The World in 2016 – 7 Pillars holding the Global Growth

[PARIKRAMA]

Submission for Poster of the year 2016

The World in 2016 – 7 Pillars holding the Global Growth

Contents
1. Introduction
2. Overview
3. The story so far

3.1 The China Story
3.2 The Global Story​

4. Pillar 1 - Oil Prices
5. Pillar 2 - The Emerging Markets
6. Pillar 3 - The Commodity Markets
7. Pillar 4 - Power of the Consumers
8. Pillar 5 - Easy Money Access - Liquidity
9. Pillar 6 - Uncertainties - Political and Institutional
10. Pillar 7 - Global Economy's hope - India
11. Conclusion


1. Introduction
Almost everyone knows why The Titanic sank, in the cold waters of the Atlantic on a starlit night in 1912. The tragedy of the Titanic was the result of ignoring risks of multiple nature. The ship was claimed to be unsinkable, which led to certain unconscious decisions on the part of people responsible for steering it, to ignore the risks and threats from sea and weather. The information on imminent risk – the icebergs – was taken too lightly. The confidence reposed in the strength of the ship – the best ship till date went to extreme lengths.

The present context is to understand and relate the how 7 pillars are holding the global growth in 2016. Have we learned anything from the story of Titanic or we are still taking every risk lightly. Are we having too much confidence on our own strength that we are ignoring every other small but important aspect emerging across the globe? Lets analyze it all here..

2. Overview
The start to 2016 was in a sense a heightened sight of fear factors. And the central theme to that is China. The start of the year news is like this

• Stock exchange installed Circuit Breakers tripping leading to a massive outbreak across the globe with fall in stock markets and a fear of a deeper contagion effect.
• China's economy grew by 6.9% in 2015, compared with 7.3% a year earlier, marking its slowest growth in a quarter of a century.
• The news comes as the International Monetary Fund said it expected China's economy to grow by 6.3% in 2016 and 6% in 2017.
• Analysts believe that actual growth is much weaker than officially released data
• Analysts said any growth below 6.8% would likely fuel calls for further economic stimulus.
• Economic growth in the final quarter of 2015 edged down to 6.8%, according to the country's national bureau of statistics

(Source : China economic growth slowest in 25 years - BBC News​

The above news items set the tone for my write up as i wish to analyse and highlight what are the 7 pillars or main support bases for a global economic story. Of course, China is a very important aspect to this story and outlook. But how much China alone matters? What about other support bases which are also risks to our global story. Are we just considering China only and re-incarnating the Titanic Saga?


3. The Story so far

3.1 The China Story -
For some time many analysts have pointed to supposedly cooling period needed for a super heated economic growth shown by China over many decades. Its economic growth and GDP expanded rapidly , industrialization zoomed ahead and debts by Corporate/Institutions ballooned to match the rapid expansion.

As in every case of growth, a stable period is needed when the expansionary growth tapers off a bit and the whole system contracts till a re-composition led transformation occurs over time. Its as simple as a human body. Suppose a man weighing 60 kgs with say 15% Body Fat and 85% Lean Body Mass decides to Bulk up and add 10 Kgs to his lean mass.. In real he has put on 15 kgs supposedly with 1/3 as fat mass and 2/3 muscle mass. Look at the table below for understanding

As you can see any expansion in this case bulking led to additional additions like Fat along with Lean Body Mass which is what he originally desired. The new re-composition needed a period of time where a process known as "CUT" was initiated to bring the fat mass back to older fat mass levels to complete the process of re-composition.

In the same manner, an economy when it gets bulked up will also add some other unwanted factors which are actually undesired "Fat Mass". Such fats needs to be cut for a completion of this re-composition. The same thing is now observed in the case of China.

So now the obvious question is whether we should all be worried about China?
The Answer - Yes and a No.

"Yes" because

• Industrialization phase seems to have come to an end.
• Traditional manufacturing sectors are debt ridden a bit on a higher side of comfort zone.
• New investment and expansions wont happen for a long time as profitability has eroded and state support will not be always possible.
• The world still needs to find another consumer market like China and to a greater extent India being a potential large market has not been so attractive to change the focus of attention completely.
• This means individual countries must devise strategies to insulate themselves from a contagion effect, improving their own self efficiency and consumers worried about individual safety of money led lowering of consumption potential resulting into a turmoil filled future.

"No" reasoning -
As good as it gets not everything from China has penetrated into common man's lives across the globe. There are very healthy signs that China may be able to hold onto its big economic growth primarily because of

• A large untapped population away from cosmopolitan centers primarily engaged in rural economy
• China's leadership.which can guide it out of this situation with innovative solutions

Thus the "CUT" potential is clearly there and unwanted Fat Mass will be removed.

The 3 chief challenges China face today for this "CUT" Phase are
1. Currency: China needs to devaluation its own currency in order to continue being export friendly. This implies that the exchange rate and monetary policies needs adjustment. Imports will be costly and the world market will be flooded with cheaper Chinese products giving stiff competition to locally produced goods.

2. Growth rate: China does not need the big growth rate rather it needs an all inclusive growth rate. For this the new market potential within its own economy and supply side issues needs more reforms. It can very well find new market within herself in its rural economy.

3. The economy expansion or limiting question :The present situation dictates wither China tries to contain its economy as a whole and work on its intrinsic components as a complete body re-composition or continue on its ever expanding economic might with severe straining of fiscal prudence. Logically Fat burning requires China to contain its economy expansion so it needs policy actions to support such a measure.

These are important milestone for China and for the whole world. It can either attract more confidence on China or create more frenzy. In the meantime the world is undergoing change and such is the change that this year 2016 will be a roller coaster ride.

3.2 The Global Story

• Global growth, currently estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017.
• The pickup in global activity is projected to be more gradual in emerging market and developing economies.
• In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps.
• The picture for emerging market and developing economies is diverse but in many cases challenging.
• The slowdown and re-balancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17.
• The projected pickup in growth in the next two years— despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.
• Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy: a generalized slowdown in emerging market economies, China’s re-balancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States.
• If these key challenges are not successfully managed, global growth could be derailed.

(Source: IMF World Economic Update released on In London: January 19, 2016, 10:00 a.m. In Washington, DC: January 19, 2016, 5:00 a.m.)

So we have set the tone for our next analysis.

4. Pillar 1 - Oil Prices
Three solid news upfront

• Oil prices have nearly halved in 2015 compared to 2014 (on average) and 2016 it started to plummet below $30 per barrel. (Souce :Oil below $30 fans wipeout fears among U.S. shale survival artists| Reuters
• Still, Russia, the US and Saudi Arabia, the three main oil producers, show no sign of cutting back their production.
• In USA Michigan, the price per Gallon of Gasoline touched less than $1 (Source: Gas Is Less Than $1 A Gallon In Michigan | The Daily Caller

As such, 2016 is likely to see oil prices drop again. The expectation of a quick end to the price war scenario did not realise as the oil producers have not budged from their positions. Major American oil producers have kept a sizable strategy of optimizing present productivity, eliminating less productive wells and running multiple shifts in order to repay the debt they had taken. With new technological innovation, they had learned to extend the life of their wells to be less dependent on breaking ground on new ones. As a result, we can expect the Brent oil price to go down to USD 20 per barrel in 2016 before starting to recover in 2017.

Oil prices will thus remain low for an extended period of time. This is a strong case for net oil importer nations who will get benefited but will burn oil exporting nation's economy for sure. Such economies will be effected by
weaker terms of trade, which translates into a stark deterioration of trade balance. This,will in tun, eats at their fiscal revenues. This is especially very true for a USD dollar denominated economy which virtually makes it extremely difficult to handle shocks arising out of fiscal exchange movement.

A low level commodity price should act as a trigger for demand improvement and will help tide over the deflationary scenario. This trend will be most noticeable in the Eurozone,India, Brazil with highest beneficiary being Philippines, Slovakia, South Africa, Thailand and Hong Kong. In these places,firms’ turnovers will pick up for good and economy as a whole should show solid signs of revival and growth potential. But we cannot expect a strong case of bounce back.

5. Pillar 2 - The Emerging Markets
2015 was a challenging year for emerging markets. The issues of China Slowdown and supposedly Fed Rate hike implying a stronger USD led to collapse of commodity prices and currencies. This has been very tough for most of the economies. Although these risk factors may bottom-out in 2016, some countries remain highly vulnerable.

In the above Chart from IMF, we see the sensitivity of emerging countries to the three risk factors via three key metrics:

1. Current-account balance, which measures a country's vulnerability to capital flows associated with the Fed rate hike;
2. Exports to China as a share of GDP;
3. Primary exports as a share of GDP.

Additionally, IMF used the depreciation of the currency since mid-2014 as a proxy for all other factors not captured by these three metrics. For instance, despite its current-account surplus, Russia has experienced a substantial fall in the Rouble, owing to a sharp increase in political risk.

From the above based on red circles, Brazil, Russia, Colombia, Poland, Ukraine, Turkey and South Africa are the most vulnerable countries. These countries have seen a significant deterioration in their economic prospects and have little room to support growth in the short run. Both external trade and domestic demand are weak; policy support is constrained by strong macroeconomic imbalances and strong pressures on the currency. In this regard, they will remain under the volatility spotlight in 2016.

