India has an economic growth problem

As 2019 has developed we have been noting the changes in the economic trajectory of India. Back on October 4th we noted this from the Reserve Bank of India as it made its 5th interest-rate cut in 2019.

The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

This was in response to this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

For India that was a slow growth rate for what we would call the second quarter as they work in fiscal years.

What about now?

Friday brought more bad news for the Indian economy as this from its statistics office highlights.

GDP at Constant (2011-12) Prices in Q2 of 2019-20 is estimated at `35.99 lakh crore, as against `34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent. Quarterly GVA (Basic Price) at Constant (2011-2012) Prices for Q2 of 2019-20 is estimated at `33.16 lakh crore,
as against `31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent over the corresponding quarter of previous year.

The areas which did better than the average are shown below.

‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ ‘Financial, Real Estate and Professional Services’ and ‘Public Administration,
Defence and Other Services’.

The first two however slowed in the year before leaving us noting that the state supported the economy as you can see below.

Quarterly GVA at Basic Prices for Q2 2019-20 from this sector grew by 11.6 percent as compared to growth of 8.6 percent in Q2 2018-19. The key indicator of this sector namely, Union Government Revenue Expenditure net of Interest Payments excluding Subsidies, grew by 33.9
percent during Q2 of 2019-20 as compared to 22.2 percent in Q2 of 2018-19.

Regular readers will not be surprised what the weakest category was.

Quarterly GVA at Basic Prices for Q2 2019-20 from ‘Manufacturing’ sector grew by (-)1.0
percent as compared to growth of 6.9 percent in Q2 2018-19.

Also those who use electricity use as a signal will be troubled.

The key indicator of this sector, namely, IIP of Electricity registered growth rate of 0.4 percent during Q2 of 2019-20 as compared to 7.5 percent in Q2 of 2018-19.

In terms of structure the economy is 31.3% investment and 56.3% consumption. The investment element is no great surprise in a fast growing economy but it has been dipping in relative terms. The main replacement has been government consumption which was 11.9% a year ago and is 13.1% now as we get another hint of a fiscal boost.

Switching to a perennial problem for India which is its trade deficit we see that it was 3.8% of GDP in the third quarter of this year. That is a little better but there is a catch which is that it has happened via falling imports which were 26.9% of GDP a year ago as opposed to 24% now. So another potential sign of an internal economic slowing.

We can move on by noting that this time last year the GDP growth rate was 7% and that The Hindu reported it like this.

Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%, the government announced on Friday.

The lowest GDP growth in six years and three months comes as Parliament has been holding day-long discussions on the economic slowdown, with Union Finance Minister Nirmala Sitharaman assuring the Rajya Sabha that the country is not in a recession and may not ever be in one.

4.5% growth is a recession?

Unemployment

The numbers are rather delayed am I afraid leaving us wondering what has happened since.

Unemployment Rate (UR) in current weekly status in urban areas for all ages has been estimated as 9.3% during January-March 2019 as compared to 9.8% during April- June 2018.

Inflation

This has been picking up as the Economic Times reports below.

Inflation touched 4.62%, according to the data released by the statistics office on Wednesday, compared to 3.99% in the month of September. Inflation, as measured by the Consumer Price Index (CPI), was 3.38% in October last year.

Sadly for India’s consumers and especially the poor much of the inflation is in food  prices as inflation here was 7.9%. Vegetables were 26.1% more expensive than a year before and it would seem the humble onion which is a big deal in India is at the heart of it. From India Today.

Households and restaurants in India are reeling under pressure as onion prices have surged exponentially  across the country. A kilo of onion is retailing at Rs 90-100 in most Indian states, peaking at Rs 120-130 per kilo in major cities like Kolkata, Chennai, Mumbai, Odisha, and Pune.

For those wondering about any inflation in pork prices then the answer is maybe.The meat and fish category rose at an annual rate of 9.75%.

Manufacturing

We noted in the GDP numbers that there was a fall but this seems to have sped up at the end of the quarter as it fell by 3.9% in September on a year before driven by this.

The industry group ‘Manufacture of motor vehicles, trailers and semitrailers’ has shown the highest negative growth of (-) 24.8 percent followed by (-) 23.6 percent in ‘Manufacture of furniture’ and (-) 22.0 percent in ‘Manufacture of fabricated metal products, except machinery and equipment’ ( India Statistics)

Fiscal Policy

From Reuters last month.

After the corporate tax cuts and lower nominal GDP growth, Moody’s now expects a government deficit of 3.7 per cent of GDP in the fiscal year ending in March 2020, compared with a government target of 3.3 per cent of GDP.

Also there is this from the Economic Times.

In India, private debt in 2017 was 54.5 per cent of the GDP and the general government debt was 70.4 per cent of the GDP, a total debt of about 125 of the GDP, according to the latest IMF figures.

The ten-year bond yield is 6.5% showing us that India does face substantial costs in issuing debt.

Comment

We get another hint of the changes at play as we note this from the Reserve Bank of India in November and note that the result was 5%.

