India’s economy isn’t doing well during Prime Minister Modi’s second term.
Major economic indicators released recently point to a major slow-down that parallels that of the early 1990s. Real GDP is growing at 4.5%, the lowest in the last five years. Production of industrial goods is flat, while the production of investment goods is declining (again, the worst showing in the last five years).
Then there’s the unemployment rate, which reached an all-time high of 8.50 in October.
These are dismal numbers for a large emerging market economy, which was growing at brisk rates a couple of years ago.
Still, there is one bright spot: the equity market, which is rallying to new highs.
But that won’t last long if the economy continues to falter. Listed firms are part of the economy, and their shares will eventually follow its pace.
What’s going on with the Indian economy? The country’s two major key drivers, exports and investments have decelerated, following the Global Financial Crisis (GFC).
That’s according to a recent working paper from the Center for International Development at Harvard University, titled “India’s Great Slowdown: What Happened? What’s the Way Out?”
“Export growth slowed sharply as world trade stagnated, while investment fell victim to a homegrown Balance Sheet crisis, which came in two waves,” writes Arvind Subramanian and Josh Felman, authors of the paper. “The first wave—the Twin Balance Sheet crisis, encompassing banks and infrastructure companies—arrived when the infrastructure projects started during India’s investment boom of the mid-2000s began to go sour.”
Nonetheless “the economy continued to grow, despite temporary, adverse demonetization and GST shocks, propelled first by income gains from the large fall in international oil prices, then by government spending and a non-bank financial company (NBFC)-led credit boom. This credit boom financed unsustainable real estate inventory accumulation, inflating a bubble that finally burst in 2019.”
It’s well-known what happens to an economy when a bubble bursts. “Consequently, consumption too has now sputtered, causing growth to collapse” add Subramanian and Felman. “As a result, India is now facing a Four Balance Sheet challenge—the original two sectors, plus NBFCs and real estate companies—and is trapped in an adverse interest-growth dynamic, in which risk aversion is leading to high-interest rates, depressing growth, and generating more risk aversion.”
What’s the Modi government been doing to avert the situation? Several things according to Udayan Roy, Professor of Economics at LIU Post. Like a large cut in the corporate tax, and the resumption of the Privatization of Public Sector Units.
Meanwhile, the Reserve Bank of India (RBI) has eased monetary policy by cutting its main interest rate by 135 basis points.
That’s one of the largest cuts in India’s history.
But these measures haven’t been working, due to a “credit crunch,” according to Roy.
“The monetary transmission mechanism has broken down,” he says. “Even though the RBI is trying to pump money into the economy, lending is not growing (because a business doesn’t want to borrow; there is no demand for loans because the prospects look uncertain). Investment is stagnant.”
And that makes the current situation strangely very similar to the US after the global financial crisis, according to his theory.
“After the global financial crisis of 2008-09 ended, Indian banks began giving loans liberally to infrastructure-building firms,” Roy explains. “These projects ended up unsuccessful and the infrastructure companies began to fail. They could not repay their loans. So, the banks cut back on lending. This began to hurt investment and exports.”
Simply put, monetary easing doesn’t work under these conditions.
What’s the solution? “The government will have to find a way to make the banks and the NBFCs less afraid to lend,” he says. “That’s the only way out.”
This means that Prime Minister Modi has a hard job ahead in his second term.
Launching Zero Waste Economic Transformation Lab – guelph.ca
Co-operators contributes $350,000 to fund lab start-up and first project
Guelph, Ont., January 20, 2022 – Today, representatives from Co-operators, the City of Guelph, Wellington County and the Guelph Smart Cities Office launched the Zero Waste Economic Transformation Lab, a new initiative under the Circular Opportunity Innovation Launchpad (COIL).
The lab will apply circular economy theories to develop and test new opportunities to reduce or redirect waste. As the lab’s founding corporate supporter, Co-operators is pledging a $350,000 investment to establish the lab and fund its first project to divert construction and demolition materials from landfill. Ongoing operations will be funded through public and private grants and corporate investments.
The commitment from Co-operators represents a unique local public-private sector collaboration to tackle factors contributing to climate change. It will also help extend the range of tools and innovation infrastructure developed by COIL and Our Food Future since 2019, adapting them to the construction and demolition sector as well as others in the future.
“Co-operators is committed to embedding sustainability into all areas of our business. We are especially excited that through COIL, we can help to sustainably divert materials away from landfills and keep them in the local economy,” says Chad Park, vice president of Sustainability and Citizenship at Co-operators. “Through this collaborative effort, we can reduce the environmental, social, and financial costs to governments, businesses and Canadian communities, while making them more sustainable and resilient.”
“We know that 45 per cent of global carbon emissions are generated when we manufacture new products, and construction materials are particularly resource intensive,” says Barbara Swartzentruber, executive director of the Smart Cities Office. “Redesigning systems to recycle and extend the life of materials is an essential part of fighting climate change and aligns with Guelph’s climate change objectives.”
