Trump – Clinton face-off- Effect on Economies worldwide

By Isha Varma

While the result of the Trump-Clinton face-off is unknown as yet, the speculations regarding the same are at its peak.

From Clinton’s email controversy to Trump’s comment on nuclear weapons, there has been a lot to fathom about the US Presidential elections 2016.  One major feature of the Presidential election is the uncertainty and that is exactly what the financial markets don’t like. It creates an atmosphere of risk and fear of financial loss which is dangerous for businesses. Furthermore, the markets will have to adjust with the new ideology and personality of the new President.

According to a report by Merrill Lynch, on an average the first year of a new presidential term witnesses a rise in markets by 6% which is below the normal 7.5% average of all years since 1928. The markets seem to be quiet volatile at present. Political environment affects everyone’s investment behavior. There is conflict of interest between Democratic and Republican supporting investors. Some investors even hold on to the money or make limited investments so as to judge how the markets are reacting to the change and then invest accordingly. Some financial advisors and experienced investors are making strong statements which in turn might influence the investing decisions of the retail investors.

Donald Trump is expected to cut taxes by a large margin. Also, his strong remarks on countries like Mexico might affect the trade relations with these nations under his leadership. Hillary Clinton on the other hand has endorsed regulatory reforms which will prevent Wall Street from taking excessive risk. It has been experienced that the presence of Democrat Presidents has been good for stocks while Republicans are supposedly more business friendly. Also, a Republican President is likely to bring about more changes in policies and hence US financial markets could expect more fluctuations in case Donald Trump wins the elections.

With Trump leading in 168 states as against Clinton who is leading in 131 states, the markets around the globe have been tumbling. Japan’s Nikkei 225 Index dropped 2.4%, Hong Kong’s Hang Seng plunged 1.7%, South Korea’s Kospi Index fell 1.4%, Australia’s S&P ASX/200 lost 1.2%, Dow futures nosedived over 600 points, and the SENSEX crashes 1600 points. The US dollar sank against the Japanese Yen, a condition that will be unfavorable to Japanese exporters, and the Mexican peso plunged nearly 10% to record low versus USD.

However, the fact that stocks have gained under every President only except Nixon and Bush 43, should be a relief. Also it is known that investments in stock markets are usually good in the long run. Change in the economies in the coming months is inevitable. The consolation here is that the change might actually prove to be good.

QUANTITATIVE EASING: A WAY OF STIMULATING ECONOMIC ACTIVITY?

By- Purvee Khandelwal

One of the main tools to control growth is raising or lowering interest rates. Lower interest rates encourage people or companies to spend money, rather than save. But when interest rates are at almost zero, central banks need to adopt different unconventional policies – such as pumping money directly into the financial system i.e. quantitative easing, or QE.

How does it work?

The Central bank purchases financial assets – mostly government bonds – from pension funds, insurance companies, and banks, among other institutions, with electronic cash. It paid for these bonds by creating new central bank reserves – the type of money that bank use to pay each other and the amount of commercial bank money used for lending purposes.

Who has tried QE?

Between 2008 and 2016, the US Federal Reserve in total bought bonds worth more than $3.7 trillion. The UK created £375bn ($550bn) of new money in its QE program between 2009 and 2012. Then in August 2016, the Bank of England said it would buy £60bn of UK government bonds and £10bn of corporate bonds, amid uncertainty over the Brexit process and worries about productivity and economic growth.  The Eurozone began its program of QE in January 2015 and has so far pumped in $600bn of extra money.

What are the expected gains?

 The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence “quantitative” easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets , such as give loans, to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment, spending, and consumption.

What are the risks?

The biggest concern is that pumping more money into the economy could ultimately lead to an inflation problem. Also, the newly created money usually goes directly into emerging markets (through financial markets) and commodity-based economies. Thus, local businesses may not get adequate loans. BRICS countries argue that such actions amount to protectionism and competitive devaluation as QE causes inflation to rise in their countries and penalizes their industries. Thus, a far more effective way to boost the economy would be for the Central bank to create money, grant it directly to the government, and allow the government to spend it directly into the real economy. However, this could also lead to reckless spending by government. Hence, the debate on what tool to use to boost growth continues.

Feasibility Of Export Led Growth In Time Of Global Slow-Down

By- Apoorv Srivastav

The engine of the global economy has started to stagnate. One of the biggest arguments that favors this statement is that the export led growth is no more feasible. The export led growth pioneered by Germany and Japan in 50’s and 60’s was further adopted by the Four Asian Tigers: Hong Kong, Singapore, South Korea and Taiwan, before finally getting implemented by China in early 90’s. The export-led growth rose to eminence in the late 70s, replacing the import-substitution model and was a prominent global economic factor for the following four decades.