For Q1:2019-20, growth forecast was revised
down from 7.2 per cent in the November 2018 round
to 6.1 per cent in the July 2019 round.

As we look forwards it is hard to see what will shake India out of its present malaise.Of course if the daily news flow that the trade war is fixed ever turns out to be true that would help. But otherwise India may well still be suffering from the demonetarisation effort of a couple of years or so ago.

After the falls of last year the Rupee has been relatively stable and is now at 71.6 versus the US Dollar. A lower Rupee is something which gives with one hand ( competitiveness) and takes away with another ( cost of imports especially oil). But as it starts its policy meeting tomorrow the RBI will feel the need to do something in addition to changing its fan chart for economic growth ( lower) and inflation ( higher) giving us what is for India something of a stagflationary influence.

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The story of India, its banks and five interest-rate cuts in a year

This morning has brought us a reminder of what has become one of the certainties of life. Oh for the time when we thought they were simply death and taxes whereas now we can add interest-rate cuts to this list. So without further ado let me look to thw sub-continent and had you over to the Reserve Bank of India,

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 4, 2019) decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 per cent from 5.40 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.
The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

As you can see the 0.25% interest-rate cut has been accompanied by some Forward Guidance of more being on the way. This is another reminder of my point earlier this week that central bankers are pack animals as to any impartial observer the whole concept of Forward Guidance has not worked or we would not be where we are. Still it does flatter central banking egos and make them feel important. After all it was only on the 4th of April I was pointing out they were telling us this.

The MPC also decided to maintain the neutral monetary policy stance.

Now I do not know about you but five interest-rate cuts in a year only three-quarters finished does not especially look neutral to me. So they were certainly not singing along with the Who.

I can see for miles and miles
I can see for miles and miles
I can see for miles and miles and miles and miles and miles
Oh yeah

Indeed there was dissent back then about the rate cut.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

Furthermore it is worse than this because when I have contact with central bankers and point this out I do get the reply that it does not matter if Forward Guidance is wrong. This proves that the thin air up in top of their Ivory Towers does affect the brain.

What has caused this?

We have another reminder of central bankers being pack animals. What is Indian for Johnny Foreigner anyway?

Since the MPC’s last meeting in August 2019, global economic activity has weakened further……..The macroeconomic performance of major emerging market economies (EMEs) was weighed down by a deteriorating global environment in Q3…….worsening global growth prospects.

You could circle the world via central bankers doing this but would then be reminded of the wisdom of Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from

In terms of the domestic economy there was this.

On the domestic front, growth in gross domestic product (GDP) slumped to 5.0 per cent in Q1:2019-20, extending a sequential deceleration to the fifth consecutive quarter.

So we are reminded of a couple of things. In addition to the slowing growth we have the fact that 5% GDP growth is considered slow in India. Oh and they mean second quarter as it is slightly unusual to present the numbers in a fiscal year style.

Now the central banking Johnny Foreigner facade crumbles away.

Of its constituents, private final consumption expenditure (PFCE) slowed down to an 18-quarter low.

So the weakness was mostly domestic after all. Perhaps they were hoping no-one would read this far down the report.

You will not be surprised to learn that there was also an issue here.

Industrial activity, measured by the index of industrial production (IIP), weakened in July 2019 (y-o-y), weighed down mainly by moderation in manufacturing. In terms of uses, the production of capital goods and consumer durables contracted……… The Reserve Bank’s business assessment index (BAI) fell in Q2:2019-20 due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins of the surveyed firms.

Also this is hardly hopeful.

The sales of commercial vehicles, a key indicator for the transportation sector, contracted by double digits in July-August.

Meanwhile as this is India there is also a reflection on the Monsoon season.

Abundant rains in August and September have led to improved soil moisture conditions in most parts of the country, particularly central India, compared to the corresponding period of the last year. Overall, the prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.

Some Perspective

The Statistics Times has crunched some numbers so let us start with a perspective on what the growth rate was only recently.

Real GDP or Gross Domestic Product (GDP) at constant (2011-12) prices in the year 2018-19 is estimated at ₹140.78 lakh crore showing a growth rate of 6.81 percent over First Revised Estimates of GDP for the year 2017-18 of ₹131.80 lakh crore.

I often get asked about GNP, well as GNI is the new GNP.

GNI (Gross National Income)  ₹139.32 lakh crore

If we look further back.

In new series, figures are available since 2004-05. GDP of India has expanded by 2.57 times from 2004-05 to 2018-19.

According to IMF World Economic Outlook (April-2019), GDP (nominal ) of India in 2019 at current prices is projected at $2,972 billion. India contributes 3.36% of total world’s GDP in exchange rate basis. India shares 17.5 percent of the total world population and 2.4 percent of the world surface area. This projection would make India as 5th largest economy of the world.

Trouble,Trouble Trouble

One of my earliest themes as a blogger was that central banks have lost control of real world interest-rates.