Likewise, to a lesser extent, Peru, Chile Nigeria, Morocco, Mexico, Argentina, Romania, Czech Republic, Hungary and Malaysia could also face difficult times depicted by Orange circles.

India and Pakistan denoted by Green circles are relatively much safer and are better in position to handle the risk factors defined above.

6. Pillar 3 - The Commodity Markets

Commodity markets took a beating in 2015. Indeed, oil is not the only commodity to have taken a plunge. Other commodities such as iron ore (-54%), Nickel (-53%) or Steel (-50%) have also tumbled. (Source: Euler Hermes Report). The prices should reach a bottom position known otherwise as "trough" as per any Business Cycle estimation in 2016 (Business cycle is four parts - Recession, Trough, Recovery and Peak)

Certain Opex commodities will benefit likenickel, zinc, soybean, which are the inputs in the basic business of companies, and as such could see a limited rebound in 2016. In contrast, the outlook of “CapEx” commodities, such as iron ore, steel, copper or coal, is more challenging and their prices could fall again.

More generally, the metals complex is much more exposed to China and its re-balancing. Challenging commodity markets undoubtedly put pressure on the currencies of commodity exporters. Countries such as Indonesia, South Africa, Brazil, Chile or Peru, will once more experience downward pressures on their currencies.

7. Pillar 4 - Power of the Consumers
Consumer spending has been increasing in last few years and 2015, it did show a stable increasing trend. In advanced economies, it has shown resilience to the 'global mess' thanks to low oil prices, improving employment and easing credit conditions. In emerging economies, coupled with demand factor and increase in affordability, need and free money kept in savings for hard time has actually fueled the sentiments upwards.

For instance, retail sales growth in the Eurozone has shot up

(Source: Turnover and volume of sales in wholesale and retail trade - quarterly data, percentage change - Eurostat

Even more importantly, consumers have been more willing to make long-term purchases, as evidenced by the rise in car sales, i.e., +8.3% y/y in the Eurozone and +6% y/y in the US. (Source Euler Hermes)


This led us to believe that future will not be having too many turmoils. Still there are strong reasons for being confident that this consumer upswing in confidence wont be a short term bubble.

• As inflation increases whereas wages and wages in individual hands dont increase in the same proportion, the actual free money availability over time will become meager. In other words, the benefit we are seeing with low price of commodities may lose its significance owing to this free money availability.
• There is a more and renewed focus on domestic markets as there always seems to be a large untapped population available for being a large stable demand base. But such cases as seen in India for example will also lead to protectionist measures to safeguard economy and thus wont open up such avenues for other economies.

As seen from above, countries like India who are placed in the right side upper quadrant in the figure have high consumption but very limited import growths. It points to what has been described before.

8. Pillar 5 - Easy Money Access - Liquidity
The US liquidity situation is important because we all live in a dollarized world economy, where the supply of funding is jointly controlled by the Fed and wholesale money markets.Despite falling international reserves in emerging markets, global liquidity will remain abundant. Thanks to the Bank of Japan, the ECB and the PBoC, liquidity should grow in 2016

(Source: Grrrrr...owls From A (Russian) Bear | Seeking Alpha

Consider these points

• The BoJ recently fine-tuned its easing stance, notably by increasing its purchases of stocks issued by companies that are “proactively making investment in physical and human capital”.
• In China, continued low inflation & slower growth in investment suggest further easing in the short run.
• The ECB has refrained from stepping up its monthly asset purchases but still expected to do so in 2016. In any case, its QE will extend at least into 2017.
• Despite its first rate hike in 9 years, the Fed will continue to reinvest the proceeds coming from maturing assets on its balance-sheet, thus preventing a "liquidity squeeze".

Meanwhile, fiscal policy is turning from a significant headwind into a moderate tailwind in some major economies. The biggest challenge is turning this situation to aid a humble boost to the economic growth of individual nations. Certain nations have taken some solid steps to do that boost as noted below.

• In China, a strong increase in public expenditures is helping to keep growth on track. This stance will be maintained next year as the economy continues to show signs of weakness.
• In Japan, the government continues to step up its efforts to enhance growth with an additional stimulus package worth 0.6 percentage point of GDP. New pro-growth measures were announced including a 3% rise in minimum wages and lower corporate taxes for companies.
• In the Eurozone, providing shelter and accommodations to refugees and an enhanced focus on fighting terrorism entail loosening the purse strings.

It would be interesting to see how Finance Minister of India, Mr A.Jaitley in his budget presentation for 2016-17 schemes to enhance government spending and how RBI Governor R.Rajan plans to keep the liquidity in check to fuel such spending yet still keeping in check fiscal prudence plus monetary accommodation, keeping growth on track and inflationary pressure under control.

9. Pillar 6 - Uncertainties - Political and Institutional
Political and institutional uncertainties could continue to pose a problem.

• First, some legacies from the past will last throughout 2016.
  • The EU announced the extension of economic sanctions against Russia until July 2016.
  • Risk of conflicts remains elevated in the Middle East with the collapse of Yemen's government and political instability in Syria.
  • Afghanistan Crisis still has not cooled down.
  • Terror attacks from Indonesia to France to African nations to India to Pakistan

• Second, rising social tensions in some major economies is a cause of concern.
  • In Brazil and South Africa, social discontent is increasing as a result of deteriorating economic prospects and increasing unemployment.
  • The racial abuse of immigrants in multiple places across the globe point chaotic time fuelled by insecurity and economic turmoil.

• Third, elections will bring a slew of uncertainties.
  • The US presidential election is obviously critical and can be a game changer for the longer term.
  • Presidential elections in countries such as the Philippines can bring significant changes regarding the economic outlook. The current president has put the economy on better footing and the next leadership will have to maintain the pace of reforms to enhance long-term growth.
  • In Taiwan, the new president Tsai Ing-wen could be a challenging event with regard to the relationship with mainland China.

• Fourth, possible institutional changes can be sources of disruptions.
  • There are never-ending discussions surrounding Greece.
  • Add to that the risk of a UK exit. If the UK votes in a referendum to exit the European Union, at least some EU institutions would have to be reorganized and revamped
  • There are chances of rating downgrades due to falling of economic conditions which can create issues in terms of investments and possible junk ratings can fuel fear factor globally.

10. Pillar 7 - Global Economy's hope - India

Lets start with first analyzing India's strengths and weakness

Strengths

• Stable democracy, with peaceful changes in government.
• Large internal market, providing some insulation from the global business cycle.
• Successful diversification into manufacturing (motor vehicles) and services (including call centres, IT and biotechnology).
• High annual GDP growth
• External debt is low relative to earnings and repayment capacity.
• Strong and Stable Foreign Exchange reserves among the emerging nations.

Weakness

• Vulnerable to natural disasters (including tsunami, droughts, floods and earthquakes).
• The Kashmir region remains volatile and a source of potential conflict.
• The political system tends to engender coalition governments that lack the ability to push through economic reforms.
• Poverty remains pervasive and income distribution uneven.
• Structural weaknesses include inadequate infrastructure for a country of its status, current and fiscal account deficits and state involvement crowds out private sector initiatives in some sectors.
• Weak structural business environment.
• Despite having billion plus population Indian consumer market cannot replace directly the Chinese consumer market implying the global leaders cannot substitute India for China outright.

The IMF projected 7.3 per cent GDP growth for India in 2015-16 and 7.5 per cent in 2016-17, levels unchanged from its outlook released in October

(source : IMF retains India’s GDP forecast for 2017 at 7.5 % - The Hindu

This outlook reflects first a base effect due to a change in methodology in Indian GDP calculation. This led to significant revisions and suggests that India enjoyed a sharp acceleration during the 2 previous years with growth now estimated at +6.9% in FY2013-14 and +5.1% in FY2012-13 which were previously estimated at just +4.7% from +4.5% under the old methodology. (Source: Euler Hermes)

More importantly, the pace is set to accelerate in the coming years due to a more favorable policy mix with less fiscal consolidation and greater monetary accommodation. Domestic demand is set to rise on the back of following chief points

• Higher public and private investment for infrastructure,
• Increasing domestic consumption as lower inflationary pressures boost purchasing power.
• This will be supported further by a gradual improvement in external trade.Policy mix is supportive but under control
• Importantly the RBI operating framework has been strengthened, with government and central bank officials agreeing the adoption of a formal inflation target and creating a legal mandate for the RBI to target inflation.

Reserve Bank of India has targeted the consumer price inflation at 4% (source :India Should Review Monetary Policy Framework Cut Rates Arvind Panagariya - BW Businessworld .

While inflation is in the target range, this policy directive was followed by an interest rate cut of -125bps to present levels of 6.75%. This will likely support credit growth which has been the main Achilles' heel for growth of late. The pace of fiscal consolidation has been reduced as the government wants to increase investment in the country’s infrastructure – planned spending is over USD 11 bn to upgrade the country’s overloaded roads, railways, ports and power plants. Against this background, the government decided to delay by one year their official target to bring down the central government deficit to -3% of GDP by FY2017/18. As a result, the deficit target for the next fiscal year will be -3.9% of GDP (compared with -4.1% in FY2014/15).

Public debt will remain under control, stabilizing at around 60%. External risk is contained the current account deficit narrowed over the two past years thanks to the authorities’ responsiveness, conservative monetary policy and stringent regulation on commodity imports.

