Cocktail of macroeconomic data paints bleak picture of global economy

Long, short or medium, all of the announcements by governments of the world are "willing and able" to make the equity, currency and commodity markets gyrate wildly

The avalanche of data and policy statements from the first fortnight of October has set the direction of the global economy unlike any other 15-day period in the past.

During this period, the USA said in its National Security Strategy that it will turn protectionist, which will mean guiding investment into its economy as much as possible. Two policy actions, doubling down on chip export technology to China, and the promise to make the US “reduce its reliance on foreign sources of fossil fuels”, made the intentions clear.

In Beijing, Chinese President Xi Jinping announced aims to double per capita income from the current levels of $12,500 by 2035, a time span of just a dozen years. The International Monetary Fund (IMF) has estimated in its World Economic Outlook that India will become the third biggest economy after the United States and China in the next five years. Dramatic as they are, these are all medium-term projections.

In the short term, on Monday, the UK rolled back all of the tax cuts, announced just three weeks ago, to stop the first-ever run on the British pound and sacked the finance minister. It has made the position of the new Prime Minister Liz Truss wobbly. Meanwhile, China has delayed the publication of its third-quarter gross domestic product (GDP) numbers, widely expected to be low. Further out, Japan has decided to continue running an easy monetary policy and OPEC+ has decided to cut oil output by a massive 2 million barrels per day, a move that will most certainly benefit Russia and make the price cap on its oil proposed by the USA, a non-starter. And, the IMF has also noted India will grow at 6.8 per cent at best instead of its earlier projection of 7.4 per cent, a shaving of the rate for this financial year by a massive 60 basis points.

These have been so significant that in the same period UK’s self-goal to kill negotiations for a free trade agreement (FTA) with India over visa issues, India’s retaliatory steps to tighten the visa application process from there were only briefly noticed. A most significant breakfast meeting hosted by India at Washington DC with several of the G20 countries where Finance Minister Nirmala Sitharaman and US Treasury Secretary Janet Yellen spoke, was not captured at all. Yet, the proposed oil price cap on Russian production was almost certainly one of the key points of discussion at this breakfast meet and the place to decide if there shall be an agreed communique at the G20 leaders' meet in November at Bali.  

Long, short or medium, all of these announcements are “willing and able” to make the equity, currency and commodity markets gyrate wildly. Possibly because they have all come together, the Indian benchmark market volatility index, NSE-VIX has instead improved over the past few days. We are discounting here the weekly and monthly data like inflation, consumption or production data that comes from each major economy and makes the mixture thicker.

How they stack up for India

It is in this environment of the rich and possibly heady cocktail of unusual data that the Indian finance ministry mandarins have begun their revised estimates meetings with their counterparts from other ministries. Those meetings also set the expenditure budget priorities for the next financial year.

Finance Minister Nirmala Sitharaman shall present her annual budget, the last full one for this government, in less than a hundred days from now. But direction finders are extremely elusive to locate in this environment. “So much variable data can make a mess of policy projections, which is what we are concerned about”, said a senior government officer.

To make the cocktail more interesting, some of the periodic data on the Indian economy has also behaved erratically in this period. The trade data released last week shows the deficit moderated to $25.7 billion in Sep 2022 from a high of $28 billion the month before. It also saw a sequential expansion in exports, while imports registered a mild contraction. But on the domestic economic front, the September Consumer Price Index (CPI)-based inflation rose to 7.41 per cent led by rising food prices, while August factory production — Index of Industrial Product (IIP), contracted by 0.8 per cent. If the officers wanted to feel a bit relieved, the prognostications make sure they cannot.

Globally, while the IMF Outlook expects the US to just steer clear of a recession in 2023, an Oxford Economics report is bleak. “In particular, we expect US, Eurozone, UK, and Canadian GDP to shrink in 2023, while the IMF anticipates positive growth for all four”, writes Ben May, Director of Global Macro Research at Oxford Economics. These are India’s key export destinations.

The biggest risk that countries see from these volatile data is the effect on jobs. “As the market conditions remain volatile, we see several key markets showcasing a month-on-month (MoM) decline in hiring activity. For instance, the MoM drop in active jobs index for India, the UK, Australia, the US, and China was 19.3 per cent, 6 per cent, 7.2 per cent, 6 per cent, and 4.2 per cent in September 2022 respectively”, said Sherla Sriprada, business fundamentals analyst at data London based data analytics firm, GlobalData.

Country-wise data

The US economic policies for this decade and more are explained in full in the country’s National Security Strategy 2022 released last week. It asserts that maintaining US security and retaining an edge in the competition with China are best assured by targeted investments at home. To understand what the statement means, a measurement of the carnage in the chip market is enough. The Biden administration announced measures that erect barriers for Chinese companies to buy from US-made firms of chip-based equipment. To show how it will work, the US Department of Commerce has expanded licensing requirements for exports of advanced semiconductors and the equipment used to make them, to cover all shipments going to China.

The announcement by Chinese President Xi Jinping at the seventh plenum of the Communist Party of China to double the country’s GDP by 2035 is remarkable because it means the nation is again setting itself up on a fast growth track. Xi said as much, using words like “new, giant leap” to reach the level of a medium-developed country by 2035. There is no definition of what is a medium-developed country but the targets mean China despite its size has to grow for decades at over 4.5 per cent annually, a tremendous draw on global resources. Very little has come out to embellish what Xi has said but when he said “momentous changes of a like not seen in a century are accelerating across the world… presenting China with strategic opportunities”. Meanwhile, the Presidential speech made clear that China will first battle a recession. Seeking Alpha Contributor Binary Tree Analytics noted, it seems “We are currently experiencing the first innings of a global recession…which in our opinion China has been experiencing since the start of 2022”.

While both the USA and China have made clear the directions they shall take, one only hopes the direction the UK takes is not encapsulated in the developments of this October. The embarrassing short stint of former chancellor of the exchequer, Kwasi Kwarteng has come to an end, but the portends for the pound is not bright. Rabobank estimates “there is still too much uncertainty in both the UK economic and political outlooks to turn constructive on the outlook”, for the UK pound. In this momentous fifteen-day period, the current UK government has already managed to shut down the chances of signing a free trade agreement with India.

This has also possibly been the fortnight when the US lost its leverage effectively in oil politics. As agencies reported markets had expected a maximum cut of around one million bpd, “with a very remote possibility of one and a half million barrels per day if OPEC decided to ignore all its Western allies” (oilprice.com) The cut is the largest since the 9.7 million decrease of May 2020 in response to the global Covid lockdown. US National Security Adviser Jake Sullivan pulled no punches when he said “The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.”

In short, it has been a fortnight, which has set the template for the world economy, for a long time. The dates will be referred to again and again.