The RBI Governor Dr. Raghuram Rajan mentioned in his August 2015 that India will see a surge in capital flows due to its relatively better position in the world economy. The data coming out of major emerging market economies strengthens his analysis. However India cannot afford to be complacent in this uncertain global economic environment and must undertake key reforms including GST to strengthen its macro-economic framework.
The economic situation of most of the emerging countries is not very encouraging and India is the only economy where conditions are beginning to improve. The inflation accompanied by GDP growth along with the employment situation has deteriorated in countries such as Brazil, Russia, China and South Africa. India has shown improvement in the above parameters in the recent past and would continue to be on the path of continuous improvement even if slowdown in most of the other economies is evident. There would be repercussions for India as overall slowdown would take its toll to some extent but the domestic dependency for growth would insulate the country to some extent in the current global macroeconomic scenario.
The developed economies such as US and Germany are also strong and are showing sustained improvement in economic parameters but given that interest rates in the US are expected to be increased in the year 2015 on account of normalization of monetary policy, India as an emerging economy would be the only promising bet that investors would have as an option in order to generate a better return on investment in the next few years. Increase in the interest rates by the US would have short term repercussions for India as well but it would even witness an upsurge in investments the moment conditions stabilise.
The emerging market economies are compared here with respect to their economic conditions and there is clear winner amongst them. GDP growth in the latest quarter, inflation and the employment situation has been analysed to give a clearer picture of what to expect in the near future in case of investment flows.
The Brazilian economy shrank 1.9 % in the quarter from April to June 2015, which was much worse than what the market expected, followed by a downwardly revised 0.7 % contraction for the first quarter of 2015. It is the worst performance since the last quarter of 2008, as a rise in exports was not able to offset a slump in private consumption and investment. The GDP annual growth rate contracted 2.60% in the second quarter of 2015 over the same quarter of the previous year, worse than market expectations.
The jobless rate in Brazil increased for the seventh straight month to 7.5 % in July 2015 from 6.9 % in June 2015, which was well above market expectations. It was the highest value since May of 2010 and the biggest for the month of July since 2009. Consumer prices in Brazil increased 9.56 % year-on-year in the month of July 2015. It is the fifth consecutive month with inflation rate above 8 %.
Brazilian economy is going through a phase of decline in GDP growth followed by rise in unemployment and increase in the rate of inflation. A further slowdown in the global economy would worsen the situation in Brazil in the time to come. Economic fundamentals remain weak in every aspect and even if situation were to improve for the global economy it would take time for Brazil to really come out of the woods.
Russian GDP shrank 4.6 % year-on-year in the second quarter of 2015 compared to a 2.2 % decline in the previous three months. It is the largest contraction in six years, marking the first recession since the financial crisis in 2009.
Annual inflation rate in Russia accelerated to 15.6 % in the month of July 2015 from 15.3 % in the previous month. Russian jobless rate decreased for the fourth consecutive month to 5.3 % in July from 5.4 % in June. It is the lowest value since December of 2014 and below market expectations.
Russian economy is going through a phase of decline in GDP growth followed by rise in employment and increase in the rate of inflation. A further slowdown in the global economy would eventually give rise to declining employment levels. Economic fundamentals would deteriorate further to weaken the employment scenario and even if situation were to improve for the global economy it would still take time for Russia to show revival in growth.
The Chinese economy grew a quarter-on-quarter seasonally adjusted 1.7 % in the second quarter of 2015, accelerating from an upwardly revised 1.4 % expansion from January to March and matching market consensus. Year-on-year, the GDP advanced by 7.0 %, the same pace as in the first quarter of 2015. China’s statistics office attributed the steady growth to recent policy stimulus. For 2015, the government expects the economy to grow around 7 %, the slowest expansion in 25 years. In 2014, the GDP grew by7.4 %, slowing from 7.7 % in the preceding year.
China’s annual inflation rate was recorded at 1.6 % in July of 2015, up from 1.4 % increase in the previous month and slightly above market consensus. The politically sensitive food prices increased by 2.7 % while non-food cost rose at a slower 1.1 %.
The People’s Bank of China cut its benchmark one-year lending rate by 25bps to 4.6 % on August 25th, 2015. Policymakers also decided to lower reserve requirements for banks. China central bank unexpectedly decided to devalue the yuan in the month of August 2015 allowing the currency to its lowest point in nearly three years.
China’s economy is going through a phase of stalled GDP growth followed by the same level of employment and a marginal increase in the rate of inflation. A further slowdown in the economy would eventually further slowdown the global economy as it is the second largest in terms of the actual GDP contribution of USD 10.36 trillion. Economic fundamentals would improve albeit at a slower pace but there would be a lag effect on GDP growth as stimulus in terms of abundant liquidity and lower interest rates would take time to materialize.
South African economy expanded 1.2 % year-on-year in the second quarter of 2015, slowing from a 2.1 % growth in the previous period, the worst performance since the recession in 2009.
The annual inflation rate accelerated for the fifth straight month to 5 % in the month of July 2015 from 4.7 % in June, in line with market expectations. It is the highest figure since December last year pushed by higher utilities cost.
The jobless rate in South Africa decreased to 25 % in the second quarter of 2015 from a ten-year high of 26.4 % in the previous period, as more stopped looking for a job and employment went up 1.3 %.
South African economy is going through a phase of slowdown in GDP growth with increase in the rate of inflation. A further slowdown in the global economy would eventually give rise to declining employment levels and stalled inflation. Economic fundamentals would deteriorate further to weaken the employment scenario and even if situation were to improve for the global economy it would still take time for South Africa to show sustained growth.
The Indian economy expanded 7% year-on-year in the second quarter of 2015, slowing from a 7.5% growth in the previous period and below market expectations. India’s GDP advanced 7.5 % year-on-year in the first quarter of 2015, up from a downwardly revised growth of 6.6 % in the previous period supported by a strong expansion in manufacturing and services sectors.
Indian wholesale prices fell 4.05 % year-on-year in July of 2015, following a 2.40 % drop in the previous month and missing market forecasts, as cost of petrol declined further while prices of food dropped. The wholesale inflation has been in negative territory since November of 2014. Consumer prices in India increased 3.8 % year-on-year in July of 2015, down from 5.4 % reported in May. It is the lowest figure on record as food cost rose at a slower pace.
Indian economy is going through a phase of revival in GDP growth followed by decrease in the rate of inflation. A further slowdown in the global economy would give rise to a further decline in the rate of inflation. Economic fundamentals would remain on a strong footing because if the situation were to improve for the global economy it would take less time for India to bounce back in relation to other emerging economies.