The outlook is favorable. Import pressures are also alleviated due to lower energy prices. Exports are
set to progress gradually reflecting further price competitiveness due to currency depreciation and improving demand from key partners (US and Gulf countries). Currency risk is moderate as the RBI has gained credibility and external imbalances have decreased.


11. Conclusion
The perennial question of Oil led changes in economic conditions is best answered by the figure below

While we have already discussed in Pillar 1 about Oil, it marks a mention that Oil will play a very significant role in global growth story. Its one of the most fundamental pillar and the price per barrel moving up and down will change the fortune of global economy surely.

When it comes to China few important factors as given in overview does need mention again
China's GDP growth is set to slow in 2016 (+6.3%) and 2017 (+6%). This outlook is based on the continued efforts to re-compose the economy and clear guidance on policies. (Source IMF)

China’s authorities will probably have to set clearer priorities for the next two years and will face following challenges.

• Firstly, keeping the RMB/Chinese Yuan stable could be a difficult task.
• Secondly, maintaining a solid financial base, namely high foreign exchange reserves and sound public finances, will require more selectivity in terms of expenditures. Thus, increasing both investment abroad and domestic fiscal stimulus will probable not sustainable in the longer term.
• Thirdly, “the move to quality growth” and the associated reforms will imply less ambitious growth targets.

But every dark cloud has a silver lining. The potential for India seems to be the key here as per the figure below

A few important points in the end are as under

• While growth is set to decelerate in China, a modest upturn is expected in Japan, India, ASEAN-5 and Eurozone.
• Each of these upturn expectations mark them as low risk economies for the year 2016.
• Among all these nations, the highest potential is seen in India where key structural reforms can actually make it the most attractive emerging market in the world and a very solid pillar for the global economy.
• A supportive policy mix, increasing wages, solid manufacturing base and stable labor market will allow for acceleration in domestic consumption.
• A key index of performance can be gauged by PM Narendra Modi ambitious Make In India program's success
• Investment is set to gain acceleration but at a slow pace. This is due to moderate increases in market opportunities, higher costs of financing in USD terms (i.e., higher interest rates in the US) and fragile business sentiment.
• Global growth momentum will depend on China’s economic re-composition and the strength of India's rise to be the engine for fueling a global upswing in coming time.

Source:

• China economic growth slowest in 25 years - BBC News
  
• Recession, Cheap Oil: The World In 2016 Is Both Opportunity And Threat For India | Swarajya
  
• Euler Hermes Economic Outlook No 1222
• IMF World Economic Update released on In London: January 19, 2016
• Oil below $30 fans wipeout fears among U.S. shale survival artists| Reuters
• Gas Is Less Than $1 A Gallon In Michigan | The Daily Caller
• Turnover and volume of sales in wholesale and retail trade - quarterly data, percentage change - Eurostat
• Grrrrr...owls From A (Russian) Bear | Seeking Alpha
• IMF retains India’s GDP forecast for 2017 at 7.5 % - The Hindu
• India Should Review Monetary Policy Framework Cut Rates Arvind Panagariya - BW Businessworld
• Indian Country Report by Euler Hermes

 

[PARIKRAMA]

@Slav Defence @WAJsal

@jhungary @Arsalan @Icarus @fatman17 @WebMaster @Horus @Irfan Baloch @jaibi @Manticore @Nihonjin1051 @Vauban @Rashid Mahmood @AUSTERLITZ @nair @MilSpec @Gufi @Oscar @Technogaianist @balixd @araz @Daneshmand @scorpionx

@Levina @MastanKhan @litefire @anant_s @Abingdonboy

 

[Spectre]

Bravo!! Well written indeed.

 

[Audio]

In the liquidity chapter, i would have also thrown at least a probability that US Fed will print some more, despite increasing rates recently. I mean, whole year prognosis and all

 

[Providence]

nobody tags me

 

[Fenrir]

@PARIKRAMA give me a few hours, I'm a bit busy right now, but I'll read it, promise.

 

[Spectre]

Submission for Poster of the year 2016

The World in 2016 – 7 Pillars holding the Global Growth

Contents
1. Introduction
2. Overview
3. The story so far

3.1 The China Story
3.2 The Global Story​

4. Pillar 1 - Oil Prices
5. Pillar 2 - The Emerging Markets
6. Pillar 3 - The Commodity Markets
7. Pillar 4 - Power of the Consumers
8. Pillar 5 - Easy Money Access - Liquidity
9. Pillar 6 - Uncertainties - Political and Institutional
10. Pillar 7 - Global Economy's hope - India
11. Conclusion


1. Introduction
Almost everyone knows why The Titanic sank, in the cold waters of the Atlantic on a starlit night in 1912. The tragedy of the Titanic was the result of ignoring risks of multiple nature. The ship was claimed to be unsinkable, which led to certain unconscious decisions on the part of people responsible for steering it, to ignore the risks and threats from sea and weather. The information on imminent risk – the icebergs – was taken too lightly. The confidence reposed in the strength of the ship – the best ship till date went to extreme lengths.

The present context is to understand and relate the how 7 pillars are holding the global growth in 2016. Have we learned anything from the story of Titanic or we are still taking every risk lightly. Are we having too much confidence on our own strength that we are ignoring every other small but important aspect emerging across the globe? Lets analyze it all here..

2. Overview
The start to 2016 was in a sense a heightened sight of fear factors. And the central theme to that is China. The start of the year news is like this

• Stock exchange installed Circuit Breakers tripping leading to a massive outbreak across the globe with fall in stock markets and a fear of a deeper contagion effect.
• China's economy grew by 6.9% in 2015, compared with 7.3% a year earlier, marking its slowest growth in a quarter of a century.
  
• The news comes as the International Monetary Fund said it expected China's economy to grow by 6.3% in 2016 and 6% in 2017.
• Some observers say its growth is actually much weaker than official data suggests, though Beijing denies numbers are being inflated.
• Analysts said any growth below 6.8% would likely fuel calls for further economic stimulus.
• Economic growth in the final quarter of 2015 edged down to 6.8%, according to the country's national bureau of statistics

(Source : China economic growth slowest in 25 years - BBC News​

The above news items set the tone for my write up as i wish to analyse and highlight what are the 7 pillars or main support bases for a global economic story. Of course, China is a very important aspect to this story and outlook. But how much China alone matters? What about other support bases which are also risks to our global story. Are we just considering China only and re-incarnating the Titanic Saga?


3. The Story so far

3.1 The China Story -
For some time many analysts have pointed to supposedly cooling period needed for a super heated economic growth shown by China over many decades. Its economic growth and GDP expanded rapidly , industrialization zoomed ahead and debts by Corporate/Institutions ballooned to match the rapid expansion.

As in every case of growth, a stable period is needed when the expansionary growth tapers off a bit and the whole system contracts till a re-composition led transformation occurs over time. Its as simple as a human body. Suppose a man weighing 60 kgs with say 15% Body Fat and 85% Lean Body Mass decides to Bulk up and add 10 Kgs to his lean mass.. In real he has put on 15 kgs supposedly with 1/3 as fat mass and 2/3 muscle mass. Look at the table below for understanding

View attachment 288737

As you can see any expansion in this case bulking led to additional additions like Fat along with Lean Body Mass which is what he originally desired. The new re-composition needed a period of time where a process known as "CUT" was initiated to bring the fat mass back to older fat mass levels to complete the process of re-composition.

In the same manner, an economy when it gets bulked up will also add some other unwanted factors which are actually undesired "Fat Mass". Such fats needs to be cut for a completion of this re-composition. The same thing is now observed in the case of China.

So now the obvious question is whether we should all be worried about China?
The Answer - Yes and a No.

"Yes" because

• Industrialization phase seems to have come to an end.
• Traditional manufacturing sectors are debt ridden a bit on a higher side of comfort zone.
• New investment and expansions wont happen for a long time as profitability has eroded and state support will not be always possible.
• The world still needs to find another consumer market like China and to a greater extent India being a potential large market has not been so attractive to change the focus of attention completely.
• This means individual countries must devise strategies to insulate themselves from a contagion effect, improving their own self efficiency and consumers worried about individual safety of money led lowering of consumption potential resulting into a turmoil filled future.

"No" reasoning -
As good as it gets not everything from China has penetrated into common man's lives across the globe. There are very healthy signs that China may be able to hold onto its big economic growth primarily because of

• A large untapped population away from cosmopolitan centers primarily engaged in rural economy
• China's leadership.which can guide it out of this situation with innovative solutions

Thus the "CUT" potential is clearly there and unwanted Fat Mass will be removed.

The 3 chief challenges China face today for this "CUT" Phase are
1. Currency: China needs to devaluation its own currency in order to continue being export friendly. This implies that the exchange rate and monetary policies needs adjustment. Imports will be costly and the world market will be flooded with cheaper Chinese products giving stiff competition to locally produced goods.

2. Growth rate: China does not need the big growth rate rather it needs an all inclusive growth rate. For this the new market potential within its own economy and supply side issues needs more reforms. It can very well find new market within herself in its rural economy.

