Reading the Slo-Mo Global Economy

We’re into the last quarter of 2024, the year of anticipated slowdown in the global economy. While we’re still awaiting the September quarter GDP growth figures for major economies around the world, it might be safe to say that the worst has been averted. That there isn’t a recession waiting around the corner. A few economies did face contraction in a quarter or two, here and there, but are likely to weather it easily and return to growth. However, that we are in the middle of a significant slowdown is not in question; Reuters reports that the Chinese economy is expected to grow by 4.5% in the September quarter, slower than 4.7% in the June quarter. As it turns out, the Chinese economy did better than estimates, growing at 4.6% in the September quarter, with industrial production and retail sales too faring better than earlier thought.

Stubbornly high inflation, the bugbear of the past couple of years especially in the western economies thanks to their generous stimulus and job protection programmes of the Covid years, is ticking down appreciably almost everywhere. And employment has remained stable, except in countries in southern Europe, South Africa and India which suffer from a chronic unemployment problem. There are some countries still facing high inflation such as Greece, Netherlands, Poland, Russia and most of Latin America, along with Egypt, Israel and South Africa, according to The Economist table of leading indicators. I can’t leave out my country India, as the latest CPI reading for September came in at 5.49%, the highest reading in many quarters. This is certainly above RBI’s targeted level, though mostly attributable to food prices, especially of vegetables. That inflation is being controlled is largely due to central banks’ action across the world, and the fear that an overly tight monetary policy for too long may tip the economy into recession has been unfounded. Especially with the US Federal Reserve’s 50bps interest rate cut, their first since the Covid-19 pandemic, which I thought might have been an overkill and that a 25bps cut would have sufficed.

Corporate earnings have just started trickling in and is unusually slow in India this year. I am not sure if this too can be blamed on the festive season, but it looks like unprofessional PR agency idiots meddling to me. With the cost of capital coming down, it should ease the pressure on businesses and individuals to borrow more, though in the months and quarters to come, it will reflect in weaker earnings for banks due to lower interest income. That said, so far, the US banks’ earnings have been good, with JP Morgan and Wells Fargo reporting better earnings than estimates, though Wells Fargo’s net interest income has declined 11% year on year, and I suspect this might be due to their higher exposure to the mortgage market, which has suffered due to the high interest rate regime. Now that interest rates will move lower, the housing market will be the first to see a recovery in the US and elsewhere. The remaining big banks from the US too have reported earnings that beat estimates, though a couple of them such as Citigroup and Bank of America made larger loan provisions against bad loans in the September quarter and their earnings suffered a tad, as a result.

The earnings forecast for the Indian economy is that they will be muted this quarter, and we will have to wait and see. In fact, a slo-mo economy is a good one to examine, for signs of what might be occurring both at a macro and at a micro level. In India, it is clearly the jobs situation that ought to be the focus area for businesses and for the government. Not merely because these elections drove this message home loudly and clearly, but because it is in the interests of businesses to see more and better-quality jobs as well as greater demand being generated. At the moment, a slight pick-up thanks to festive season demand might take place especially in urban India. This year’s monsoon was good, albeit excessive in some parts of the country, and rural consumption demand might improve as well. The corporate earnings of FMCG companies will reveal how much of an uptick we can expect. In a previous blog post I had written about an Economic Times article citing Nielsen IQ research saying that rural consumption demand had grown faster than urban demand and how Google wouldn’t serve me the relevant links for me to read it on Nielsen’s website. Well, now I have been able to read the Nielsen piece and though it is relevant only for the first quarter of the calendar year 2024, I must say that the findings strike me as odd. However, sustained economic growth is another matter and one that requires serious reforms to be undertaken across several areas.

After years of government capex-led growth in India, it is time for the private sector to pick up the mantle of investment and create employment. This will improve consumer demand on a more broad-based level, rather than affluent classes alone doing most of the spending. India is a huge market for most products and services, but lacks the purchasing power that other large markets such as China possess. The way to improve this situation in India is to generate higher quality employment opportunities.

As I had written recently on my blog, while companies wait for consumption demand to revive, they can also seriously consider investing in upgradation of technology since we are in a phase of great change around the world, one of new technologies as well as climate change crises. Such upgradation of technology will stand companies in good stead and make them more productive as well as competitive. Implicit in such technology upgradation is also the skill and knowledge upgradation of the workforce that will take place simultaneously which can only take the economy forward faster. Gross fixed capital formation is strong in some economies such as the US, but not in many others. It is believed that investment in AI is slowing – or at least in generative AI – and so is private sector investment in clean energy. The latest World Energy Investment Report 2024 highlights the progress that clean energy investment has made in recent years, though it’s confined mostly to the US, Europe and China. Emerging and developing economies have plenty of catch-up to do and the private sector has to increase its share of clean energy investment in many countries, such as India.

