WORLD ECONOMY: ANALYSIS BY RUCHIR SHARMA
Ruchir Sharma is interviewed by Pranoy Roy at the beginning of each year for NDTV to take stock of the world economy in which Ruchir forecasts the future for the year. The information is very valuable. I have summarized the contents of the interview for Jan 2023 for the benefit of our students and the visitors to our website.
ANALYSIS OF FORECASTS FOR 2022
Falling Birth Rates
Birth rates in the world were declining. A slight flattening in the birth rates was noticed in 2022 in the world as well as India. This was a minor deviation from the broad trend which is expected to continue. The likely impact on the world economy is that the earlier trend of growth of 3.5 to 4% will remain at 2.5 to 3%.
China’s Growth has Peaked
China’s demographic profile is among the worst in the world. The debt level is too high, particularly the property sector. China’s growth is likely to pick up in 2023 because of suppressed growth in 2022 because of the poor Covid policy. It is expected to be around 2.5% in the future.
World in Debt Trap: India Stable
There is deepening of the global debt trap but India is not caught in this, particularly the private sector.
Global inflation remained high as forecasted. It has probably peaked and is likely to remain high.
High Commodity Prices
Global commodity prices remained high as predicted and went up to 15%. The major reasons were oil and energy prices, partly driven by the Ukraine war. Concerns for protecting the environment have retarded capacity enhancement in commodities. Despite the demand being low, the supply has been so limited that commodity prices have remained high.
Global productivity has remained low. The major cause is the increase in the number of inefficient companies because of stimulus and low interest rates. In US the number of such companies has gone up from 2% in the 1980’s to 20% now. The technology boom and work from home culture has not enhanced productivity.
Increase in Data Localization
Russia is almost weaponizing data localization, China is racing to block global dissent, US senators want to stop Tik Tok, India is the 5th worst in terms of data restrictions ahead of China, Saudi Arabia, Russia and Indonesia. There is an increasing trend in restricting the flow of data globally.
Small Investors Mania for Stock Market: Cool Down
The post pandemic boom has cooled and small investors’ interest in the stock market has come down.
Increase Investment in Physical Economy
The investment in the technology economy was up 5% and in the physical economy it was down 7% for the last 10 years, before 2021. The technology bubble has burst. The technology economy grew by 5.7% and the physical economy grew from minus 7 to 9.7% in 2022 because people realized the need for physical infrastructure and that under investment had created inflation.
FORECASTS FOR 2023
No Long Harsh Recession: India GDP:5%
Long recessions are a part of history. Whenever inflation comes down the governments lower interest rates and provide stimulus as was done during the pandemic. Inflation has peaked but is likely to remain in the zone of 4% rather than the 2% which was the norm for the developed world. Despite the slow growth unemployment is close to record lows because people are sitting on reserves and unwilling to re-enter the labour force. The recession will be soft and so will the recovery be. India’s growth is expected to be above the world average. When the world growth was 3.4% then India’s growth was 6.1%. Now that the world will grow at 2.5 to 3% then India will grow at 5%. Indians tend to under estimate global linkages. There is a 70% correlation in India’s growth rate and the rest of the world.
Time for Downturn of Dollar
The dollar has probably peaked and it is likely to hit a downturn after a slowdown in rise. The rupee is thus, likely to strengthen. Many countries, including India would like to increase their trade in other currencies as well as their own. The rise in dollar has made US cities some of the most expensive in the world and Indian cities are some of the cheapest in the world. New York and Singapore are ranked 1&2 as the most expensive, while Bangalore, Chennai and Ahmedabad are ranked at 161, 164 & 165 respectively.
US Stock market will Fall
US has 4% of the world population, contributes 25% of the GDP and the market capitalization is 60%.
US stock market has outperformed all the markets and its share is too high. It is likely to come down in the future and the stock markets of other countries will rise, including India.
Technology Shares will Fall
The craze for technology firms and unicorns is going to come down because they are overvalued. It is the nature that when firms become too big, the business model gets spent, more competition comes in and regulatory pressure sows the seeds for the emergence of new firms.