3. The economy expansion or limiting question :The present situation dictates wither China tries to contain its economy as a whole and work on its intrinsic components as a complete body re-composition or continue on its ever expanding economic might with severe straining of fiscal prudence. Logically Fat burning requires China to contain its economy expansion so it needs policy actions to support such a measure.

These are important milestone for China and for the whole world. It can either attract more confidence on China or create more frenzy. In the meantime the world is undergoing change and such is the change that this year 2016 will be a roller coaster ride.

3.2 The Global Story

• Global growth, currently estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017.
• The pickup in global activity is projected to be more gradual in emerging market and developing economies.
• In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps.
• The picture for emerging market and developing economies is diverse but in many cases challenging.
• The slowdown and re-balancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17.
• The projected pickup in growth in the next two years— despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.
• Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy: a generalized slowdown in emerging market economies, China’s re-balancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States.
• If these key challenges are not successfully managed, global growth could be derailed.

(Source: IMF World Economic Update released on In London: January 19, 2016, 10:00 a.m. In Washington, DC: January 19, 2016, 5:00 a.m.)

So we have set the tone for our next analysis.

4. Pillar 1 - Oil Prices
Three solid news upfront

• Oil prices have nearly halved in 2015 compared to 2014 (on average) and 2016 it started to plummet below $30 per barrel. (Souce :Oil below $30 fans wipeout fears among U.S. shale survival artists| Reuters
• Still, Russia, the US and Saudi Arabia, the three main oil producers, show no sign of cutting back their production.
• In USA Michigan, the price per Gallon of Gasoline touched less than $1 (Source: Gas Is Less Than $1 A Gallon In Michigan | The Daily Caller

As such, 2016 is likely to see oil prices drop again. The quick end to the current price war expected by many did not happen as US oil producers are more resilient than ever. American energy companies have shelved their least productive and most speculative drilling projects while keeping their best wells running to repay their sizable debts. They have also learned to extend the life of their wells to be less dependent on breaking ground on new ones. As a result, we can expect the Brent oil price to go down to USD 20 per barrel in 2016 before starting to recover in 2017.

Oil prices will thus remain low for an extended period of time. This is a strong tailwind for net oil importing countries. On the contrary, low oil prices hurt net oil exporters. Their economies suffer from weaker terms of trade, which translates into a stark deterioration of trade balance. This, in turn, eats at their fiscal revenues. This is all the truer when a currency is pegged to the USD, making it impossible to absorb shocks to fiscal balances by foreign exchange movements.

More generally, stabilizing at a low level commodity prices should lead to demand improvement and deflationary pressures fading away. This trend will be most notable in the Eurozone,India, Brazil with highest beneficiary being Philippines, Slovakia, South Africa, Thailand and Hong Kong. In these places,firms’ turnovers will pick up for good and economy as a whole should show solid signs of revival and growth potential.

However, a strong rebound in prices is not expected. The ongoing deleveraging process in both advanced and emerging countries prevent such a possibility.

5. Pillar 2 - The Emerging Markets
2015 was a very tough year for emerging markets. The double whammy of a slowdown in China and expectations of a Fed rate hike and thus a stronger USD translated into plummeting commodity prices and currencies. This was too much to bear for most countries. Although these risk factors may bottom-out in 2016, some countries remain highly vulnerable.

As is usual with regard to emerging economies, differentiation will be the name of the game.

View attachment 288673

In the above Chart from IMF, we see the sensitivity of emerging countries to the three risk factors via three key metrics:

1. Current-account balance, which measures a country's vulnerability to capital flows associated with the Fed rate hike;
2. Exports to China as a share of GDP;
3. Primary exports as a share of GDP.

Additionally, IMF used the depreciation of the currency since mid-2014 as a proxy for all other factors not captured by these three metrics. For instance, despite its current-account surplus, Russia has experienced a -substantial fall in the Rouble, owing to a sharp increase in political risk.

From the above based on red circles, Brazil, Russia, Colombia, Poland, Ukraine, Turkey and South Africa are the most vulnerable countries. These countries have seen a significant deterioration in their economic prospects and have little room to support growth in the short run. Both external trade and domestic demand are weak; policy support is constrained by strong macroeconomic imbalances and strong pressures on the currency. In this regard, they will remain under the volatility spotlight in 2016.

Likewise, to a lesser extent, Peru, Chile Nigeria, Morocco, Mexico, Argentina, Romania, Czech Republic, Hungary and Malaysia could also face difficult times depicted by Orange circles.

India and Pakistan denoted by Green circles are relatively much safer and are better in position to handle the risk factors defined above.

6. Pillar 3 - The Commodity Markets

Commodity markets got a beating in 2015. Indeed, oil is not the only commodity to have taken a plunge. Other commodities such as iron ore (-54%), Nickel (-53%) or Steel (-50%) have also tumbled. The prices should reach a trough as per any Business Cycle estimation in 2016 (Business cycle is four parts - Recession, Trough, Recovery and Peak)

View attachment 288764

This will be all the more true for basic Opex commodities such as nickel, zinc, soybean, which are used as inputs in the basic business of companies, and as such could see a timid rebound in 2016. In contrast, the outlook of “CapEx” commodities, such as iron ore, steel, copper or coal, is more challenging and their prices could fall again.

More generally, the metals complex is much more exposed to China and its re-balancing. Challenging commodity markets undoubtedly put pressure on the currencies of commodity exporters. Countries such as Indonesia, South Africa, Brazil, Chile or Peru, will once more experience downward pressures on their currencies.

7. Pillar 4 - Power of the Consumers
Consumer spending has been a bright spot for the global economy for about a year. In advanced economies, it has shown resilience to the 'global mess' thanks to low oil prices, improving employment and easing credit conditions.

For instance, retail sales growth in the Eurozone has shot up
View attachment 288682
(Source: Turnover and volume of sales in wholesale and retail trade - quarterly data, percentage change - Eurostat

Even more importantly, consumers have been more willing to make long-term purchases, as evidenced by the rise in car sales, i.e., +8.3% y/y in the Eurozone and +6% y/y in the US. (Source Eurostat)

This signals that households are facing the future with more confidence. Still, there are at least 2 reasons why the happy consumer will not be a huge tailwind for the world economy.

First, as inflation will edge up a bit in 2016 whereas wages will not , real disposable income growth will be moderate. In other words, the boost coming from low oil prices will reduce gradually, thus putting a lid on consumption growth. Moreover, households' indebtedness remains high, especially in the developed world, so that some of the windfall will be saved.

Second, and more crucially, we see increasing evidence of the emergence of a domestic market focusing trend, whereby countries are becoming more and more inward-looking. Protectionist measures and the closing of capital accounts are two manifestations of this trend.
View attachment 288686

This is particularly striking in emerging countries such as India, where consumption has grown by 13.2% since 2013 whereas imports have grown a paltry 2%.

8. Pillar 5 - Easy Money Access - Liquidity
The US liquidity situation is important because we all live in a dollarized world economy, where the supply of funding is jointly controlled by the Fed and wholesale money markets.Despite falling international reserves in emerging markets, global liquidity will remain abundant. Thanks to the Bank of Japan, the ECB and the PBoC, liquidity should grow in 2016

View attachment 288766
(Source: Grrrrr...owls From A (Russian) Bear | Seeking Alpha

Consider these points

• The BoJ recently fine-tuned its easing stance, notably by increasing its purchases of stocks issued by companies that are “proactively making investment in physical and human capital”.
• In China, continued low inflation & slower growth in investment suggest further easing in the short run.
• The ECB has refrained from stepping up its monthly asset purchases but still expected to do so in 2016. In any case, its QE will extend at least into 2017.
• Despite its first rate hike in 9 years, the Fed will continue to reinvest the proceeds coming from maturing assets on its balance-sheet, thus preventing a "liquidity squeeze".

Meanwhile, fiscal policy is turning from a significant headwind into a moderate tailwind in some major economies. The biggest challenge is turning this situation to aid a humble boost to the economic growth of individual nations. Certain nations have taken some solid steps to do that boost as noted below.

• In China, a strong increase in public expenditures is helping to keep growth on track. This stance will be maintained next year as the economy continues to show signs of weakness.
• In Japan, the government continues to step up its efforts to enhance growth with an additional stimulus package worth 0.6 percentage point of GDP. New pro-growth measures were announced including a 3% rise in minimum wages and lower corporate taxes for companies.
• In the Eurozone, providing shelter and accommodations to refugees and an enhanced focus on fighting terrorism entail loosening the purse strings.

It would be interesting to see how Finance Minister of India, Mr A.Jaitley in his budget presentation for 2016-17 schemes to enhance government spending and how RBI Governor R.Rajan plans to keep the liquidity in check to fuel such spending yet still keeping in check fiscal prudence plus monetary accommodation, keeping growth on track and inflationary pressure under control.

9. Pillar 6 - Uncertainties - Political and Institutional
Political and institutional uncertainties could continue to pose a problem.

• First, some legacies from the past will last throughout 2016.
  • The EU announced the extension of economic sanctions against Russia until July 2016.
  • Risk of conflicts remains elevated in the Middle East with the collapse of Yemen's government and political instability in Syria.
  • Afghanistan Crisis still has not cooled down.
  • Terror attacks from Indonesia to France to African nations to India to Pakistan

• Second, rising social tensions in some major economies is a cause of concern.
  • In Brazil and South Africa, social discontent is increasing as a result of deteriorating economic prospects and increasing unemployment.
  • The racial abuse of immigrants in multiple places across the globe point chaotic time fuelled by insecurity and economic turmoil.