Monetary transmission has remained staggered and incomplete. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. However, the WALR on outstanding rupee loans increased by 7 bps during the same period.

In terms of economic theory this is along the lines of what was called Liquidity Preference Theory at least in terms of principles. It is why I think interest-rate cuts below around 1.5% are ineffective and at times can make things worse and not better. We now have a new nuance that due to its unique circumstances India has some features of this at interest-rates of around 5%.

Comment

If we start with an international perspective then we have another week where Australia and India have cut interest-rates. This means that the number of interest-rate cuts in the credit crunch era must be pushing past 750 confirming my view of them being one of the new certainties of life.

Next comes the issue of “The Precious! The Precious!” which I have avoided so far explicitly although of course regular readers of my work will have spotted the implicit reference via the transmission of interest-rate cuts. Let me make me point with this from the RBI on the 26th of September.

Rumours are being circulated in sections of social media about operations of banks to create panic among the public. All are advised not to fall prey to such baseless and false rumours.

And Tuesday.

There are rumours in some locations about certain banks including cooperative banks, resulting in anxiety among the depositors. RBI would like to assure the general public that Indian banking system is safe and stable and there is no need to panic on the basis of such rumours.

The trigger for this is described by @fayedsouza

The RBI must communicate with depositors 1. When will they get access to their money? 2. How did the bank fraud go unnoticed for a decade? 3. Which other bank fraud have you missed while napping over the last 10 years? #PMCBankScam

 

What is the economic impact of an oil price shock?

The economic news event of the weekend was the attack on the Saudi oil production facilities. It looks as though Houthi rebels and Iran were involved but forgive me if I am careful about such things along the lines of this from the Who.

Then I’ll get on my knees and pray
We don’t get fooled again

As you can imagine there was a lot of attention on the London oil price opening last night and no doubt fear amongst those who were short the oil price. Their fears were confirmed as we saw an initial flurry of stop loss trading which can the price of a barrel of Brent Crude Oil go above US $71 which was some US $11 higher. It then fell back to more like US $68 quite quickly. For those unaware this is a familiar pattern in such circumstances as some will have lost so much money they have to close their position and everybody knows that. It is a cruel and harsh world although of course you need to know the nature of the beast before you play.

Thus the first impact was some severe punishment for sections of the oil trading market. The rumour was that a lot of quant funds were short of oil and we will have to wait and see if there is a blow-up here. If we move on we see that the oil price has been falling this morning leaving the price of a barrel of Brent Crude at US $65.50 or up over 8%.So let us start by looking at the winners from a higher oil price.

Winners

A clear group of winners and presumably the group who have taken the edge off the higher oil price are the shale oil wildcatters in the United States and elsewhere.

“Since the last in-depth review five years ago, the United States has reshaped energy markets both domestically and around the world,” the IEA’s Executive Director, Fatih Birol, said at the presentation of the report on Friday, accompanied by U.S. Secretary of Energy Rick Perry. ( oilprice.com )

If we continue with this analysis here is some more detail.

U.S. crude oil exports have soared since the ban was lifted at the end of 2015, to reach 3.159 million bpd on average in June 2019, according to the latest available EIA crude export detail.

As you can see the impact of the shale oil era had one underlying effect last night and this morning via the way that Saudi production is not as important as it was. But also there is the economic model of the shale oil industry which I have pointed out before is more of a cash flow model than a profit one. So I would have expected them to rush to hedge their production last night and this morning. As it happens these levels are ones which would be profitable for them as their costs are often around US $50 per barrel. However they will not be making as much as you might think as they would have impacted more on the WTI ( West Texas Intermediate ) benchmark which is about US $5 lower than the Brent benchmark.

Other companies in the production business will also be winners and we see an example of that as the British Petroleum share price is up 4% at 523 pence today.

Next comes the countries who are net oil producers. We have looked at the US already and the position for Saudi Arabia is mixed as it is getting a higher price but has lower production. Russia is a clear winner as its economy depends so much on its oil production.

Exports of mineral products (consisting mainly of oil and natural gas) accounted for 59.2% of total Russian exports in 2016 (Rosstat, 2017).

There is quite a list of winners in the Middle East including ironically Iran assuming it will be allowed to sell its oil. Then places like Kazahkstan as well as Canada and to some extent Australia. There is also Norway where according to Norskpetroleum it represents some 16% of GDP and 40% of exports as well as this.

The government’s total net cash flow from the petroleum industry is estimated to NOK 251 billion in 2018 and NOK 263 billion in 2019

Thus I am a little unclear how Oxford Economics are reporting that Norway would lose from a higher oil price.

There are quite a few African countries which produce oil and Libya comes to mind as do Ghana and Nigeria ( assuming the output of the latter can avoid the problems there).

Another group of winners would be world central banks especially the ECB after its moves on Thursday. The reason for this is that they have been trying to raise the inflation rate for some time now and either mostly or entirely failing as Mario Draghi pointed out on Friday..