The fall of export led growth

Currently, US economy is debt saturated and still struggling to recover from the crash of 2008, and Europe is also constrained by fiscal austerity and Brexit. Export has lost its feasibility as buyers themselves are struggling. And the impact of which can be seen from Bank of Japan adopting negative interest rates & European Central Bank (ECB) implementing Quantitative Easing (QE) to increase the domestic consumption by reducing its lending rate 10 basis points to -0.4%.

Secondly, Emerging Market (EM) economies have become a larger share of the global economy, increasing from 39.1 percent in 1980 to 57 percent in 2014 and their collective export is not letting the industrialized economies recover, leading to the economic tension between EM and Industrialized nations.

For EM country, export led growth would have been a safe bet, but the recessionary condition of the US and Euro market is making hard to find buyers. This proves export led model is critically dependent on the global economy, and any global crisis will affect the economy directly.

The competition has increased with many EM countries following the same model. One of such methods is ‘Currency devaluation’ which countries like China and Japan are using to boost their exports and seeking trade advantage over other countries.

Though export led growth proved to be a sound strategy for Asian countries, but it was not the case everywhere. Mexico, whose GDP growth was 6.4% during 1950-80, reducing to 2.6% for 1980-2008 and finally 1.1% in 2013 because of export led growth model.

To conclude, we can say that the export led economy has lost its feasibility for EM and is posing a risk to the global economy. Countries need to recalibrate and shift from the export led growth to the demand led growth, with a greater role of domestic and regional demand.

Impact of Negative Interest Rate

By Payal Sachdeva

The concept of “Negative interest rate” was flourished after 2008 financial crisis when all other means to reinvigorate the economy had been exhausted. It is a monetary policy tool employed by central banks to combat deflation. This tool was first adopted by Sweden’s central bank in July 2009 when the overnight deposit rate was lowered to -0.25%. European Central bank did the same in 2014 followed by Bank of Japan recently which has resulted in $10 trillion worth of government debt carrying negative yield.

A common misconception with the concept is that the depositors think they need to pay interest for their deposits to the bank. However, this is not true. Usually, commercial banks are required to keep a certain amount of money as reserves at their central bank as a safeguard against bank runs and to accommodate for last minute loans. The central banks generally pay the interest rate on these deposits, however, in Japan and Eurozone, banks have to pay central banks for parking their reserves.

Since commercial banks are charged for parking their reserves with the central bank in negative interest rate regime, they prefer to park that money with other banks to manage liquidity and meet the reserve requirements at a lower rate with an intention to earn some interest. Since a lot of banks try to get rid of their excess reserves, the competition pushes the interbank rate down which enables banks to pass on the benefits to their customers in the form of lower mortgage, personal loan, education loan etc. This is the ultimate objective of lower interest rate – to encourage investment and consumption, thereby stimulating the economy. Also, it might encourage investors to seek avenues abroad for better returns, which eventually leads to the depreciation of the currency due to the currency outflow. This would in turn boost exports to revive the economy. Euro has depreciated against the dollar by 20% since ECB introduced negative deposit rate.

However, a major concern is that banks would be unwilling to increase the lending as the profit margin between lending and deposit rate squeezes when they absorb the cost of negative interest rate. Though central bankers say it’s too early to gauge the impact of interest rate, they predict that if more and more central banks use this tool, it could actually lead to a currency war of devaluations.

Abenomics: Has it really worked for Japan?

By Keerthana Raghavan

Abenomics refers to a set of policies adopted by the Japan Prime Minister Shinzo Abe when he was selected as Prime Minister for the second time in 2012. The policies were implemented in the background of near zero growth rate for past 20 years and huge government debt. The policies were aimed to fight deflation by encouraging private investments and consumer spending.

The Three “Arrows” of Abenomics:

  1. Monetary Stimulus: Monetary stimulus like quantitative easing (when the Central Bank buys bonds from people to lower rates and increase money supply in the economy which would trigger spending) was undertaken. In 2013, the Bank of Japan purchased bonds to reach its inflation target of 2%. The rates are currently negative (-0.1%) in Japan which means the banks need to pay interest to the Central Bank for keeping excess reserves. The whole point is to increase lending and prevent people from saving and also to break the chain of deflation and low spending.
  1. Fiscal Stimulus: Relates to government spending in three main areas ranging from welfare of the people to the infrastructure. The government is trying to create a good environment for business with big building projects. The focus on infrastructure relates to building schools, roads etc. and buildings for the upcoming Tokyo Olympics in 2020. Other measures include fulfilling of its debt obligation which is very high.
  1. Structural Reforms- Policies targeted towards long-term growth focusing on the productivity of its labour force, improving the ease of doing business, deregulation of various industries, increasing inbound tourism etc. productivity of labour force is vital since the demographics of Japan are skewed more towards the older population.

