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The world’s fastest-growing major economy is headed for more turbulence

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India, despite its economic growth slowing to 4.4% in the December 2022 quarter, is the world’s fastest-growing major economy. But that will be a difficult lead to keep for long amid high interest rates and subdued demand.

The three months ending in December were India’s slowest in three quarters. It had grown 6.3% in the one before that and 13.2% in the June quarter, data released yesterday (Feb. 28) show.

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This slowdown was caused primarily by slowing manufacturing activity, weaker personal consumption, and lower government expenditure. The negative growth in manufacturing indicated rising input costs.

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What are the immediate challenges to India’s growth?

To achieve its full-year growth target of 7%, India needs to grow at 5.1% at least—the Reserve Bank of India’s projection is only 4.2%—in the current quarter, analysts estimate.

Economists at QuantEco Research expect growth to moderate to 6% as post-covid-19 pent-up demand fizzles out. A drawdown in government revenues and higher interest rates have curbed capital expenditure, too. Add to that the disruptions caused by the Ukraine war and the global slowdown.

The challenges that lie ahead for India’s economy include inflation, the continuing global slowdown, and a further weakening of the post-pandemic spurt.

Consumer prices have been on the rise for nearly a year, affecting Indians’ purchasing power. Aggressive interest rate hikes by the RBI to tame inflation have also hit demand. Yet, retail inflation rose to 6.52% in January, breaching the central bank’s upper threshold for the first time in three months.

Worsening it all is the global inflationary trend fueled by the supply chain disruption caused by the Ukraine war.

All this has dampened consumption which, since the pandemic ended, has been cruising along on pent-up demand. That phase is now over.

“We believe that overall growth momentum is softening, as pent-up demand from the lockdown period fades, exports weaken, and tighter fiscal and monetary policy rate take their toll. We expect GDP growth to slow from 6.8% in the financial year 2023 to 5.5% in the financial year 2024,” Pranjul Bhandari, chief India economist at HSBC, told The Indian Express.

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Euro-Area Economy Strengthens More on Service-Sector Surge – Financial Post

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(Bloomberg) — Euro-zone economic growth continued to pick up in March, driven exclusively by the service sector as concerns over energy supplies recede.

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The overall rate of expansion rose to the highest level in 10 months, according to business surveys by S&P Global. Manufacturing output broadly stagnated, however, only supported by a backlog of orders as demand continued to fall.

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“Growth has been buoyed since the lows of late last year as recession fears and energy market worries fade, inflation pressures ease and the unprecedented supply chain delays seen during the pandemic are replaced with record improvements to supplier delivery times,” said Chris Williamson, an economist at S&P Global.

Sentiment in Europe has been improving as it became clear that the region would avoid worst-case scenarios for access to natural gas predicted after Russia cut off supplies to the bloc. Recent turmoil in the banking sector has cast some doubt on how the global economy will develop, though European officials have sounded confident that the sector can withstand any fallout.

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While activity improved in both Germany and France, the strongest performance came in the rest of the 20-nation euro area.

What Bloomberg Economic Says…

“The euro-area composite PMI survey for March suggests the economy is beginning to emerge from a period of stagnation and holding up well under the weight of higher interest rates. While monetary policy works with long and variable lags and choppy waters may still lie ahead, the resilience of the economy should allow the hawks at the European Central Bank to succeed in pushing for more interest rate increases”

—David Powell, economist. For full analysis, click here

Inflation is still running far above the European Central Bank’s 2% target, however, with underlying data becoming the key focus for policymakers. While price gains continued to moderate in March, they remain elevated by historical standards, according to S&P Global.

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“Such stubborn inflationary pressures, fueled primarily by the service sector and rising wage costs, will be a concern to policymakers and suggests that more work may be needed in terms of bringing inflation down to target,” Williamson said.

The jobs market also remained resilient. Employment growth reached a nine-month high, with acceleration seen especially in services in line with rising demand.

Firms’ confidence in the business outlook dipped, though it remained well above levels seen in late 2022. That could be linked to concerns over uncertainty caused by banking-sector stress and the impact of further increases in interest rates, S&P Global said.

The composite PMI reading for the UK edged lower to 52.2 in March from 53.1 the previous month, suggesting the economy has avoided a recession for now. British companies are the most confident they’ve been since the start of Russia’s invasion of Ukraine.

Data earlier revealed activity in Japan’s services sector edged up to the strongest in almost a decade as the return of Chinese tourists boosted demand. The US number due later on Friday is expected to be below 50.

—With assistance from Mark Evans, Joel Rinneby, Tom Rees and Zoe Schneeweiss.