The reference to levels sufficiently close to but below 2% signals that we want to see projected inflation to significantly increase from the current realised and projected inflation figures which are well below the levels that we consider to be in line with our aim.

Should this transpire then we will no doubt see a shift away from core and the new “super core” measures of inflation which for newer readers basically ignore what are really important.

Losers

These are the net oil importers which are most of us. In terms of economic effect the standard view has been this from FXCM.

Data analysed by the Federal Reserve shows that a 10 percent increase in the price of oil is associated with about a 1.4 percent drop in the level of U.S. real GDP.

The 10% depends on the actual price but that has been a standard with the Euro area thinking there would be the same effect on it from a US $5 move. Of course these days the US would see more offset from the shale industry and I think worldwide the advance of renewable energy would help at the margins. But a higher oil price leads to a net loss overall as the importers are assumed to fall by more than the exporters rise. Geographically one thinks of China, Japan and India.

The effect on inflation is unambiguously bad and let me offer a critique of the central banking view above. The impact of inflation on real wages will make workers and consumers worse and not better off reminding us that central bankers have long since decoupled from reality.

Comment

There are a couple of perspectives here. The first is that in any warlike situation the truth is the first casualty. This leads to a situation where we do not know how long Saudi oil output will be reduced for, which means that we do not know how long there will be an upwards push on the oil price. Next comes a situation where looking ahead there will be fears that attacks like this could happen again. That is in some way illogical as defences will no doubt be improved but is part of human nature especially as we now know how concentrated the production facilities are in Saudi Arabia.

Another perspective is provided by the fact that the oil price is back to where it was in May and some of July.

Oh and central bankers used to respond to this sort of thing with interest-rate increases whereas later this week we are expecting an interest-rate cut from the US Federal Reserve. How times change…..

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The Reserve Banks of India and New Zealand press the panic button

This morning brings to mind the famous poem from Rudyard Kipling.

Oh, East is East, and West is West, and never the twain shall meet,
Till Earth and Sky stand presently at God’s great Judgment seat;
But there is neither East nor West, Border, nor Breed, nor Birth,
When two strong men stand face to face, though they come from the ends of the earth!

Whilst we in the west like to think we are still in charge of events the economic axis of the world is plainly shifting eastwards. This has today shifted towards central bank policy because the western ones have fired so much of their ammunition and now find that events are running ahead of them. Whereas if we head east we see a barrage of action.

India

Regular readers will know I have been following closely the moves of the Reserve Bank of India this year. Indeed those who follow me will know I challenged Bloomberg a couple of months ago when (breathtakingly) they put it as a central bank unlikely to cut interest-rates. Whereas here is this morning’s RBI statement.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to:

  • reduce the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent with immediate effect.
  • The MPC also decided to maintain the accommodative stance of monetary policy.

There are various issues here beyond this being yet another RBI interest-rate cut which is the fourth this year. Then we note that it was of 0.35%! How on earth did they get to that? Some plainly wanted 0.5% but could not get it and compromised. Thus we are very near to one of the central bank group think insanities of our time which is that a 0.1% change in interest-rates is significant, as they have plainly added 0.1% to the usual 0.25%. Then as we have followed this we see that the vote for easing was unanimous ( albeit with disagreement over the size of the cut), which is a change. In the previous moves we have seen dissent to the interest-rate cuts whereas now not only is this latest cut voted for we get a hint of more from “maintain the accommodative stance.”

We have to wait to the bottom of the statement to get to an explanation of the reasoning.

The MPC notes that inflation is currently projected to remain within the target over a 12-month ahead horizon. Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish.

I think they mean policy meeting. But as we mull this we note that it seems to come from an alternative reality to their GDP forecasts. Also if you are poor you are likely to be rather less keen on an inflation rise as this is happening.

 First, the uptick in food inflation may be sustained by price pressures in vegetables and pulses as more recent data suggest.

New Zealand

Even earlier today the Reserve Bank of New Zealand advanced with all the aggression of an All Black number 8.

The Official Cash Rate (OCR) is reduced to 1.0 percent. The Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives.

In itself a 1% interest-rate is no shock but the size of the move moves me towards my whiff of panic headline so let me give their explanation from the RBNZ.

The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

How could both options be consistent with the forward path? After all they then call it a “larger monetary stimulus” in a clear contradiction.

We do see something familiar as there is a section which is the sort of thing that used to be used as an explanation for interest-rate rises.

Employment is around its maximum sustainable level…….Recent data recording improved employment and wage growth is welcome.

In fact things can only get better.

In New Zealand, low interest rates and increased government spending will support a pick-up in demand over the coming year. Business investment is expected to rise given low interest rates and some ongoing capacity constraints.

This is all a little curious as we see that they are plainly afraid of something. Perhaps it is house price falls.

The outlook for household spending was discussed with regard to the assumed dampening impact of soft house price inflation. Some members noted lower mortgage rates could contribute to a stronger pick-up in house price inflation,

You may note that “some members” are pretty explicitly calling for more house price inflation.

