Jim Walker, Asianomics: Fear is back; global growth deteriorating

It seems that fear is coming back to financial markets in a big way and financial conditions are turning bad again, isn’t it?

Yeah, I am afraid that’s right but I certainly see on the radar screen it’s obviously led by what’s happening in Southern Europe. But it’s not just Southern Europe. I think people need to be aware that one of the main reasons behind this heightened fear is the fact that governments are being forced to exit stimulus programmes whether it’s slightly higher interest rates in India, tightening in China, rigid fiscal deficits in Europe and US - all of that.

There is a real doubt on whether or not the private sector is truly on the move after what’s happened in the last 18 months. The figures show that certainly there is not very much appetite in the private sector for increased investment and that’s what we need to increase employment. So I think the fear is right back and global growth - I am afraid - is deteriorating again, it’s not improving.

What about the Eurozone because Nouriel Roubini is talking about a potential breakup of the Eurozone, Paul Krugman is saying that Europe may not have been an optimal currency area to begin with? What are your thoughts?

Well I am kind of surprised at the statement by Paul Krugman. We realised that it really never had the conditions for being an optimal currency zone. Countries were far far too much overlaid in terms of debt and budget deficits and of course there is no unified labour market in the Eurozone which is exactly what was required and to smoother the deficit and surplus.

People cannot move easily between Greece and Germany for example. So what we have at the moment is the realisation that some countries have cheated dramatically in the budget deficit possessions. We had the ECB stepping in and then saying we will buy government debt that’s made things worse. It hasn’t made things better.

Everybody was rejoicing at the beginning of last week with the ECB saying that it would buy up government debt, it would buy up private debt and would make sure that things didn’t fall apart. The natural fact is that it was the worst decision that they could have taken and the reason that it was a worst decision is that this wasn’t dealing over the financial system. It wasn’t a top programme to shore up the banking sector over the private sector.

This was trying to cover the cracks in the government sector and roughly those were not cracks. They were chasms especially in places like Greece, Portugal and Spain. It cannot be done and because of ECB action people have lost confidence and as a result of that there is an increase in sense of Europe quite rightly.

Eventually the Euro will become a much stronger currency based on a core number of countries. But I am afraid that the end game to this crisis is that it was going to be exit from the Eurozone - people were getting be thrown out probably rather than leave it and dealt with the stronger core Euro. But in the meantime the Euro will go much much weaker from here certainly.
Robert Shiller is saying that a second recession in the US may not happen this year but it will happen just like the 1937 recession in the US happened - a good four years after the 1929 to 1933 depression was over. What are your thoughts?

Yeah, there are various aspects to this but the most important is that the recovery end of in the US has been led by a huge stimulus programme. Interest rates are zero, government deficit at almost 10% and GDP up 5%-6% in one year. So of course that has pumped huge amounts of money.

People in the US are no longer paying mortgages. So their disposable incomes are actually going up in the last year because they don’t have any outgoings anymore. They are just setting there doing nothing until buying for closets.

But let’s speak very clear about the US economic data that the retail sales are back to around of 2007 levels, industrial production is at 2005 levels, most activity is way way down from where it was by end of 2007 beginning of 2008. The housing market is at 50-year lows - not even rebound that we would count as a rebound. So there is still very significant weakness in the US economy despite massive stimulus.

So what Robert Shiller is worried about is that when the stimulus begins to be withdrawn - and of course Europe is just a few months ahead of the US - the pressure will go on into the US to cut deficit very quickly and also to start tightening on monetary policy. When that happens the private sector is actually quite weak underneath the nearer strength at the moment and that’s all as Southern Euro strength unemployment properly measured.

At the moment the US would be 11.4% but is only 9.9 because so many people have jobbed the actual labour force. So that the possibility of falling back into may be not so much recession is, just cost to zero growth I think is very real for the US over the course of the next 12 months.

How are you mapping the economic environment for India because you have always talked about how you are bullish in India? How would you rate India now?

Yeah, I still look at India really more positively than most other countries in Asia and certainly most emerging markets. I think there are still some weak spots with India going through that the next year or I guess concern is actually growth. It’s not inflation, it’s not RBI tightening. I think RBI is not behind the curve.

The inflation has come for very specific reasons and will be dropping I think pretty quickly over the course of the next 6 months. But if we would look at the money and the credit from India - which are the growth supporting numbers - then what we see is really quite degree of weakness relative to where we were 2 or 3 years ago. That makes us a bit concerned that may be GDP is in a region of 6%-7% this year.

I would expect to come back relatively strongly and probably a degree of risk aversion within the Indian corporate sector remaining over the course of the next 12 to 24 months. That will further down growth. The downside means that the RBI certainly shouldn’t be tightening aggressively over the next few months.
You are talking about 6% to 7% economic growth for this fiscal year when most economist official and unofficial private sector are expecting at least 7.5% to 8%.

Yeah, we are basically belied because of the risk aversion trade coming back and that stops companies from investing strongly. A lot has to do with the monetary conditions in India at the moment which I say up in terms of credit growth and money supply growth slightly trending down. The credit side is much weaker than a few years ago and it doesn’t really adopt 8%-9% growth. It looks very much more or like 6% or 7% even with a good rebounding monsoon.

Government has set itself a very daunting budget deficit reduction target. It was to take the deficit number to 5.5% from 6.9%. But if GDP is not going to grow as strongly as people think, then do you think this deficit reduction target could be met?

I think it’s going to be very tough to meet that 6.9% to 5.5. India is predicated in strong growth at the nominal GDP level and that there will still be good growth at the nominal GDP level. But my guess is it may take the deficit down toward 6% of GDP that certainly knelt towards the 5.5% level which is really required. This is a much tougher stands on spending and government expenditure - specifically at the subsidy level more than anything else. That has to be cut back and we have to get into a much more structural decline in the fiscal deficit - not relying on growth but actually relying on rationalisation of the expenditures.

What is your view on the level of the index, where we may head from here onwards and which pockets do you think will sort of lead to the strong growth kicking in for the next few quarters?

Well I would be tending to be a bit more defensive in my portfolio selection on India at the moment just as I see concerns on my mind of that cyclical recovery. So I would be concentrating a lot more on consumer staples, utilities avoiding the deep cyclicals and we are avoiding the export companies as well and certainly the property sector we are bit worried.

So we would be looking at the defensive sectors. The return on equity in India is a almost guaranteed better than average return purely because India is central buying because it always kept interest rates high in response to the government deficits that means that the private sector considers the capital is scarce and therefore invest much more wisely than in many other countries out in the world.

(from economic times, May 17, 2010)