(Updates with UK PMI data in 10th paragraph.)

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Economy headed into a ‘Bermuda Triangle’ financial crisis: Nouriel Roubini

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  • The economy is headed into a “Bermuda Triangle” of risk, economist Nouriel Roubini warned.
  • Roubini pointed to three stressors facing the US economy.
  • He sounded the alarm for a stagflationary debt crisis and a severe recession to hit the US.

In a recent interview on the McKinsey Global Institute’s “Forward Thinking” podcast, the top economist warned that the economy was risking another financial crisis as central bankers continue to tighten monetary policy.

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Federal Reserve officials raised interest rates another 25 basis-points this week, and have hiked rates 475 basis-points over the last year to control inflation. That marks one of the most aggressive Fed tightening cycles in history, and could place the economy under three different kinds of stress, Roubini warned.

First, high interest rates could easily overtighten the economy into a recession, experts say, which reduces income for households and corporations.

Second, high interest rates means firms are battling higher costs of borrowing and waning liquidity, which weighs on asset prices. Last year, US stocks plunged 20% amid the Fed’s rate hikes, with warnings from other market commentators of an even steeper crash in equities this year.

Finally, high interest rates are pressuring the mountain of debt, both private and public, that was amassed during the years of low rates, Roubini said. He pointed to bankrupt “zombies”, which include households, corporations, and governments.

“It’s got like, a Bermuda Triangle. You have a hit to your income, to your asset values, and then to the burden of financing your liabilities. And then you end up in a situation of distress if you’re a highly leveraged household or business firm. And when many of them are having these problems, then you have a systemic household debt crisis like [2008],” he warned.

Roubini, one of the experts who called the 2008 subprime mortgage crisis, has repeatedly sounded the alarm for another crisis to strike the US economy. The scenario he envisions combines the worst aspects of 70s-style stagflation with something like the 2008 crisis, with  a severe recession, stubborn inflation, and mounting debt levels bludgeoning economic growth.

He and other top economists have criticized the Fed’s aggressive rate hiking regime over the last year, and some experts have called central bankers to stop raising interest rates entirely out of fear of “breaking” something in the financial system.

Signs of stress are mounting, the most recent being the failure of Silicon Valley Bank. But pausing interest rates could panic investors and lead to a resurgence of inflation, meaning central bankers are powerless no matter what they do with rates, Roubini has said previously.

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Cuba’s new parliament will face a familiar economic hangover

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For Jose Guerra Ferrer, a Havana-based industrial engineer, “the economic situation in Cuba is bad”. “I hope it can be addressed by the new parliament,” he says, with reference to national assembly elections this weekend.

In recent years, Cuba’s parliament has implemented gradual policy adjustments to try and ease economic constraints and that is Guerra Ferrer’s hope with the country’s upcoming elections.

The country’s highest political body is assembled through committees such as trade unions and student organisations. Once candidates, most of whom are members of the Communist Party of Cuba, or PCC, are nominated, they can confirm their choice for president.

That is certain to be the incumbent, Manuel Diaz-Canel, who took over from Raul Castro in 2018. The following year, in 2019, Diaz-Canel, a PCC stalwart, adopted a new constitution. Amid growing political dissatisfaction, it was designed to modernise Cuba’s entrenched state apparatus.

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Voter absenteeism has become a feature of recent elections in Cuba. Turnout for the November 2022 municipal elections, for instance, fell below 70 percent for the first time, indicating disengagement in a political system that depends on public support.

Decades of sanctions

Asylum seeking migrants, mostly from Venezuela and Cuba, wait to be transported by U.S. Customs and Border Protection agents.
Large numbers of Cubans have been trying to leave the country [File: Go Nakamura/Reuters]

After US-backed leader Fugencio Batista was toppled in 1959, Cuba became a one-party-state led by Fidel Castro and his successors. Since then, the PCC has defied expectations by surviving decades of economic isolation and the disintegration of the Soviet Union, a key ally.

Since the early 1960s, the cornerstone of US foreign policy towards Cuba has been a controversial trade embargo, among other restrictions. Then, in 2015, the Obama administration began normalising relations with Cuba, including a shift away from sanctions.

By contrast, Donald Trump reintroduced old measures and added new ones as well. He barred US tourism and limited the amount of money Cuban Americans could send to their relatives (some remittance restrictions have been eased under President Joe Biden).

“The truth about sanctions is that repercussions are multilayered,” says Guillaume Long, Ecuador’s former minister of foreign affairs. “Governments are prevented from following standard protocols, which undermines state-building capacity.”