What central bankers never seem to acknowledge is their role in the formation of this.

The Committee noted that low business confidence had dampened business investment in 2018 and had remained weak in mid-2019.

What I mean is the psychological impact of low and indeed ever lower interest-rates on confidence. As we discuss so often the credit crunch changed economic reality and like generals central banks are open to the criticism that they are fighting the last war rather than the current one. An example is below.

The members noted that estimates of the neutral level of interest rates have continued to decline and this was consistent with generally lower interest rates over time.

I find the Kiwi move particularly significant as it is geographically about as isolated as you can get and yet it cannot escape the black hole sucking us all lower. For example like so many central banks it is worried that it is losing what influence it had.

The Committee agreed to continue to monitor and assess the impacts of monetary policy, including the transmission through to retail interest rates.

Bank of Thailand

And there there were three as the Bank of Thailand had the genesis of an idea.

I will follow you will you follow me

Although this time not everyone was onboard.

The Committee voted 5 to 2 to cut the policy rate by 0.25 percentage point from 1.75 to 1.50 percent, effective immediately. Two members voted to maintain the policy rate at 1.75 percent.

The driver here is the slow down in trade in the Pacific which we looked at last week.

In deliberating their policy decision, the Committee assessed that the Thai economy would expand at a lower rate than previously assessed due to a contraction in merchandise exports, which started to affect domestic demand.

Also it was only Monday I pointed out that nobody wants a strong currency these days.

With regard to exchange rates, the Committee expressed
concerns over the baht appreciation against trading partner currencies, which might affect the
economy to a larger degree amid intensifying trade tensions.

Comment

We have found that just like water interest-rates head downhill these days. There have been somewhere around 750 interest-rate cuts and of course we expect more. The three today will be followed by others as we note that the balance has shifted eastwards. This is for two main reasons. The trade slow down is hitting the Pacific region harder than elsewhere and because they can. Mostly they have higher interest-rates ( for now anyway) so there is some scope to cut.

Of course if the interest-rate cuts were really a game changer then we would not be where we are would we?

The Investing Channel

 

 

Are we on the road to a US $100 oil price?

As Easter ends – and one which was simply glorious in London – those of us reacquainting ourselves with financial markets will see one particular change. That is the price of crude oil as the Financial Times explains.

Crude rose to a five-month high on Tuesday, as Washington’s decision to end sanctions waivers on Iranian oil imports buoyed oil markets for a second day.  Brent, the international oil benchmark, rose 0.8 per cent to $74.64 in early European trading, adding to gains on Monday to reach its highest level since early November. West Texas Intermediate, the US marker, increased 0.9 per cent to $66.13.

If we look for some more detail on the likely causes we see this.

The moves came after the Trump administration announced the end of waivers from US sanctions granted to India, China, Japan, South Korea and Turkey. Oil prices jumped despite the White House insisting that it had worked with Saudi Arabia and the United Arab Emirates to ensure sufficient supply to offset the loss of Iranian exports. Goldman Sachs said the timing of the sanctions tightening was “much more sudden” than expected, but it played down the longer-term impact on the market.

 

So we see that President Trump has been involved and that seems to be something of a volte face from the time when the Donald told us this on the 25th of February.

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile! ( @realDonaldTrunp)

After that tweet the oil price was around ten dollars lower than now. If we look back to November 7th last year then the Donald was playing a very different tune to now.

“I gave some countries a break on the oil,” Trump said during a lengthy, wide-ranging press conference the day after Republicans lost control of the House of Representatives in the midterm elections. “I did it a little bit because they really asked for some help, but I really did it because I don’t want to drive oil prices up to $100 a barrel or $150 a barrel, because I’m driving them down.”

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.” ( CNBC)

If we stay with this issue we see that he has seemingly switched quite quickly from exerting a downwards influence on the oil price to an upwards one. As he is bothered about the US economy right now sooner or later it will occur to him that higher oil prices help some of it but hinder more.

Shale Oil

Back on February 19th Reuters summarised the parts of the US economy which benefit from a higher oil price.

U.S. oil output from seven major shale formations is expected to rise 84,000 barrels per day (bpd) in March to a record of about 8.4 million bpd, the U.S. Energy Information Administration said in a monthly report on Tuesday……..A shale revolution has helped boost the United States to the position of world’s biggest crude oil producer, ahead of Saudi Arabia and Russia. Overall crude production has climbed to a weekly record of 11.9 million bpd.

Thus the US is a major producer and the old era has moved on to some extent as the old era producers as I suppose shown by the Dallas TV series in the past has been reduced in importance by the shale oil wildcatters. They operate differently as I have pointed out before that they are financed with cheap money provided by the QE era and have something of a cash flow model and can operate with a base around US $50. So right now they will be doing rather well.

Also it is not only oil these days.

Meanwhile, U.S. natural gas output was projected to increase to a record 77.9 billion cubic feet per day (bcfd) in March. That would be up more than 0.8 bcfd over the February forecast and mark the 14th consecutive monthly increase.