In this context, it would be good to also consider the corporate earnings of technology companies, both in the US and in India. India’s big tech companies have reported earnings that seem to indicate improvement going forward and hopefully, as the global economy grows they will see more business from overseas clients. As I have been writing on my blog, Indian big tech needs to move up the value chain and offer competitive solutions in the space of cloud and AI as well, since these are the order of the day. I mean deep, meaningful improvements that AI can bring to engineering, healthcare, customer-relations, financial services, automation, etc. and not merely generative AI which the world has hyped up unnecessarily, in my opinion. US tech companies have yet to report, but it appears that the earnings growth that they saw during the Covid-19 years when technology was ramped up across the board has slackened to a more normal rate of growth. In fact, many big tech companies laid off several staff that they had hired during those high-growth years through last year, and this year too began with massive layoffs which were attributable to AI, it is believed.

The big elephant in the room is geopolitics which is always known to throw a spanner in the works. The world is bracing for higher tariffs across the board by 10% if Trump were to get elected in the US elections in a few weeks’ time. EU’s CBAM or carbon tariff on imports is also causing problems for many countries and I have already shared my thoughts on how this carbon tax can be tweaked and improved for G20 countries to then adopt and share the carbon tax burden. With two wars raging and escalating, commodity prices especially that of oil can be unpredictable and play spoiler. All these can be quite damaging at a time of global economic slowdown. India needs to be extra cautious about its subsidies on food and fertilisers in this context, along with oil import bills.

At a more micro, firm level, we should expect to see companies report a healthier growth in volumes as inflation ticks down, though that would be a gradual process. It is also subject to companies passing on the lower commodity costs to the customer, but it appears that prices of many soft commodities such as agricultural products are still staying firmly high, in part due to supply problems and climate change. Companies should also be able to lower their debt and finance costs with lower cost of capital though this too would take a couple of quarters to take effect. Of course, companies might still resort to cost-cutting in order to maintain their operating margins especially in cases where volume growth doesn’t compensate for smaller price increases.

Ditto for governments. They need to get their fiscal house in order, as monetary policy becomes more accommodative with the lowering of interest rates. Many countries are still reeling from extremely high debt and large fiscal deficits, especially the advanced economies that financed huge stimulus packages through greater borrowing and are also investing to build capacity for tomorrow, as the US seems to be doing now. These levels of debt and deficit are unsustainable, of course, and therefore these governments will have to adopt a judicious mix of reining in public spending as well as raising taxes on corporations and the wealthy. The IMF and the World Bank are convening for their Annual Autumn meetings, as I write this, and their preliminary outlook is for the global economy to grow at the estimated rate of 3.2% in 2024, but the huge risk is that total global debt is likely to cross US$ 100 trillion this year. There would be regional variations, of course, because even a slo-mo global economy is growing at separate speeds across regions and countries.

From IMF’s last Fiscal Monitor released in April this year, it appears that overall fiscal balances are best in low-income developing countries at -3.65%, followed by advanced economies at -4.4%, emerging market and middle-income economies at -5.61% and India at -7.83%. The figure for India seems a tad too high to me, since we had reduced our fiscal deficit to -4.9% in 2023, and this year’s target is -4.1%, from what I have been reading in the news, here in India. I must point out that while the figure for the advanced economies is -4.4% which looks low to me, the fiscal deficit of the US alone is -6.5%. What is important to note is that this is after three years of the pandemic and the economic turmoil it unleashed. Low income developing economies wouldn’t have had the same borrowing capacity as the other economies and were therefore able to protect their fiscal position better as a percentage of GDP.

A similar picture pans out when one looks at the gross government debt of various economies. Advanced economies have racked up debt higher than their GDP in many cases, followed by emerging and middle-income economies and the low-income developing economies. India, thanks to its public spending on capex and other welfare measures during the pandemic years and thereafter, and with elections thrown in, has a fairly high debt level at around 82% of GDP, which it must pare down soon.

All eyes now turn to the World Bank Group meetings in the US and for the IMF’s and World Bank’s latest updates on the global economy. Meanwhile, the OECD maintains that G20 economies are seeing good and stable economic growth, though this was for the June quarter of this year. It’s clear that what is slowing is not merely consumption demand but private investment as well, job creation, and action on the clean energy transition and climate change. Hopefully, the COP29 Summit in Azerbaijan next month, on the heels of the US elections, will provide a clear path forward and accelerate progress on this front.

This article was first published on my blog on October 24, 2024