Technology Slowdown will Impact India
In 2021, 35% of all the capital raised through IPOs was by technology firms and in 2022 it was only 2%. There will be a slowdown in the growth of technology firms in India as well. It will take a long time for a rise to come.
Less Money: Better TV
Money spent on TV, from 2018 to 2022 has risen from 89 billion$ to 142 billion $. The content of TV has actually deteriorated in the period. With the rise in interest rates and past losses, it is forecasted that less money will be spent on TV and the content is likely to improve.
In India Netflix, Amazon’s, Disney had a lot of money and hence spent it on a junk movies and series. Now they are reducing the expenses. This will improve the quality of the content. In India the top services used to buy 25-30 movies directly to go digital would now buy about 6-7 only. Thus, there will be a pressure on the budgets and the stars’ ability to charge will come down.
Japan’s Economy will Rise
Japan had a big debt problem for many decades. Now developed markets’ debt is higher than Japan’s. In 1980s Japan used to be a shining star accounting for 16% of global economy and 45% of global stock value. For three decades Japanese markets did badly. The rest of the world’s demographics and debt levels are matching Japan. Thus, Japan is likely to make a quiet comeback. Japan has increased profit margins to around 6%. Female participation rate in Japan at around 85% offsets a part of the demographic disadvantage.
Rising Japan will Lift India
Japan has been a major investment partner of India. Since 2011, Japan’s share in FDI in India has gone up from 3% to 7%. As the Japanese economy improves our exports are likely to rise as also investments into India.
Reduction in Outsourcing to China
Outsourcing to China is likely to reduce and hence increase to other destinations offering valuable opportunities. Outsourcing from US to China has reduced by 4% and the rest of Asia has gained 4%. Outsourcing to India has increased by only 0.2%.
- China, for the last 20-30 years was the factory of the world, where everyone from US or Europe wanted to set up factories because of the scales and low wages. In the last few years two things have changed:
o Wages have shot up making it a bit more uncompetitive.
o Geopolitical reasons: the world wants to diversify the investments.
- The West still wants to outsource because the domestic wages are much higher. Wages in US in the manufacturing sector are over $5000 per month and wages in the rest of Asia are not even $500 per month. The outsourcing has been going to Vietnam, Cambodia, Bangladesh and even India. Indian wages are also very competitive (approximately $300 per month), but higher than Vietnam (approximately $250 per month) and Bangladesh (below $200 per month). The wages in China are almost $600 per month.
What India Should Do to Get Investments?
Pranoy recollects that when he visited China long back there was poverty, people were moving on bicycles and there were inefficient Soviet style factories. When Deng opened up China to FDI, China got the first McDonalds and the first Golf course and now there are two thousand McDonalds. He asks as to how China did it? Ruchir answers that it is multifaceted to include infrastructure, attitude of the tax authorities or other people doing business, implying the entire ecosystem.
Return to Orthodox Economics
Pranoy: India is among the 10 developing countries which have the biggest twin deficits: fiscal and CAD. Return to orthodoxy implies changing this situation?
Ruchir: The era of easy money is over because interest rates have risen globally. In this era the scope for policy makers to do something too experimental is not there. Countries need to follow a tight fiscal policy and have high interest rates. He quoted the example of how Truss got thrown out for cutting taxes and not cutting spending in the UK. He quoted the example of Brazil which over stimulated and paid the price for doing so. India has been reasonably orthodox. He advocates pursuance of orthodoxy and not giving in to the temptation to spend more in the run up to the 2024 elections.
No Elections in 2023
There are no elections among the G7 countries in 2023 which is quite unusual. The spotlight will be on possible regime change in Turkey and Nigeria. 2022 has been a bad year for strongmen. In emerging economies stock markets do well when a new leader comes to power because he is most incentivized to carry out economic reforms.
Black Swans and Blue Birds
The world is going through difficult times and predictions are difficult. Ruchir looks for Blue Birds instead of Black Swans. The Black Swans were:
- War in Ukraine.
Blue Birds to look out for are:
- Ukraine peace.
- US-China reconciliation.
- Disappearance of inflation.
–BY COL M M NEHRU