Gas production was about 65.5 bcfd in March last year.

Reinforcing my view that this area has a different business model to the ordinary was this from Reuters earlier this month.

Spot prices at the Waha hub fell to minus $3.38 per million British thermal units for Wednesday from minus 2 cents for Tuesday, according to data from the Intercontinental Exchange (ICE). That easily beat the prior all-time next-day low of minus $1.99 for March 29.

Prices have been negative in the real-time or next-day market since March 22, meaning drillers have had to pay those with pipeline capacity to take the gas.

So we have negative gas prices to go with negative interest-rates, bond yields and profits for companies listing on the stock exchange as we mull what will go negative next?

Economic Impact on Texas

Back in 2015 Dr Ray Perlman looked at the impact of a lower oil price ( below US $50) would have on Texas.

To put the situation in perspective, based on the current situation, I am projecting that oil prices will likely lead to a loss of 150,000-175,000 Texas jobs next year when all factors and multiplier effects are considered.  Overall job growth in the state would be diminished, but not eliminated.  Texas gained over 400,000 jobs last year, and I am estimating that the rate of growth will slow to something in the 200,000-225,000 per year range.

Moving wider a higher oil price benefits US GDP directly via next exports and economic output or GDP and the reverse from a lower one. We do get something if a J-Curve style effect as the adverse impact on consumers via real wages and business budgets will come in with a lag.

The World

The situation here is covered to some extent by this from the Financial Times.

In currency markets, the Norwegian krone and Canadian dollar both rose against the US dollar as currencies of oil-exporting countries gained.

There is a deeper impact in the Middle East as for example there has been a lot of doubt about the finances of Saudi Arabia for example. This led to the recent Aramco bond issue ( US $12 billion) which can be seen as finance for the country although ironically dollars are now flowing into Saudi as fast as it pumps its oil out.

The stereotype these days for the other side of the coin is India and the Economic Times pretty much explained why a week ago.

A late surge in oil prices is expected to increase India’s oil import bill to its five-year high. As per estimates, India could close 2018-19 with crude import bill shooting to $115 billion, a growth of 30 per cent over 2017-18’s $88 billion.

This adds to India’s import bill and reduces GDP although it also adds to inflationary pressure and also perhaps pressure on the Reserve Bank of India which has cut interest-rates twice this year already. The European example is France which according to the EIA imports some 55 million tonnes of oil and net around 43 billion cubic meters of natural gas. It does offset this to some extent by exporting electricity from its heavy investment in nuclear power and that is around 64 Terawatt hours.

The nuclear link is clear for energy importers as I note plans in the news for India to build another 12.

Comment

There are many ways of looking at this so let’s start with central banks. As I have hinted at with India they used to respond to a higher oil price with higher interest-rates to combat inflation but now mostly respond to expected lower aggregate demand and GDP with interest-rate cuts. They rarely get challenged on this U-Turn as we listen to Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Next comes the way we have become less oil energy dependent. One way that has happened has been through higher efficiency such as LED light bulbs replacing incandescent ones. Another has been the growth of alternative sources for electricity production as right now in my home country the UK it is solar (10%) wind (15%) biomass (8%) and nukes (18%) helping out. I do not know what the wind will do but solar will of course rise although its problems are highlighted by the fact it falls back to zero at night as we continue to lack any real storage capacity. Also such moves have driven prices higher.

As to what’s next? Well I think that there is some hope on two counts. Firstly President Trump will want the oil price lower for the US economy and the 2020 election. So he may grow tired of pressurising Iran and on the other side of the coin the military/industrial complex may be able to persuade Saudi Arabia to up its output. Also we know what the headlines below usually mean.

Podcast

India is facing its own version of a credit crunch

Travel broadens the mind so they say so let us tale a trip to the sub-continent and to India in particular. There the Reserve Bank of India has announced this.

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal
standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

The MPC also decided to maintain the neutral monetary policy stance.

So yet another interest-rate cut to add to the multitude in the credit crunch era and it follows sharp on the heels of this.

In its February 2019 meeting, the MPC decided to
reduce the policy repo rate by 25 basis points (bps)
by a majority of 4-2 and was unanimous in voting
for switching its stance to neutral from calibrated
tightening.

This time around the vote was again 4-2 so there is a reasonable amount of dissent about this at the RBI.

What has caused this?

The formal monetary policy statement tells us this.

Taking into consideration these factors and assuming a normal monsoon in 2019,the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1:2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced.

That path is below the annual inflation target of 4% (+ or – 2%) so it is in line with that.

However we know that central banks may talk about inflation targeting but supporting the economy is invariably a factor and can override the former. The Economic Times points us that way quoting the Governor’s words.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” RBI governor Shaktikanta Das said. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”

I will park for the moment the appearance of the discredited output gap theory and look at economic growth. The opener is very familiar for these times which is to blame foreigners.

Since the last MPC meeting in February 2019, global economic activity has been losing pace……The monetary policy stances of the US Fed and central banks in other major advanced economies (AEs) have turned dovish.