• Third, elections will bring a slew of uncertainties.
  • The US presidential election is obviously critical and can be a game changer for the longer term.
  • Presidential elections in countries such as the Philippines can bring significant changes regarding the economic outlook. The current president has put the economy on better footing and the next leadership will have to maintain the pace of reforms to enhance long-term growth.
  • In Taiwan, the new president Tsai Ing-wen could be a challenging event with regard to the relationship with mainland China.

• Fourth, possible institutional changes can be sources of disruptions.
  • There are never-ending discussions surrounding Greece.
  • Add to that the risk of a UK exit. If the UK votes in a referendum to exit the European Union, at least some EU institutions would have to be reorganized and revamped
  • There are chances of rating downgrades due to falling of economic conditions which can create issues in terms of investments and possible junk ratings can fuel fear factor globally.

10. Pillar 7 - Global Economy's hope - India

Lets start with first analyzing India's strengths and weakness

Strengths

• Stable democracy, with peaceful changes in government.
• Large internal market, providing some insulation from the global business cycle.
• Successful diversification into manufacturing (motor vehicles) and services (including call centres, IT and biotechnology).
• High annual GDP growth
• External debt is low relative to earnings and repayment capacity.
• Strong and Stable Foreign Exchange reserves among the emerging nations.

Weakness

• Vulnerable to natural disasters (including tsunami, droughts, floods and earthquakes).
• The Kashmir region remains volatile and a source of potential conflict.
• The political system tends to engender coalition governments that lack the ability to push through economic reforms.
• Poverty remains pervasive and income distribution uneven.
• Structural weaknesses include inadequate infrastructure for a country of its status, current and fiscal account deficits and state involvement crowds out private sector initiatives in some sectors.
• Weak structural business environment.
• Despite having billion plus population Indian consumer market cannot replace directly the Chinese consumer market implying the global leaders cannot substitute India for China outright.

The IMF projected 7.3 per cent GDP growth for India in 2015-16 and 7.5 per cent in 2016-17, levels unchanged from its outlook released in October

(source : IMF retains India’s GDP forecast for 2017 at 7.5 % - The Hindu

This outlook reflects first a base effect due to a change in methodology in Indian GDP calculation. This led to significant revisions and suggests that India enjoyed a sharp acceleration during the 2 previous years with growth now estimated at +6.9% in FY2013-14 and +5.1% in FY2012-13 which were previously estimated at just +4.7% from +4.5% under the old methodology.

More importantly, the pace is set to accelerate in the coming years due to a more favorable policy mix with less fiscal consolidation and greater monetary accommodation. Domestic demand is set to rise on the back of following chief points

• Higher public and private investment for infrastructure,
• Increasing domestic consumption as lower inflationary pressures boost purchasing power.
• This will be supported further by a gradual improvement in external trade.Policy mix is supportive but under control
• Importantly the RBI operating framework has been strengthened, with government and central bank officials agreeing the adoption of a formal inflation target and creating a legal mandate for the RBI to target inflation.

Reserve Bank of India has targeted the consumer price inflation at 4% (source :India Should Review Monetary Policy Framework Cut Rates Arvind Panagariya - BW Businessworld .

While inflation is in the target range, this policy directive was followed by an interest rate cut of -125bps to present levels of 6.75%. This will likely support credit growth which has been the main Achilles' heel for growth of late. The pace of fiscal consolidation has been reduced as the government wants to increase investment in the country’s infrastructure – planned spending is over USD 11 bn to upgrade the country’s overloaded roads, railways, ports and power plants. Against this background, the government decided to delay by one year their official target to bring down the central government deficit to -3% of GDP by FY2017/18. As a result, the deficit target for the next fiscal year will be -3.9% of GDP (compared with -4.1% in FY2014/15).

Public debt will remain under control, stabilizing at around 60%. External risk is contained the current account deficit narrowed over the two past years thanks to the authorities’ responsiveness, conservative monetary policy and stringent regulation on commodity imports.

The outlook is favorable. Import pressures are also alleviated due to lower energy prices. Exports are
set to progress gradually reflecting further price competitiveness due to currency depreciation and improving demand from key partners (US and Gulf countries). Currency risk is moderate as the RBI has gained credibility and external imbalances have decreased.


11. Conclusion
The perennial question of Oil led changes in economic conditions is best answered by the figure below
View attachment 288777

While we have already discussed in Pillar 1 about Oil, it marks a mention that Oil will play a very significant role in global growth story. Its one of the most fundamental pillar and the price per barrel moving up and down will change the fortune of global economy surely.

When it comes to China few important factors as given in overview does need mention again
China's GDP growth is set to slow in 2016 (+6.3%) and 2017 (+6%). This outlook is based on the continued efforts to re-compose the economy and clear guidance on policies. China’s authorities will probably have to set clearer priorities for the next two years and will face following challenges.

• Firstly, keeping the RMB/Chinese Yuan stable could be a difficult task.
• Secondly, maintaining a solid financial base, namely high foreign exchange reserves and sound public finances, will require more selectivity in terms of expenditures. Thus, increasing both investment abroad and domestic fiscal stimulus will probable not sustainable in the longer term.
• Thirdly, “the move to quality growth” and the associated reforms will imply less ambitious growth targets.

But every dark cloud has a silver lining. The potential for India seems to be the key here as per the figure below

View attachment 288778

A few important points in the end are as under

• While growth is set to decelerate in China, a modest upturn is expected in Japan, India, ASEAN-5 and Eurozone.
• Each of these upturn expectations mark them as low risk economies for the year 2016.
• Among all these nations, the highest potential is seen in India where key structural reforms can actually make it the most attractive emerging market in the world and a very solid pillar for the global economy.
• A supportive policy mix, increasing wages, solid manufacturing base and stable labor market will allow for acceleration in domestic consumption.
• A key index of performance can be gauged by PM Narendra Modi ambitious Make In India program's success
• Investment is set to gain acceleration but at a slow pace. This is due to moderate increases in market opportunities, higher costs of financing in USD terms (i.e., higher interest rates in the US) and fragile business sentiment.
• Global growth momentum will depend on China’s economic re-composition and the strength of India's rise to be the engine for fueling a global upswing in coming time.

Few points

1. China's External investment quality - Would love some analysis on this as a follow up. China has been investing tremendous sum of money over-seas. One reason for this is that the internal economies only have so much capacity to absorb the surplus and still provide the desired returns hence most of the investments have been emerging economies with potential for growth and hence return however that carries with it the downside of higher risk.

2. Impact of multilateral free trade agreements - Agreements like TPP and TTIP both would have significant economic repercussions in terms of shift of trade equilibrium away from China. This has been explored and assurances given but it is clear to everyone that there are strategic motives behind these agreements. Interestingly both China and India are not part of it. I would love your comments on this.

3. Asset Bubbles - A lot of economists are predicting an asset bubbles in major economies signifying downturn in coming days. I haven't explored this in detail but if true then we should be ready for some belt tightening.

4. Sustainability of low oil prices - You have done a bang up job of explaining why low oil prices are here to stay but the cynic in me refuses to believe this. May be you can post cost/profitability data to explain how many oil producing are in the red and based on their liquid assets and reserves how much longer they can subsist. I know a lot of them like Russia are bleeding money.

Regards

 

[Levina]

@PARIKRAMA
A very well written article.
I have often noticed that you put your knowledge of excel to good use, and this time your knowledge of weight loss too. Lol
I think that kept the article interesting.
I am dilettante when it comes to economics, but I can see the effect of plunging oil prices on GCC economies(read job cuts). And ergo the subject chosen by you is very relevant atleast in my view.
Compared to other GCC countries UAE has fared better owing to its aggressive economic diversification since last 5 years. I guess UAE learnt a lesson from the last recession which occurred not so long back.

What really niggled me is the fact that a known plagiarist of the forum had the galls to show the mirror to others on this thread. Lol

If anyone else is submitting something, let me know and I'll read it too.

Reminds me of sparky.
He is good at spotting plagiarised stuff.lolzzz

 

[Genesis]

Few points

1. China's External investment quality - Would love some analysis on this as a follow up. China has been investing tremendous sum of money over-seas. One reason for this is that the internal economies only have so much capacity to absorb the surplus and still provide the desired returns hence most of the investments have been emerging economies with potential for growth and hence return however that carries with it the downside of higher risk.

2. Impact of multilateral free trade agreements - Agreements like TPP and TTIP both would have significant economic repercussions in terms of shift of trade equilibrium away from China. This has been explored and assurances given but it is clear to everyone that there are strategic motives behind these agreements. Interestingly both China and India are not part of it. I would love your comments on this.

1.Some good some bad. The Nexen deal was crap, but if CPEC works out, China would have found a reliable partner for growth for the next 2 decades.

2. Shifting of trade away from China is difficult. China is the second biggest consumer market at this point, by a mile. Who wouldn't want to get a taste of that pie. China has infrastructure that will continue to go unmatched by the developing world, and in some cases even developed world.

China's spending on R&D is second, massive increase in university quality and moving up the value added chain. Who can replace China?

