturing each showing growth rates of close to 12%.

Inflation in food prices should now reduce sharply and if industry and manufacturing maintain their spurt, a total 10%+  GDP growth for 2010 -11 becomes probable.

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