He stressed that “there is no doubt that Cuba’s economy has suffered under US sanctions”. The country also experienced a painful adjustment after the collapse of the Soviet Union in 1991. Up to that point, the USSR supplied 90 percent of Cuba’s petroleum needs and 70 percent of all other imports, including food and medicine, mostly at subsidised prices.

Between 1989 and 1994, Cuban trade with the former Soviet Union plummeted by 89 percent. While domestic production was squeezed, the government consolidated its control over the economy. Large public enterprises have survived through privileged access to credit and foreign currency.

Today, Cuba’s economy remains undiversified and commodity-dependent. Tobacco and sugar account for roughly 30 percent of foreign exchange earnings. Cuba also exports healthcare services by sending physicians and nurses to Brazil and Venezuela. Tourism, meanwhile, represents an important source of revenue.

Elsewhere, the PCC has succeeded in establishing reputable education and healthcare systems. Not only is Cuba’s life expectancy higher than the United States’, it is also the smallest country in the world to have successfully developed a vaccine against COVID-19.

Recent setbacks

Customers wait in line to enter a grocery store in Havana, Cuba
Tourism, a key source of revenue, has been badly hit by the pandemic [File: Natalia Favre/Bloomberg]

Due to the outsized role of tourism in Cuba’s economy, COVID-19 dealt the island a body blow. Tourist arrivals fell dramatically during the pandemic, from four million in 2019 to just 356,000 in 2021, Bloomberg News reported. Foreign currency inflows slowed significantly.

To cope with falling international reserves, the PCC was forced to unify Cuba’s dual exchange rate system in January 2021. This involved devaluing the Cuban peso (CUP), which had been set at parity with the US dollar for decades, to the then unofficial rate of 24 pesos per greenback.

However, the new rate was “overvalued” according to Alberto Gabrielle, a senior researcher at Sbilanciamoci, a Rome-based political think tank. “The devaluation did not achieve an equilibrium in Cuba’s import-export mix, causing a scarcity of goods and nudging up inflation,” he added.

Though difficult to measure, Cuba’s official consumer price index rose by 70 percent during 2021. Unofficial estimates showed that inflation increased between 100 percent to 500 percent over the same period. “Queues at supermarkets and pharmacies went from long to longer,” said Gabrielle.

Together with a surge in coronavirus cases at the start of 2021, the hit to purchasing power led to a groundswell of social unrest. In July of that year, Cuba witnessed the largest anti-government demonstrations in years.

Though public dissent is forbidden, thousands of protesters took to Cuba’s streets, voicing concerns over food supplies and the handling of the pandemic by the authorities. The protests were quickly stamped out, but they did succeed in rattling the regime.

“The government got scared, especially when inflation persisted into 2022,” noted Gabrielle. To counter these trends, authorities introduced a second exchange rate for personal transactions in August 2022 at CUP120:$1. This cooled the demand for dollars and eased import price pressures.

Cuba Climate Change
Hurricane Ian knocked out Cuba’s national power grid, damaging infrastructure extensively [File: Ramon Espinosa/AP Photo]

At roughly the same time, Cuba was struck by two concurrent shocks. On August 6, the island’s main fuel import facility – the Matanzas supertanker – was struck by lightning. Three of its tanks caught fire, triggering electricity blackouts nationwide.

A month later, in September, a powerful storm surge rolled across western Cuba. Hurricane Ian knocked out the national power grid. It also prompted thousands of evacuations and caused extensive physical infrastructure damage, including to tobacco and sugarcane fields.

Gradual opening up

Even before the events of last year, the PCC agreed to expand private sector activity in an effort to boost output and relieve goods shortages. In February 2021, the government agreed to grant private company status for 2,000 listed professions (up from 127 previously), facilitating partnerships with foreign investors and limiting state control over commercial activities.

While a new law granting equal commercial rights for private companies and state firms has yet to be agreed upon, the government is hoping that piecemeal reforms will stimulate growth.

“Heterodox policies will be maintained, but a gradual opening will probably be the direction of travel for the new parliament,” said Guillaume Long.

Until then, large numbers of Cubans are expected to try and leave the country. A record 220,000 Cubans were caught at the US-Mexico border in the fiscal year 2022, which ended on September 30, Reuters news agency reported. In December 2022 and January 2023, US Customs and Border Protection reported nearly 50,000 encounters with Cuban migrants.

The experience of Guerra Ferrer, the engineer, is not uncommon, “I have many friends who’ve emigrated. My son may also leave to help my wife and I once we retire.”

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