I would ask what is Indian for “Johnny Foreigner”? But of course more than a few might say it in English. But if we switch to the Indian economy we are told this in the formal report.

Since the release of the Monetary Policy Report (MPR)
of October 2018, the macroeconomic setting for the
conduct of monetary policy has undergone significant
shifts. After averaging close to 8 per cent through
Q3:2017-18 to Q1:2018-19, domestic economic
activity lost speed.

So a slowing economy which is specified in the announcement statement.

GDP growth for 2019-20 is projected at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced.

That is more likely to be the real reason for the move and the Markit PMI released this morning backs it up.

The slowdown in service sector growth was
matched by a cooling manufacturing industry.
Following strong readings previously in this quarter,
the disappointing figures for March meant that the
quarterly figure for the combined Composite Output
Index at the end of FY 2018 was down from Q3.

The actual reading was 52.7 but we also need to note that this is in an economy expecting annual economic growth of around 7% so we need to recalibrate. On that road we see a decline for the mid 54s which backs up the slowing theme.

Forward Guidance

We regularly find ourselves observing problems with this and the truth is that as a concept it is deeply flawed and yet again it has turned out to be actively misleading. Here is the RBI version.

The MPC maintained status quo on the policy repo rate in its October 2018 meeting (with a majority of 5-1) but switched stance from neutral to calibrated tightening.

So it led people to expect interest-rate rises and confirmed this in December. I am not sure it could have gone much more than cutting at the next two policy meetings. That is even worse than Mark Carney and the Bank of England.

Output Gap

Regular readers know my views on this concept which in practice has turned out to be meaningless and here is the RBI version. From the latter period of last year.

the virtual closing of the output
gap.

Whereas now.

The MPC notes that the output gap remains negative and the domestic economy is facing
headwinds, especially on the global front. The need is to strengthen domestic growth impulses by
spurring private investment which has remained sluggish

Yet economic growth has been at around 7% per annum. I hope that they get called out on this.

The banks

We have looked before at India’s troubled banking sector and since then there has been more aid and nationalisations. Here is CNBC summing up some of it yesterday.

Over the last several years, a banking sector crisis in India has left many lenders hamstrung and impeded their ability to issue loans. Banks and financial institutions, a key source of funding for Indian companies, hold over $146 billion of bad debt, according to Reuters.

That may be more of a troubled road as India’s courts block part of the RBI plan for this.

But such things do impact monetary transmission.

Analysts said the transmission of the previous rate cut in February did not materialise as liquidity remained tight. Despite the central bank’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end was in deficit at Rs 40,000 crore.

The tightness in liquidity was visible in high credit-deposit ratios and elevated corporate bond spreads.  ( Economic Times)

Putting it another way.

What is holding them back is higher interest rate on deposits and competition from the government for small savings.

The RBI is worried about this and reasonably so as it would be more embarrassing if they ignore this rate cut too.

Underlining the importance of transmission of RBI rate cuts by banks to consumers, Governor Shaktikanta Das on Thursday said the central bank may come out with guidelines on the same.

“We hope to come out with guidelines for rate cut transmission by banks,” Das said, interacting with the media after the monetary policy committee (MPC) meet.

 

Comment
There is a fair bit here that will be familiar to students of the development of the credit crunch in the west. I think one of my first posts as Notayesmanseconomics was about the way that official interest-rates had diverged from actual ones. Also we have a banking sector that is troubled. Next we have quick-fire interest-rate cuts following a period when rises were promised. So there are more than a few ticks on the list.
As to money supply growth it is hard to read because of the ongoing effects of the currency demonetisation in late 2016. So I will merely note as a market that broad money growth was 10.4% in February which is pretty much what it was a year ago.

 

The banking problems of India are mounting

We in the western world have got used to problems with our banking system but yesterday highlighted that we are far from alone. From the Reserve Bank of India.

The Reserve Bank of India and the Securities and Exchange Board of India are closely monitoring recent developments in financial markets and are ready to take appropriate actions, if necessary.

This morning we have seen the government also trying to calm matters.

MUMBAI: Indian Finance Minister Arun Jaitley said on Monday the government is ready to ensure credit is available to non-banking financial companies (NBFCs), just a day after the market regulator and the central bank sought to calm skittish investors.  ( Economic Times of India).

There are a variety of factors at play here but the common denominator is the shadow banking sector.

Yes Bank

Here there were signs of trouble on Friday as the central bank intervened. From Reuters.

 Indian private sector lender Yes Bank Ltd’s shares tumbled nearly a third on Friday, wiping as much as $3.1 billion off its market value, after the central bank reduced charismatic CEO Rana Kapoor’s term, creating uncertainty about its outlook.

Using the word “charismatic” to describe a banker is a warning sign in itself but events here were being driven by this.

Yes Bank’s bad loans spiked in October last year after a risk-based supervision exercise by the central bank forced the lender to account for 63.55 billion rupees ($881.1 million) more in the non-performing category. Kapoor had termed it a “temporary setback” and said remedial steps were underway.

