Some macroeconomic musings for 2019

The challenges of growth and job-creation in 2019 look quite daunting

It’s that time of the year, to offer some thoughts about key economic issues as 2019 unfolds in the coming dozen months. The only thing one can be sure about is that there will be major economic and political developments about which we have little inkling at present. That’s the glorious and scary uncertainty inherent in the future. As in past years, I divide my remarks between global and Indian domains.

Illustration by Binay Sinha

Global Issues

The world’s largest economy, the United States (US), recorded strong growth in 2018, at nearly 3 per cent, thanks mainly to the extraordinarily pro-rich and uncompensated tax cut stimulus enacted in late 2017. Although Trumpian trade wars ramped up during the second half of 2018, their negative effects on output and growth will be felt mostly in 2019. As the tax stimulus wanes, trade wars hurt and interest rates normalise, US growth is likely to decelerate to the 2-2.5 per cent range in 2019. Some bearish analysts even foresee signs of recession in the last quarter. That is unlikely unless financial market turbulence is unexpectedly high or the political discord between President Trump and the Democrats-controlled House of Representatives reaches extreme levels or the trade wars (especially with China) get much worse.

The European economy (of comparable size to that of the US) was already slowing in 2018 and growth is likely to be even lower at around 1.5 per cent in 2019, significantly lower than the 2 per cent projected by the International Monetary Fund (IMF) in October. Factors suppressing dynamism include: Trade spats with the US; the increasing polarisation of European politics; the massive debt and deficit problems of Italy; the impending end of Angela Merkel’s remarkable stewardship of Germany; and, of course, the spillover effects of Brexit.

The United Kingdom’s self-goal, the Brexit drama, will reach some sort of climax in the next few months. Likely endgames are parliamentary ratification of the current Theresa May draft deal (most analysts consider this least likely at present), crashing out of the European Union without a deal in March, or a second referendum which, in effect, may cancel the result of the June 2016 vote. Most serious analysts assess the last possibility as the best for Britain from both economic and security vantage points, but that doesn’t mean it will happen. All other options will hurt Britain now and in future, and also entail significant negative consequences for Europe.

Of equal concern to the likely economic slowdowns in the US and Europe is the slackening of growth in China. Even at market exchange rates, China’s economy is now two-thirds the size of the US; so what happens in China matters to the global economy. Against a background of high total debt (now 250 per cent of GDP compared to 140 per cent in 2009), determined government efforts to rein in the large shadow banking sector and environmental pollution, and the unresolved trade and other economic disputes with the US, the recent weakening of sales of iPhones, cars and houses is ominous. It is quite possible that GDP growth in 2019 could slow to 5-5.5 per cent from about 6.5 per cent in 2018.

Taken together, this suggests that world economic growth at market exchange rates in 2019 could well slow to 2.7-2.9 per cent from 3.2 per cent in 2018, with consequential further dampening of global trade. The only silver lining is that international prices of oil will probably average at moderate levels ($50-60 per barrel of Brent crude). 

India’s issues

The Indian economy has opened 2019 on a weak note. The recent official “First Advance Estimates” for fiscal year 2018-19 indicate GDP growth of 7.2 per cent (lower than earlier projections by both the Reserve Bank of India and the finance ministry), with a significant slowing in the second half to 6.8 per cent from 7.6 per cent in the first half. The deceleration is particularly sharp in manufacturing, from 10.3 per cent in the first half to 6.4 per cent in the second half.

More worryingly, the slowdown is likely to persist in the coming fiscal year, 2019-20, because of:

• The expected deceleration in the global economy;
• The rising fiscal stress at both central and state government levels, stemming from under-performance in major taxes (especially GST) and growing expenditure commitments for pre-election, populist programmes (such as loan waivers). This could keep interest rates high and crowd out private investment;
• The lacklustre performance of exports, which remain challenged by the slow growth of world trade, an over-valued exchange rate, higher customs duties (in India), weak infrastructure, the lasting impacts of demonetisation and GST transition on small-scale exporters, and a variety of sectoral policy distortions. This will keep our external finances vulnerable to volatility in capital flows and oil prices;
• The continuing drag of high levels of non-performing assets in our largely government-owned banking system and the more recently exposed  weaknesses in the non-bank finance sector;                                           
• The inevitable uncertainties associated with the forthcoming General elections in the first quarter of FY 2019-20.

All things considered, it is likely that the economic growth will remain below 7 per cent, possibly closer to 6 per cent, in the coming year.

Of even greater concern is the continuing stagnation (or worse) in the employment situation, for which reliable official data (National Sample Survey) are 7 years old. The most recent large sample survey information is provided by the Centre for Monitoring Indian Economy’s “Wave” survey for September-December 2018, with a sub-sample of 140,000 households in December. According to this, the unemployment rate has climbed to7.4 per cent, the highest in 15 months (see Mahesh Vyas’s “On the job” column in Business Standard, January 8, 2019). Furthermore, the absolute number of unemployed increased by 11 million over the year 2018, corresponding to a decline in total employment by that magnitude. Four-fifths of the job losses were accounted for by women, of which three-quarters were in rural areas. If this data is even approximately correct, it paints a very depressing picture.

The macroeconomic challenges of growth and job-creation in 2019 look quite daunting.

The writer is honorary professor at ICRIER and former Chief Economic Adviser to the Government of India. Views are personal