In spite of all these reforms in 4 years nothing much has changed. The GDP growth is still flat this quarter and capex has declined 0.4%. The prime minister has also delayed the hike in consumption tax to 10% to 2019 for the worry of consumer spending taking a hit.

 Why has Abenomics failed?

The major problem in Japan has been a chronic lack of demand for goods. The problem is rooted in the demography. The growth is possible only if there is a major technological growth driver that can revive the economy or if there is huge immigration to balance out the ageing population and shrinking workforce. The fiscal stimulus cannot keep continuing since the budget of Japan is already constrained. The need of the hour is to accept the fact that Abenomics has failed and look for reforms that may boost the economy.

WHAT DOES CHINESE SLOWDOWN MEAN FOR INDIA?

By Priyanka Modi

Edited by Sachit Modi

Executive Summary

The purpose of this paper is to analyze the impact of the slowdown in the economic growth of China on India. I will analyze the repercussions of Chinese economic crisis on the global economy. India being well-integrated with the global economy cannot be alienated from the effects of the slowdown. I will discuss both the benefits and the negative implications for the Indian economy. In the midst of this crisis, there is also an opportunity for India. I will consider the steps that can be taken by the Indian government to reduce the degree of the negative impacts of the weakening Chinese economy and leverage the opportunities at hand.

Ever since the economic growth of China, India’s largest trading partner in goods started slowing down, concerns have been raised over its possible impact on the Indian economy. The steep fall in value of the Chinese currency, Yuan, in recent times has once again emboldened the naysayers. While it will be erroneous to argue that India will not be impacted by the economic churning happening in China, it will be equally irresponsible to suggest that India will be completely doomed if China falters. In value terms, China accounts for approximately one-tenth of India’s merchandise trade, and bulk of it comes from imports of goods to India. India’s trade deficit with China stood at $51.86 billion, with a bilateral trade of $71.22 billion in 2015. During this period, India’s exports to China came in at $9.68 billion while imports stood at $61.54 billion. With respect to 12 major product groups largely manufactured by MSMEs, imports from China grew at a higher rate than respective imports from all other countries combined during the period negative impact of a Chinese slowdown as trade flows slow down. At the same time, it should also explore the positive side and leverage the opportunities it has.

Implications of Chinese slowdown on the Global Economy

China used to have the fastest growing economy with growth rates averaging 10% over the past 30 years, according to the International Monetary Fund. They account for close to half of the global consumption of copper, aluminium and steel, and more than 10% of the crude oil. China has driven global growth, which has averaged a paltry 3% a year since 2008. So, the Chinese economy slowdown would impact different regions of the world in different ways depending on their exposure. In countries like Australia, Brazil, Canada and Indonesia, which are dependent on the commodity exports, the slowdown could have a negative impact on their GDP. However, the inevitable fall in the commodity prices could be beneficial for the countries that consume the commodities, such as the United States. Either way, the slowdown will require some adjustment on the part of the global economy. As per IMF, the country was the single largest contributor to the global economic growth, contributing 31% on average between 2010 and 2014. In this scenario, slower Chinese GDP growth would definitely have global repercussions. A fall in exports to China will impact countries such as South Korea, Japan, Brazil and Australia as exports to China are ~20-30% of total exports for these countries. India too won’t be spared as the overall global growth falters.

Positive Impact on India

Lower commodity prices: The first and an overwhelmingly positive impact of a slowdown in China’s commodities demand on India would be through lower commodity prices. India imported $139 billion worth crude and petroleum products in the FY 2015, and as a rough rule of thumb, every $1 drop in crude prices results in a $1 billion drop in the country’s oil import bill.

Attract foreign capital: Though India cannot do much about the currency, the rupee is expected to remain strong as oil prices tumble and markets remain flush with foreign money. While the impact of China is negative for exports, it may provide a good opportunity for Indian debt and equity markets. The Chinese devaluation has scared foreign investors who may flock to India to look for better returns. A depreciated currency shrinks the dollar value of investments at the time of repatriation. Given that other large emerging markets such as Brazil, Russia and South Africa are going through their own economic issues, India currently is the best-placed country among the top developing nations to attract these flocking investors.

Lower cost of infrastructure: China is the world’s largest copper consumer, accounting for 40% of the global consumption. The Chinese slowdown has resulted in the fall in prices of the hard commodities, especially copper and aluminum. These commodities constitute the largest portion of the infrastructure bills. Thus, the fall in prices could be beneficial for India, whose major focus at this time is building a strong infrastructure network for the country. This fall would help India to reduce the cost of constructing new infrastructure and would act as a supporting element to initiatives such as the Smart City Mission.

Control deficit and inflation: Oil prices were already tumbling down because of the global slowdown and the possible US-Iran deal. The Chinese economic slowdown further plummeted the prices. Low oil prices help India to control its deficit and keeps inflation under check.