The developing countries of TPP would replace China if they had the capabilities, they don't. The developed countries of the deal will not find a market in the minor developed countries because of price and their size.

All in all, this deal does set some new standards for trade, but like any business deal, it goes down hill the minute you make it personal.

 

[PARIKRAMA]

@PARIKRAMA
A very well written article.
I have often noticed that you put your knowledge of excel to good use, and this time your knowledge of weight loss too. Lol
I think that kept the article interesting.
I am dilettante when it comes to economics, but I can see the effect of plunging oil prices on GCC economies(read job cuts). And ergo the subject chosen by you is very relevant atleast in my view.
Compared to other GCC countries UAE has fared better owing to its aggressive economic diversification since last 5 years. I guess UAE learnt a lesson from the last recession which occurred not so long back.

What really niggled me is the fact that a known plagiarist of the forum had the galls to show the mirror to others on this thread. Lol



Reminds me of sparky.
He is good at spotting plagiarised stuff.lolzzz

Fortunately I am associated with one of the institutions (who have written this report and i have some real good contribution to it) in Real Life and thus my love for France stems from a deeper loyalty of Indo French relations and personal experiences.... So this does opens up a avenue of information which i had never imagined in my life when in past i worked with an India based bank before. And a stint in a foreign conglomerate abroad for quite some good time opened my eyes how we as a country for so long have been protected purely bcz we have such a big domestic demand and we were really happy living with that huge base of consumers. But world today has changed drastically for India as well

Inspite of hope that we have given to the whole world, the actual data is not very encouraging. The third quater or Q3 as we call it for most FIs wont show very drastic growth. The FIs will show some profit but there is a deeper issue of bad loans across the sectors which are either hidden, restructured or ever greening done to hide. The real bleeding of this issue is not yet seen. A good example is check for public sector banks like PNB (Punjab National Bank).. Its in very terrible shape.. There are dozen such banks in India going through a realisation phase where the monies lended is not gonna come back soon and they cant keep on giving a new loan to hide old loan dues forever. The provisions will shoot up and eat up the profit but that being a public entity will raise so many eyebrows that the whole system will suffere due to a contagion effect.

Take for example the power sector in India. Numerous FIs have given huge finances to this sector. Its having issues like

• Issues of cyclical commodity price surge leading to increase in input costs
• Discom issues and huge financial stress seen on them
• Structural issues with inefficient systems

Fixing discoms needs

• Capital
• political will at state level
• Bigger political will at center level to work with state to effect pricing changes

We always say demand is want backed by purchasing power. Unfortunately money especially from FI credit is almost stagnant to this sector.

On top we have bad loans or NPA issues. It puts us to the important question how long we can depend on economic growth to kind of put all these sectoral issues under carpet.

Take another example.. Corporate earnings is a subset of GDP of majorly listed entities. But India as a country has a much larger base of unlisted companies, Now consider a scenario where unlisted entities doing much better than listed ones. In such a case GDP growth will be much higher in true sense. But then also consider the reverse scenario. In such a case the growth that India is showing and giving the whole world may actually be much lower as real bleeding is well hidden among unlisted entities.

You mentioned job cuts.. You know most corporates in India may well give a max 10.8% average salary hike (source : India Inc to Dole Out 10.8% Salary Hike in 2016: Report - NDTVProfit.com . Even this estimation to me looks at higher side.and real salary post inflation adjustment may be much lower than last few years(but thats average for all sectors.)
Most of the important sectors like FIs in my personal estimate wills be avg salary hike at just around 7% and bonus (based on profitability if any) will be less than 1 multiple of months salary.Imagine a inflation rate at say 5 or 5.5%. So the real salary growth is in the range of 1.5-2% post inflation adjustment.
On top there would be job cuts, postponement of hiring and replacement of 2 high salary profiles with one medium salary profile. Imagine this contagion effect on the youth who are beginning their career or are less than say 5 years in experience.

If GOI does not initiate a massive restructuring across core sectors and increase investments, we are looking at a much bigger issue in India.Unfortunately the resolve shown by ruling majority in parliament has not translated into meaningful contribution for such structural changes. We may see USD/INR closer to 69 owing to maximum 5% deviation from FY beginning before RBI steps in and stops the plummeting currency. Indian tourists who flock the world will try more domestic vacation due to currency issues and this implies its good for domestic market but the effect on global tourism industry, airlines and hotel industry - you can imagine how such actions will have a bull whip effect.

India having a protectionist regime have always saved herself from the world market. But that issue cannot be sustainable for protecting the interests forever.

Take a look at China.. Its investments outside economy of herself has been in places which can fuel its new demands, shorten and raise efficiency in the supply chain and most importantly try and bridge the gap of reaching markets. These are important steps needed for re-composition as i have mentioned before. The effect of controlling a massively expanded economy and reworking the efficiency levles for demand supply gap and cost of production and avenues to reach market is a very important aspect. Thats why i said Chinese leadership is very important for their role os shaping the economic might for coming decades.

Two major factors which work in CHina's favour has been the developed infrastructure they had mustered and continue to develop portion and secondly the massive investments it makes in many domestic projects espeically in R&D. The China market is already a consumers market and no economy from world will not like to take advantage out of it.

Trans Pacific Partnership comprising of 12 nations 4 original and 8 negotiated to become members

Source - Google search for images.

The TPP is suppose to have 40% of the world economy. But if you see their members like Chile, New Zealand, Singapore and Brunei - original members and Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam, joined them later. TBH limited trade is being done between these members and they majorly deal with Internet freedoms, intellectual property, regulations and other subjects etc which are actually not very important to understand from Trade angle. Its more like a controlling mechanism which comes as apart of feedback loop in a control system. But what it effectively lacks is the markets which has the potential for outcomes chiefly China, India and other economies where potential is huge. Some good points are also mentioned in Wikipedia on this Trans-Pacific Partnership - Wikipedia, the free encyclopedia

The other agreement TTIP or Transatlantic Trade and Investment Partnership infact involves almost 45-50% of the world economy. Its effectively an extension of TTP as its majorly EU and USA. At least both these entities have solid trade numbers every year and are highly interdependent. But again these numbers are based on interdependency on economic terms but still it does not give access to the potential markets with largest consumers like China and India.

In another opinion, it looks like both TTP and TTIP are just NATO alliance in trade form.
If i remmebr correctly a year back in some newspaper a view about such agreements on India was covered. One important aspect discussed was medicines and its cost and access.. The IP rights and access by Consumers in China and India where lcoally produced same molecule can be far more cheaper versus these treaty protected pharma majors contention was seen as a driving force of healthcare costs.

I remember a speech By Sujata Mehta from MEA, organised by FICCI. She had spoken about issues that will go well beyond trade in goods and services into areas such as transparency,regulatory issues, IP, labor laws, environment, investment, government procurement, and dispute settlement mechanisms. In Her opinion she commented that unless Indian industry change their overall perspectives and the way they operate, they wont be able to meet requirements as stated by both these treaties. In essence we wont be able to enlarge our trade basket nor we will be able to take any benefits out of it. On top such Trade treaties ensure that dominant forces like USA and EU can dictate terms which are detrimental for countries like India and China.. Combine this with recent Environment regulation of or Paris Climate accord, you see how developed economies in such treaties dominantly ask to control environmental issues which will have a direct impact on local economy's supply side and will impact labor side harshly.

Thus in essence, these treaties pose challenges and issues but since they dont have directly India and China as members they are not in a unique position as they believe themselves. Their might is well known but cannot sustain their might unless they have their markets for such economic might... Unless these treaty members market can actually replace China and India completely within their domestic demands among members, it cannot help them completely. But on the other side the strict rules and standards will create minor issues for India and China who would definitely engage with them and WTO to come to a better understanding and work out a meaningful acceptability.

@Spectre

 

[Spectre]

Trans Pacific Partnership comprising of 12 nations 4 original and 8 negotiated to become members

Source - Google search for images.

The TPP is suppose to have 40% of the world economy. But if you see their members like Chile, New Zealand, Singapore and Brunei - original members and Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam, joined them later. TBH limited trade is being done between these members and they majorly deal with Internet freedoms, intellectual property, regulations and other subjects etc which are actually not very important to understand from Trade angle. Its more like a controlling mechanism which comes as apart of feedback loop in a control system. But what it effectively lacks is the markets which has the potential for outcomes chiefly China, India and other economies where potential is huge. Some good points are also mentioned in Wikipedia on this Trans-Pacific Partnership - Wikipedia, the free encyclopedia

The other agreement TTIP or Transatlantic Trade and Investment Partnership infact involves almost 45-50% of the world economy. Its effectively an extension of TTP as its majorly EU and USA. At least both these entities have solid trade numbers every year and are highly interdependent. But again these numbers are based on interdependency on economic terms but still it does not give access to the potential markets with largest consumers like China and India.

In another opinion, it looks like both TTP and TTIP are just NATO alliance in trade form.
If i remmebr correctly a year back in some newspaper a view about such agreements on India was covered. One important aspect discussed was medicines and its cost and access.. The IP rights and access by Consumers in China and India where lcoally produced same molecule can be far more cheaper versus these treaty protected pharma majors contention was seen as a driving force of healthcare costs.