The lab’s projects will bring together researchers, industry stakeholders, entrepreneurs and government to reduce waste in specific material sectors, including salvaged materials from properties following insurance claims.
As with Our Food Future, another Smart Cities initiative, COIL’s lab will focus on designing scalable systems-level solutions that create new social, economic and environmental benefits.
“Our comprehensive circular economy approach considers not only the reuse, recovery and recycling of materials that were previously wasted, it addresses processes and decisions that prevent waste generation across an entire value chain,” says David Messer, manager, COIL.
The Zero Waste Economic Transformation Lab’s projects will follow a process that can be replicated and applied across all waste streams in industries such as textiles, plastics and electronics. The lab will work with other cities, labs and circular economy innovation organizations across Canada to share best practices, advise on future strategies and collectively advance sector transformation using the circular economy approach.
The lab’s current national collaborators and advisors include:
“This is an incredible example of public-private sector collaboration. It’s fantastic to see a major local employer stepping up and working together with the City of Guelph and County of Wellington to tackle this global issue.”
Cam Guthrie, Mayor, City of Guelph
“This program will also help the County come closer to achieving our sustainability objectives, environmental visioning and economic growth plans by creating jobs and helping businesses with their waste challenges.”
Jana Burns, Wellington Place Administrator, Museum, Archives and Economic Development, Wellington County
“More broadly, however, this program will play an important role in supporting several key priorities within Guelph’s Strategic Plan as well as wider city priorities. It will accelerate partnerships and innovations in our economy. And it will further integrate businesses into our community and cultural fabric.”
Scott Stewart, Chief Administrative Officer, City of Guelph
Launched in April 2021 with $5 million in funding from the Federal Economic Development Agency for Southern Ontario (FedDev Ontario), COIL is an innovation platform and activation network aimed at creating, proving and scaling transformative solutions across the food and environment sectors in southern Ontario that will move Canada toward a more sustainable, circular economy.
COIL builds on the Our Food Future Smart Cities initiative which is close to meeting its goal of creating 50 new circular businesses and collaborations.
Funding for COIL program participants is provided in collaboration with 10C’s Harvest Impact Fund, a community social finance fund developer with Our Food Future aimed at supporting impactful projects to strengthen the Guelph and Wellington communities.
Co-operators is a leading Canadian financial services co-operative, offering multi-line insurance and investment products, services, and personalized advice to help Canadians build their financial strength and security. The company has more than $61.5 billion in assets under administration. Co-operators has been providing trusted guidance to Canadians for the past 76 years. The organization is well known for its community involvement and its commitment to sustainability. Achieving carbon neutral equivalency in 2020, the organization is committed to net-zero emissions in its operations and investments by 2040, and 2050, respectively. Co-operators is also ranked as a Corporate Knights’ Best 50 Corporate Citizen in Canada and is listed among the Best Employers in Canada by Kincentric.
About Our Food Future
Inspired by the planet’s natural cycles, a circular food economy reimagines and regenerates the systems that feed us, eliminating waste, sharing economic prosperity and nourishing our communities. In Guelph-Wellington, we are working to build a regional circular food economy that will achieve a 50 per cent increase in access to affordable nutritious food, 50 new circular economy businesses and collaborations, and a 50 per cent increase in circular economic benefit by unlocking the value of waste.
Our Food Future is one of the ways the City of Guelph and Wellington County are contributing to a sustainable, creative and smart local economy that is connected to regional and global markets and supports shared prosperity for everyone.
David Messer, Manager, COIL
Smart Cities Office, Office of the Chief Administrative Officer
City of Guelph
519-822-1260 extension 3661
Opinion | Economic Trends Aren't What They Used to Be – The New York Times
Back in 2010 a group of conservative academics, economists and money managers signed an open letter warning that the efforts of the Federal Reserve to support the economy would be dangerously inflationary. But the inflation never came. So four years later Bloomberg reached out to as many of the signatories as they could, to ask what happened.
Not one was willing to admit having been wrong.
I don’t want to be like those guys. So I’m currently spending a fair bit of time trying to understand why my relaxed view of inflation early last year has been refuted by events. What I want to do today is share where I am now on that topic, and what my current take says about future policy.
Last spring the debate was focused on the American Rescue Plan, the Biden administration’s large spending package. A number of economists, including Larry Summers, Olivier Blanchard, and Jason Furman, warned that this package would overstimulate the economy — that output and employment would soar to levels that would create a lot of inflationary pressure.
Those of us on the other side argued that the risks of excess spending were much less than they warned — that large parts of the Biden package, like aid to state and local governments, would end up being disbursed gradually over time and therefore not have that much of an inflationary impact. To use the jargon, I argued that the A.R.P. would have a low “multiplier.”
So here’s the funny thing: The multiplier does indeed seem to have been low. The economy has expanded fast, but it started in a deep hole, and at this point is still if anything a bit below its prepandemic trend.
