A Tough Year Ahead

A Tough Year Ahead

People who say that a new year is just a date, may be struck by the speed and pace of momentous developments, both at home and abroad, since the 1^st of January 2016.

Next month, on 8^th February, we will also welcome the Chinese New Year, the Year Of The (red fire) Monkey. The monkey year is characterised by sudden changes, disruption, even delight, at least in some quarters.

But 2016, seems to have an explosive quality to it, sometimes a prelude to wild swings of the pendulum.

This may be why, the renewed attempt to resolve long festering differences between India and Pakistan, has been marred by a fresh terrorist attack on a major air force base at Pathankot.

And North Korea, unofficially nuclear weaponised since 2006, let off a powerful hydrogen bomb underground, occasioning a 5.1 Richter scale event,   raising tensions, and inviting speculation on its import. 

Overall, the paroxysms in the Chinese economy, may define 2016. A $12 trillion economy, second only to that of the US, is going down. The world will be deeply roiled by this, even as China does its best to stave off a full-fledged recession. 

But the cracks, long supressed, are appearing all over: in China’s stubbornly inflated currency being force-devalued now; in its vanished exports, its badly compromised banking system, its opaque state owned companies, the rampant, punter-led speculation in the Shanghai Composite Index.

Then there are its China financed infrastructure contracts around the world that are burdens on its economy today. The vast acreage of empty housing and offices in major cities. The over-built infrastructure with poor returns on investment. The slow, inward looking economy that has failed to replace exports with domestic consumption.

There is the huge military expenditure, on the powerful PLA and the Chinese armament industry. This defence industry is difficult to finance without strong external demand, and doubly hard to sustain in a recession.

China’s typical ‘forward policy’, using muscular diplomacy, with massive grants and soft loans to pave its pathways, also suits a rich country better. Of course, there are trillions in reserves from the good years, but how long will they last?

Reflecting all this, there have been two 7% plus tumbles of the Shanghai Composite Index in the first days of January, and sudden, 4% plus devaluations of the Yuan.

Says billionaire international investor George Soros, the bells have begun to toll for a undisguisable recession in China.  Respected market savant Marc Faber agrees, and thinks lower global liquidity due to fallen crude prices, may lead to a US crash of 2016, capable of dwarfing that of 2008.

One point made by some leading economists, including our own Raghuram Rajan of the RBI, is that the prolonged stimulus involving billions of dollars a month, both in the US and in the EU, has only kicked the recession/depression can down the road. These huge amounts cannot be recovered and will have to be written-off over long years, given their magnitude. Other economies, in BRICS, and elsewhere, are also doing badly, some because of low oil prices, others for their unsustainable debt burdens.  

Debt is certainly the number one global malaise today. Governor Rajan is also very unhappy with India’s own non-performing assets (NPA) situation, that would, if fully acknowledged, wipe out most of the Indian banks. He is trying to get the banks and the government to own up. Meanwhile, our exports are falling, and farm income, construction, industrial production, services, and jobs, are not growing either. We do have a good GDP figure however, based mainly on public expenditure in infrastructure, financed by savings on the oil bill and  yes, greater deficits.

Meanwhile, Saudi Arabia, once the arbiter of the oil price economy, calculates it has enough to hold out for just 6 or 7 years at present rates of expenditure. It needs a $ 105 price per barrel to balance its budgets.  But this is unlikely to come back any time soon. So, as fairly swift changes are afoot in the kingdom, the ruling Saudi royal family is dealing with a  small population of just 28 million. But even then, they are, and have been for some time, battling growing  domestic unrest.

47 people, one Iranian Shi’ite cleric, and 46 Sunnis from the 85% majority community, were beheaded recently for ‘treason’, in a blood- letting not seen since the 1980s.  Subsequent tensions with Iran have resulted in diplomatic relations being snapped.

And the aerial pounding of Shi’ite rebel Houthis, backed by Iran, in neighbouring Yemen, is not yielding the results hoped for. Instead, it is taking on the contours of Saudi Arabia’s own Vietnam.

And if we talk of the threat from ISIS and its affiliates, not only in Saudi Arabia, but in Syria, Iraq, Libya, and so on, there is a stark picture of West Asian instability. 

The global oil scenario continues to be unrelenting. The abundant US shale oil industry, able to break-even at $ 20 a barrel, will survive, even as the current prices in the region of $ 30, delivers a profit.  And then there is also the concerted effort to reduce long-term dependence on fossil fuel.

In 2015, after a pause that lasted over a decade, there was the first little uptick in US interest rates. And that too, with just a 0.25%  hike. It signals, tentatively enough, that America is stable and growing again. Still, the situation is nebulous, and the US Federal Reserve Bank Chairman Janet Yellen has reserved the right to change course  at any time if warranted.

Meanwhile, the US dollar, the world’s trade and reserve currency, has been getting stronger. Investment funds have been gravitating back to US bourses from the emerging markets and economically beleaguered Europe.

This strength of the dollar is not altogether helpful for US exports, but who’s buying much anyway? Besides, the high-value and price shock- proof armaments and US high-technology areas are not affected.

International demand for goods and services, including other commodities, from the oil producing countries and China is indeed down.   India, however, wants  global investment on a massive scale to fuel giant development plans. And foreign investors are overcoming their reservations on Indian bureaucracy etc. as it is increasingly seen to be the only game in town.

Given all the red markers, by 2017, we can certainly congratulate ourselves, if India, becomes one of the few countries that manages to grow strongly. As for the world, it will have done well enough if it does not spin out of control into a deep economic crisis or worse.

For: The Pioneer

(1,092 words)

January 19^th, 2016

Gautam Mukherjee