I remember a speech By Sujata Mehta from MEA, organised by FICCI. She had spoken about issues that will go well beyond trade in goods and services into areas such as transparency,regulatory issues, IP, labor laws, environment, investment, government procurement, and dispute settlement mechanisms. In Her opinion she commented that unless Indian industry change their overall perspectives and the way they operate, they wont be able to meet requirements as stated by both these treaties. In essence we wont be able to enlarge our trade basket nor we will be able to take any benefits out of it. On top such Trade treaties ensure that dominant forces like USA and EU can dictate terms which are detrimental for countries like India and China.. Combine this with recent Environment regulation of or Paris Climate accord, you see how developed economies in such treaties dominantly ask to control environmental issues which will have a direct impact on local economy's supply side and will impact labor side harshly.

Thus in essence, these treaties pose challenges and issues but since they dont have directly India and China as members they are not in a unique position as they believe themselves. Their might is well known but cannot sustain their might unless they have their markets for such economic might... Unless these treaty members market can actually replace China and India completely within their domestic demands among members, it cannot help them completely. But on the other side the strict rules and standards will create minor issues for India and China who would definitely engage with them and WTO to come to a better understanding and work out a meaningful acceptability.

@Spectre

Very good observations.

This is a very complex and grey topic - there are no right and wrong and but it comes to down to every country protecting it's own interest. Let me lay out the background

High Tech Manufacturing - Defence Hardware, Medical Equipments, HSR, Nuclear reactors etc are cornered by the west and Japan with China now increasingly crashing the party with it's relative competence and cost advantage.

High End Services - Financial Services, Media and Entertainment, High end Software, Medicine, Pharma, Education, Consultancy - (IT and Business) also cornered by West with India trying to cut in.

Low end Manufacturing - Completely dominated by China

Low end services - Dominated by India

Of-course I am generalising and there are various other countries involved with notable exceptions as such but for the sake of simplicity the above illustration will do.

Now the West, Japan etc are completely content to let India, China and other developing economies cater to the lower end of spectrum and in process compete with the other developing countries and under cut them.

The problem arises when when for example India manufactures generic drugs at 1/10 the cost ignoring the IP rights. When Chinese companies under cut Apple, Google, Microsoft etc and when they eat into the Nuclear, HSR, Defense pies which were the sole preserve of developed economies. This leads to loss of high spectrum income and thus jobs.

So what is the solution? Under cut India and China by using the age old adage of divide and rule. There are numerous other countries which can produce equally capable lower spectrum goods and services like China and India and hence they will re-route the investments and contracts out of India and China to let's say Vietnam, Phillipines, Sri-Lanka etc.

Will this work? I don't know for sure but I dont think so but that is not the point. India and China despite trying to transition upwards are still fundamentally lower spectrum players at base and their economies cannot take the substantial withdrawal of investments and contracts. The domestic demand is just not strong enough to cover for loss of export income - more so true for China but relevant in case of India too.

Hence these treaties are the carrot and stick combined approach - as you have said if India and China are willing to play by the rules, follow copyrights and respect IPR then they are welcome into the club and if not the stick would be to threaten economic consequences by excluding them from the club.

In short - west wants to stack the odds as they very well know India and China cannot compete with years of R&D expertise and investments of their western counterparts but from the POV of West it is levelling the playing field.

So far India and China are not blinking - but the pressure is piling up day by day and significant concessions have to be made.

Regards

 

[PARIKRAMA]

Very good observations.

This is a very complex and grey topic - there are no right and wrong and but it comes to down to every country protecting it's own interest. Let me lay out the background

High Tech Manufacturing - Defence Hardware, Medical Equipments, HSR, Nuclear reactors etc are cornered by the west and Japan with China now increasingly crashing the party with it's relative competence and cost advantage.

High End Services - Financial Services, Media and Entertainment, High end Software, Medicine, Pharma, Education, Consultancy - (IT and Business) also cornered by West with India trying to cut in.

Low end Manufacturing - Completely dominated by China

Low end services - Dominated by India

Of-course I am generalising and there are various other countries involved with notable exceptions as such but for the sake of simplicity the above illustration will do.

Now the West, Japan etc are completely content to let India, China and other developing economies cater to the lower end of spectrum and in process compete with the other developing countries and under cut them.

The problem arises when when for example India manufactures generic drugs at 1/10 the cost ignoring the IP rights. When Chinese companies under cut Apple, Google, Microsoft etc and when they eat into the Nuclear, HSR, Defense pies which were the sole preserve of developed economies. This leads to loss of high spectrum income and thus jobs.

So what is the solution? Under cut India and China by using the age old adage of divide and rule. There are numerous other countries which can produce equally capable lower spectrum goods and services like China and India and hence they will re-route the investments and contracts out of India and China to let's say Vietnam, Phillipines, Sri-Lanka etc.

Will this work? I don't know for sure but I dont think so but that is not the point. India and China despite trying to transition upwards are still fundamentally lower spectrum players at base and their economies cannot take the substantial withdrawal of investments and contracts. The domestic demand is just not strong enough to cover for loss of export income - more so true for China but relevant in case of India too.

Hence these treaties are the carrot and stick combined approach - as you have said if India and China are willing to play by the rules, follow copyrights and respect IPR then they are welcome into the club and if not the stick would be to threaten economic consequences by excluding them from the club.

In short - west wants to stack the odds as they very well know India and China cannot compete with years of R&D expertise and investments of their western counterparts but from the POV of West it is levelling the playing field.

So far India and China are not blinking - but the pressure is piling up day by day and significant concessions have to be made.

Regards

Yes sir, solid analysis.. thats why these treaties and particularly Dispute Resolution mechanism needs a much deeper look, negotiation and a much wider forum like WTO to make every nation aware of catastrophic potential issues.

You remember the Martin Shkreli episode
US pharmaceutical company defends 5,000% price increase - BBC News

Now consider a scenario In India or China where following the IP rights and as dictated by these treaties adhering to local production of the same molecule/formula. The spike in healthcare costs would bleed the whole population, pharma sector and economy will face turmoil from within. On top this will cause serious political instability too.

I dont think India and China will ever blink, but there would be very very strong and tough series of negotiations for many years.

India this budget is planning for a national healthcare scheme launch. IF we go by rules, this scheme in flowing years will become another bottomless pit of expenses with no limits or no way to back roll it.

Coming: A mega healthcare plan this Budget? - Moneycontrol.com

• CNBC-TV18’s Nayantara Rai, quoting sources, says that the Budget 2016 will see a ‘mega’ healthcare scheme with an initial investment of Rs 6,000 crore.
• Sources say that the government is planning to rely on unclaimed employee provident fund (EPF) and public provident fund (PPF) deposits to launch the scheme.
• The new scheme is expected to focus on providing subsidised services to senior citizens, marginal farmers as well as below poverty line (BPL) families, sources say.
• The scheme could also make healthcare services free for super senior citizens (over 80 years of age).
• Sources add that the government also plans to club existing schemes into a single entity. The scheme could be combined with government’s other schemes like Pradhan Mantri Jan Dhan Yojana.

Now imagine the catastrophe we will be with when this gets formally approved. In all sense, India will not agree by the rules fully. I am personally expecting a long road of negotiations. This will become sticky points once certain strategic investments and purchases are done with USA/West and the group members will pressurize us then to adhere to their rules and play the game with concessions like access to technology and more investments in varied sectors like Infrastructure. You are right - its a carrot and stick policy in essence.

@Levina.. sorry i forgot to add yes body recomp is a process under intense working for me.. Personally i became super huge at 89 kgs with a Truck like tyre in belly and the chest to belly looking like clear tread marks. Double chin was replaced by triple chin and love handles were like hanging gardens. all bcz i kept on eating for years sitting a doing a desk job with lots of mental play and understanding but very limited physical exercise

It took me a great deal of mental strength building to finally say i want a healthy life and exercise should be part of it. I was almost 30% Body fat before at 89 Kgs. Lost over 18kgs at a steady rate of 100-150 gms a day so it took me very long time. I had concentrated on first losing fat and building muscles alternatively. So the whole work out schedule was divided per week basis after sitting with a personal trainer. One week solid weight loss fat boost scheme and other week muscle building weight training scheme. each week had its own diet. and after almost 7 months i started seeing drastic change as i saw my weight drop closer to 75-76 kgs.

The last stretch was terrible.. Body has toned, muscles firmed up, defined and fat lowering was very very tough. I am still at around 13-14% fat but now with a stable weight.

Many times the whole recomp process failed for me.. Lack of motivation, lack of results, stagnancy, saturation, weight bouncing back and most importantly fat numbers moving up due to much lower than maintenance calorie intakes.

But i had stick to that.. Worked hard, trained hard .. 6 days a week.. over time, i shifted from cardio/HIIT aspect to more of weight training with much heavier weights.. that leaves you famished and hungry.. and yet food intake and what you eat is far far important.

In life we all should realise what we keep munching.. Its very important. The amount of garbage we eat is never understandable at that time but over time your body goes through a terrible cycle. When i was huge and bulky my arms strengths were pathetic. When i use to look down i could not even see my shoes and feet properly with such a big belly. junk foods, rice , white carbs killed me internally.

and now i see myself as a much better person in the mirror. better confidence.. and a much healthier body.

go through some sites like bodybuilding.com and others when you search in google..

i had advised my friends and well wishers not to let their own bodies rot by neglecting their health. Hopefully few of them would take a resolution to become healthy for life...