Ah temporary we know what that means especially in banking circles! Yes Bank is the fifth biggest private-sector bank in India and seems to have fallen victim to the effort described below.

Indian banks have seen a surge in soured loans that hit a record $150 billion at the end of March and stricter rules enforced by the central bank are expected to have pushed the industry’s non-performing loans even higher.

So as we note that Yes Bank had been rather too enthusiastic in living up to its name we see that others were competing with it. Somewhat bizarrely it would appear that the RBI is dealing with the private banks because it feels it cannot do so with the state-owned ones.

Earlier this year, RBI chief Urjit Patel said the central bank had limited authority over state-run banks that account for the bulk of bad loans in the sector, and called for reforms to give the regulator more powers to police such lenders.

State Banks

At a time like this we have learned to be very wary of mergers where the reality is often very different from the claims. From News18.

The merger of Bank of Baroda, Vijaya Bank and Dena Bank by the government poses short-term challenges like spurt in bad assets, but will be beneficial over a longer term, a report said today.

Slippages may increase in the short-term as recognition of non-performing assets is harmonised and accelerated, India Ratings said in a note.

By contrast The Times of India appears to have taken up cheerleading.

Made in Baroda, now poised to merge and take on the world

Infrastructure Leasing & Financial Services Ltd

This morning the focus is especially on IL&FS which as Bloomberg explains below has been struggling for a while now.

Infrastructure Leasing & Financial Services Ltd. an Indian conglomerate that has missed payment on more than five of its obligations since August, is seeking to raise more than 300 billion rupees ($4.2 billion) selling assets to cut debt, according to an internal memo seen by Bloomberg.

This is a particular problem because as ever with banking issues the fear is of contagion.

Investors are concerned that defaults by IL&FS, which has total debt of $12.6 billion — 61 percent in the form of loans from financial institutions — could spread to other shadow banks in Asia’s third-largest economy. The firm, which helped fund India’s longest highway tunnel, hasn’t been able to pay more than 4.9 billion rupees ($68 million) of its obligations this year and has additional dues of about 2.2 billion rupees to be repaid by end of October, according to data compiled by Bloomberg.

If we move to the wider shadow banking sector or as India calls them non banking financial companies ( NBFCs) then according to the Economic Times of India we have seen some contagion hints.

The sell-off was sparked by news that a large fund manager sold short-term bonds issued by Indian NBFC Dewan Housing Finance Corp at a sharp discount, raising fears of wider liquidity problem among NBFCs.

DHFC was as high as 679 Rupees at the beginning of the month but in spite of a bounce back rally today it is now at 400.

Bad Debts at Indian banks

The Financial Stability Report of June 26th posted a warning shot.

The stress in the banking sector continues as gross non-performing advances (GNPA) ratio rises further……. SCBs’ GNPA ratio may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019………… eleven public sector banks under prompt corrective action framework (PCA PSBs) may experience a worsening of their GNPA
ratio from 21.0 per cent in March 2018 to 22.3 per cent, with six PCA PSBs likely experiencing capital shortfall relative to the required minimum CRAR of
9 per cent.

Sorry for all the acronyms and SCB stands for Scheduled Commercial Banks.

As Reuters reported in May perhaps more of this will be needed.

 When the Indian government announced a surprise $32 billion bailout plan for the nation’s state-controlled banks last October, credit rating firms and the nation’s central bank saw it as a huge step to getting the industry back to robust health – and lending more to businesses and consumers.

Yet the reality as you will have seen already has been one of disappointment.

House Prices

There has been some extraordinary action here in the credit crunch era. According to the RBI house price growth averaged around 15% between 2011 and 2017. Prices are around two and a half times what they were at the beginning of that period. So you might think that the banks are safe. But maybe the times they are a-changing as The Hindu reported in July.

Residential property prices have dropped by up to 15 per cent in Mumbai, NCR, Pune and Kolkata in the first half of 2018 despite government incentives and reduced prices as developers battle with unsold inventory that will take another three years to clear up, Knight Frank said today.

We will have to wait a while for the official data but should we see a dip we will find out which lenders were assuming it would only be up,up and away.

Comment

On the face of it the weekend brought some good economic news for India as Fitch Ratings forecast that GDP would rise at an annual rate of 7.8% next year. In what is a poor country in isolation that is very welcome. But the ratings agencies were also optimistic for the western world before our banks hit the “trouble,trouble,trouble” of Taylor Swift.

In terms of bad economic news then it can be encapsulated in the way that Brent Crude Oil has risen above US $80 per barrel this morning. As well as the inflationary impact India is an oil importer so the balance of payments will be hit again by this. No doubt this has been a factor in the weakening of the Rupee through 70 versus the US Dollar (72.6 as I type this) which adds to the inflation problem. Should the RBI respond to this with another interest-rate increase then we see that there is a chain of tightening going on inside India’s financial sector. Can it take the strain?