Higher profits for Indian corporates: Over the past few years, due to the depressed domestic demand, many of the Indian corporates had been struggling with their pricing power and were unable to pass on the increased cost to the end consumer. Cheap global crude and commodity prices mean lower input costs, translating into higher profit margins for them. This will act as a major respite for them.

Negative Impact on India

India’s export growth: India’s exporters will lose out on currency competitiveness in the segments where it competes directly with China, particularly textiles, apparels, chemicals and project exports. If the Chinese demand slows down, its raw material requirement will go down, and India’s exports to that country may decrease to such an extent that it may not be able to take advantage of the Yuan devaluation to earn more dollars. The fact that India’s exports to China declined 19.5 percent to $11.9 billion in 2014-15 from $14.8 billion a year ago illustrates this. India’s trade deficit with China has almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15. And China’s share of India’s total trade deficit is up from just under 20% in 2009-10 to 35% in 2014-15. Thus, there is a chance that India may lose out in the race.

Indian metal producers: China accounts for nearly half of the world’s steel production and as construction and investment slows down, the decline in demand for commodities will hurt the Indian metal producers. Steel companies and Aluminium manufacturers may start facing losses. Hindalco and Balco, for instance, are increasingly relying on costlier captive coal. Steel manufacturers like JSW Steel and Tata Steel were forced to lower their prices and face the fear of dumping from across the border. Also, companies like Tata Steel and SAIL, which have their own mines, will suffer the most as they will not be able to benefit from the lower iron ore and coal prices. Metal producers like JSW, who buy coal and iron ore from the open market, would be the least affected.

Tyre industry: As demand slows down in their home market, Chinese tyre makers might start exporting tyres at very competitive rates to the rest of the world. A Chinese tyre is around 30-40 per cent cheaper as compared to the domestic prices. Thus, the commercial vehicle tyre segment will be negatively impacted as most of the consumers are more concerned about the value rather than the brand.

Automobile industry: China had the potential of becoming the fastest growing market for the automobile exporters and manufacturers. As the demand in their market goes down, companies like JLR, who were investing in that market, will have to look for alternate options.

How should India react?

India’s GDP has expanded by 7.3 percent in the last quarter of 2015 whereas China’s GDP slipped to 6.8 percent in the same period. India will be the fastest-growing major economy in 2016-17 growing at 7.5%, ahead of China, at a time when global growth is facing increasing downside risks, as per the World Economic Outlook released by the IMF in April 2016.

Since we are already growing, now is the right time to leverage the Chinese slowdown to our advantage. India can surely benefit from the opportunities it has by focusing on the following-

Make in India: With the government of India giving a lot of weight to the ‘Make in India’ campaign, this may be the time to provide impetus to manufacturing and invite Chinese companies to set up a manufacturing base in India.

Growth center to invest: A slowdown in the Chinese economy would also mean that the global finance and capital market would look for new growth centers to invest in. The government should invest in infrastructure like roads, railways etc. and introduce reforms to improve business conditions in India. By providing an attractive alternative to China, India can have a much bigger pie of the global capital, which in any case it needs to fund its huge infrastructure capital requirement.

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Stem the rupee’s fall: A bigger concern that arises from the Chinese devaluation is for the Reserve Bank. RBI governor, Raghuram Rajan, who had been giving warning against the “beggar thy neighbor” policies, may have to alter rate decisions in order to keep up with the global environment. The Reserve Bank of India could sell dollars in the market to increase the rupee’s value. There are several other measures possible that range from floating a sovereign bond to raise money from NRIs to making the import of luxury goods costlier by imposing duties on them.

Anti-dumping duty: The steel industry and the government, both are worried over dumping from China. So far, there have been 322 anti-dumping cases in 2015, of which 177 cases involve China. The Finance Ministry has imposed antidumping duties on the import of hot-rolled stainless steel (HR SS) flats of grade 304 originating from China, Malaysia and South Korea. The anti-dumping duties will be effective for a period of five years starting 2015. India consumes about 1 million ton of this type of stainless steel and more than 40 percent of that is imported, mainly from China. The anti-dumping duty can also be extended to the 200 grade stainless steel as it commands a market share of more than 50 percent in India.

Conclusion

The impact of China’s slowdown on India would depend on many factors such as lower input prices, intensity of competition from cheaper imports and the pace of global growth. The speed at which we go ahead with the reforms is very important. It is not a matter of global economy slowing down, but how India speeds up its reforms. India will have to come to grips with the fact that in an integrated world, much is beyond its control and it needs to focus on the things it can change – boosting investments and generating jobs.

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About the author:

She is a PGDM finance student of batch 2015-17 at TAPMI. Her area of interest includes economic research and risk management. You can contact her at priyankam.17@tapmi.edu.in