Here, for example, is real gross domestic product:
The Congressional Budget Office regularly publishes projections of “potential” G.D.P. — the level of output consistent with stable inflation. So far the official numbers through the third quarter of 2021, extended by private estimates of growth in the fourth quarter, still put us slightly below what we thought the economy’s potential was going to be.
Here’s another number, the employment rate of prime-age adults, which has generally been a good indicator of the state of the labor market (probably better than the unemployment rate):
We’ve seen a strong recovery in employment, but we’re still significantly below prepandemic levels.
The point is that if you had told me a year ago that this is what current output and employment numbers would be, I wouldn’t have predicted soaring inflation. To put it another way, my expectations of a relatively muted effect of government outlays on demand were more or less vindicated. But of course my expectations of moderate inflation weren’t. So what happened?
Part of the answer lies in supply-chain issues. Overall demand hasn’t grown all that fast, but fear of face-to-face interactions has skewed demand away from services toward goods, overstraining shipping and in some cases manufacturing capacity. These issues account for a lot of recent inflation, but in a way they don’t worry me too much: The private sector has huge incentives to get stuff moving, so sooner or later supply-chain issues will fade away.
However, it’s not just the supply chain; it’s obvious that we’re now experiencing widespread labor shortages even though employment is still below its prepandemic trend.
I mentioned that the employed percentage of prime age adults has generally been a good indicator of the state of the labor market. Another good indicator is the rate at which workers are quitting their jobs: Quits are high when people believe that new jobs are easy to find. Normally these two measures move in tandem; but something has changed.
Here’s a scatter plot of the prime-age employment rate against the quit rate since 2001; the blue dots represent the prepandemic era, the red dots the era since early 2020:
You can see the close relationship between the two measures before 2020. Since then, however, the relationship seems to have shifted, so that a labor market that seems only OK judging by the employment rate looks extremely tight judging by the number of people who are quitting. And wages are rising rapidly, which suggests that quits are telling the real story.
What we’re seeing, of course, is the Great Resignation — which is also, to an important extent, a Great Retirement. A recent blog post from the International Monetary Fund shows that there has been a surge in the number of older Americans (and Britons) choosing not to be in the labor force. (Memo to the IMF: That’s a rather unfortunate acronym you’ve chosen there.)
Now, a labor market in which jobs are easy to find and workers can bargain for higher wages is a good thing. But the fact that labor markets are so tight even though employment and real G.D.P. are below prepandemic projections suggests that we can’t rely on those projections to assess the economy’s productive capacity. For whatever reason or reasons — presumably reasons linked to Covid — the U.S. economy apparently can’t sustainably produce as much as we expected.
And that in turn tells us that it’s time for policymakers to pivot away from stimulus — in particular, that the Federal Reserve is right to be planning to raise interest rates in the months ahead. As I read the data, they don’t call for drastic action: the Fed should be taking its foot off the gas pedal, not slamming on the brakes. But that’s a story for another day.
For now, the moral is that Covid-19 means that we can’t assess where we are simply by comparing our situation to the prepandemic trend. That trend, at least, no longer appears to be our friend.
Canadian dollar gives back weekly gain on rising risk aversion
The Canadian dollar weakened to a one-week low against its U.S. counterpart on Friday as disappointing corporate earnings weighed on investor sentiment and domestic data showed retail sales growing less than expected in November.
The loonie was trading 0.5% lower at 1.2565 to the greenback, or 79.59 U.S. cents, after touching its weakest level since last Friday at 1.2568.
“Global risk sentiment is really in the driver’s seat for FX markets right now,” said Erik Nelson, a currency strategist at Wells Fargo. “CAD is following global equities and oil prices lower.”
Wall Street’s main indexes dropped as Netflix shares plunged after a weak earnings report that also weighed on rivals, putting stocks on course to close out a gloomy week on a sour note.
The price of oil, one of Canada’s major exports, was pressured by an unexpected rise in U.S. crude and fuel inventories while investors took profits after the global benchmarks touched seven-year highs this week.
U.S. crude prices settled 0.5% lower at $85.14 a barrel. [O/R]
The loonie fell 0.1% for the week, giving back gains it made in recent days on rising expectations the Bank of Canada https://www.reuters.com/world/americas/even-omicron-slams-canada-bets-january-rate-hike-rise-2022-01-18 would hike interest rates at a policy announcement next Wednesday.
Canadian retail sales rose 0.7% in November, on higher sales at gasoline stations and building materials and gardening equipment and supplies dealers, Statistics Canada said.
That missed analyst estimates for a 1.2% increase, while preliminary data showed sales falling 2.1% in December.
Canadian government bond yields were lower across a flatter curve, tracking the move in U.S. Treasuries. The 10-year eased 4.3 basis points to 1.790%, pulling back from its highest level in nearly three years on Wednesday at 1.905%.
(Reporting by Fergal Smith; Editing by Barbara Lewis and Alison Williams)
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