 

[Spectre]

This will become sticky points once certain strategic investments and purchases are done with USA/West and the group members will pressurize us then to adhere to their rules and play the game with concessions like access to technology and more investments in varied sectors like Infrastructure. You are right - its a carrot and stick policy in essence.

What many people fail to realize is that US plays the game at multiple levels. There is China counter-weight aspect, there are market access aspects, there is the IP rights access, there is a defence sales aspect.

P.S. Your fitness journey is really remarkable!!
Indian bureaucrats and diplomats are well aware of this fact and I fully support their current stance - co-operate, obfuscate, stall, delay and oppose. Two things India has going for it are:

1. Domestic Market - No country in the world not even China will refuse to business with India. The potentials of our demographic dividend are immense.

2. NRI Base - They are our trojan horses. Perfect little American Patriots but with a soft corner for their ancestral land. They need to be wooed and pampered so that bonds once broken and re-forged again. Congress had brilliant minds in their Govt and mostly they played the hand they got dealt with competence when it came to trade issues but they did not pay adequate attention to over-seas Indians. We cannot strong arm US - they are experts at seeing through BS and bluffing tactics. What we need to do is to influence them from within - have influential Indians at place in US Corporates, State Dept, White House Staff, Congress and Senate who would actively promote Indian PoV when it doesn't conflict with US interests.

As for internal issues - focus has to be on sustained building of supply side economics. Mr. Rajan was correct that we should not blindly ape China and repeat their mistake. Global Demand is slowing down hence Make of India has to be conservative in it's ambitions. Focus should be on technology acquisition and efficiency improvement leading to better profit margins. I dont know if our over-stressed banks can handle more defunct assets.

On this note I would like to say that we have to be very careful about infiltration of Chinese goods which is harming our economy. Traders which form the core support base of BJP would oppose any protective measures but it has to be done before our un- officially bankrupt private sector companies go officially bankrupt.

Sorry for going off-topic - hope you don't mind.

 

[PARIKRAMA]

What many people fail to realize is that US plays the game at multiple levels. There is China counter-weight aspect, there are market access aspects, there is the IP rights access, there is a defence sales aspect.

P.S. Your fitness journey is really remarkable!!
Indian bureaucrats and diplomats are well aware of this fact and I fully support their current stance - co-operate, obfuscate, stall, delay and oppose. Two things India has going for it are:

1. Domestic Market - No country in the world not even China will refuse to business with India. The potentials of our demographic dividend are immense.

2. NRI Base - They are our trojan horses. Perfect little American Patriots but with a soft corner for their ancestral land. They need to be wooed and pampered so that bonds once broken and re-forged again. Congress had brilliant minds in their Govt and mostly they played the hand they got dealt with competence when it came to trade issues but they did not pay adequate attention to over-seas Indians. We cannot strong arm US - they are experts at seeing through BS and bluffing tactics. What we need to do is to influence them from within - have influential Indians at place in US Corporates, State Dept, White House Staff, Congress and Senate who would actively promote Indian PoV when it doesn't conflict with US interests.

As for internal issues - focus has to be on sustained building of supply side economics. Mr. Rajan was correct that we should not blindly ape China and repeat their mistake. Global Demand is slowing down hence Make of India has to be conservative in it's ambitions. Focus should be on technology acquisition and efficiency improvement leading to better profit margins. I dont know if our over-stressed banks can handle more defunct assets.

On this note I would like to say that we have to be very careful about infiltration of Chinese goods which is harming our economy. Traders which form the core support base of BJP would oppose any protective measures but it has to be done before our un- officially bankrupt private sector companies go officially bankrupt.

Sorry for going off-topic - hope you don't mind.

Well challenges also comes from the fact that Chinese goods vs Indian goods in a third economy outside India and China will face very very stiff competition. In essence the Asian competition plays right into the hands of the advanced economies who are more than happy to see them fight and let one of them suffer.. Most presumably, its India who will suffer bcz of lower cost of exports from China along with Yuan devaluation and coupled with mass production flooding world markets.

The NRI lobby seems to be working slowly for a better control from inside particularly in the west advanced economies like USA. Now it also wants India to be more of a partner to USA in strategic level. As long as we can get our desires reasonably done, its cool but then a perfect ally position especially with often repeated US propping India vs China argument makes the whole geopolitical position dangerous. Its true we get more pro India reasonings and leaning from USA, access to technology but also eats up our neutral position.

A view to your line of thought was recently in news.I quote

• "In the end, that not only makes Indian goods less competitive in the Chinese market, but also India's ability to compete with the Chinese in third markets is impacted," he said.
• Figures this week showed that India's merchandise exports fell in December for the 13th month - and were down by nearly 15 percent from a year earlier.
• That meant India was losing its share of the global trade pie, said Panagariya, attributing some of those losses to the appreciation of the rupee against currencies other than the U.S. dollar.
• He highlighted Modi's decision to build out India's coastal ports to improve access to the world market for goods as one key initiative to expand India's 1.7 percent share of world exports.
• Modi has also promoted a "Make in India" drive that, after a slow start, has attracted U.S. auto makers and Chinese consumer electronics firms.
• That includes reviving stalled infrastructure projects and helping farmers recover after two years of drought.

India can still emulate China's export miracle - Panagariya| Reuters

• Any depreciation in rupee on account of China-led turmoil in the global financial markets should only be welcome sign for India, or else Indian exports will suffer more at the hands of China and other emerging countries witnessing correction in their currencies, an ASSOCHAM Paper has pointed out.
• It said India must also ensure that Indian exports need to get back their competitiveness even in the midst of global slowdown. The major challenge is coming from China in various forms with sizeable influence on the currency valuation.
• Yuan devaluation, third in the last five months, will negatively impact Indian firms which have export exposure to China in sectors such as tyres, pharmaceuticals, steel and organic chemicals textiles due to a volatile change in terms of trade, the paper said.
• In 2014-15, the trade imbalance at USD 48.5 increased by over a third from USD 36.2 billion (in the previous year). “This large trade deficit is essentially a reflection of India's inability to penetrate the Chinese markets, a problem that seems to have aggravated over the past three years".
• In 2011-12, India's exports to China were valued at USD 18 billion, but in 2014-15, the value of exports dropped to below USD 12 billion.
• He said while it is true that India is not as badly affected by the global headwinds, "we cannot remain insulated and the wisdom lies in cushioning ourselves with generating more traction in the domestic economy while seeking to make Indian exports competitive ".
• Even in a third country market, the currency devaluation in China can make things difficult for Indian goods since the rupee depreciation has not been sharp enough to give competitive edge to the country's exporters.
• “The fact that China and India compete for several export items such as textiles, leather goods, light engineering , gems and jewellery etc is an additional challenge faced by the Indian exporters. Besides, there is also a concern that a weaker Yuan will help China dump goods into the Indian market".

Assocham India

So you are on perfectly right track. We cant export properly into China as seen in the imbalacne and also we cannot let the imports flooding our own domestic market and killing it.

 

[PARIKRAMA]

Sharing something here which seems to suggest some good development happening for Global Economy.

Global Economy may be showing first strong signs of recovery with a projected close of this week positive for the first time in 2016

India's BSE Sensex finally closed positive first time in Jan 2016

SENSEX >> BSE Sensex, Sensex Index, Live Sensex Index, Sensex Stocks

The BSE sensex closing and today rising by 473.45 points or 1.98% gave the first positive week closing for 2016 as seen from the graph above. Some important Global news contributed to this event. These events are

1. Oil prices rose above $30 today (some 5% increase on Friday)
2. Mario Draghi: Whatever it Takes to Save the Euro and he would expand quantitative easing in the Eurozone
3. China indicated stimulus policies for economic revival
   
4. In Japan, the Central Bank’s statement that it would increase stimulus

Source:
Mario Draghi Keeps Playing His Monetary Fiddle While Euro-Banks Burn - Money and Markets - Financial Advice | Financial Investment Newsletter — Money and Markets - Financial Advice | Financial Investment Newsletter
A global market recovery? | The BRICS Post


Looks like the key word stimulus is triggering a rally.

The important question to ask did Oil price bottom out below $28?
A good few indicators like below says this but above statements from the Chinese leadership, to ECB to Japan all stating the word stimulus package has led to adding more credibility.

Saudi Arabia Crude Oil Production Forecast 2016-2020

We observe a downward indication based on above graph starting from Oct 2015 but still the oversupply in the market is too huge coupled with global demand slowdown.. If global stimulus led demand revival coupled with a mechanism of slowly lowering the over supply by Saudi Arabia and perhaps OPEC with USA shale outputs may be seen in next 12 months. With global stimulus, we may see a rally in OIL prices at least to around $50 over next 12 months.

If we use some more forecasting data like this below

Saudi Arabia Gasoline Prices Forecast 2016-2020

The above analysis which i said seems a bit more credible especially as Gasoline prices in Saudi Arabia are market linked based on Demand and Supply. And this is indicated to move up as already seen from Nov-Dec cycle where it moved from a stable 0.16 USD/Liter price for almost 8 out of total 12 months in the year to December 0.23 USD/Liter - an almost 50% hike in cost/liter.

Lets hope this does turns out true..