360 degrees in 3 minutes

360 degrees in 3 minutes- may seem like an interesting theme, but, it does come with two caveats. First, the time it takes to read this blog is conditional on the fluency of my write-up and your reading speed. Hence I do not take sole responsibility of the accuracy or precision of number ‘3’. You would be wondering, why I have put 3 of all the numbers.  This choice is based on some assumptions. First, it took me three minutes to read the article. Second, if I make 10 people read the article, the average time they would spend is 3 minutes. Lastly, 3 is my lucky and birth number. The second caveat lies in the other number– 360. As it would be a futile exercise to cover all the 360 degrees around the world, I would only cover the relevant angles.

I could take you around the world by telling you what’s happened in 2011 or I could tell you what may happen in 2012. I chose the latter and have laid out what I think would happen in 2012 around the world (in particular the countries which we here most in the news).

United States: Flat growth

This big power would be able to register low growth. Although, US is out of the recession, its high unemployment rates and a weak property sector act as obstacles to growth.  Persistently high unemployment rates forces consumers to curtail their spending which results in reduced consumption and growth. The crisis in the US started in the property sector and will not truly end until the sector recovers- and there is no evidence of that. Additionally, loose monetary policy (with almost zero interest rates and a possible Quantitative Easing III) coupled with easy fiscal policy (as a result of the upcoming presidential elections) impede growth.

European Union: Recession in progression

After a disastrous 2010-11, European Union will in all probability perform poorly in 2012 with tight fiscal policy and loose monetary policy. Although, Greece, Ireland and others knocking the doors of doom, others are far better. The debt crisis is beginning to hurt Italy allot more then it hurts Germany and France. The high unemployment rates and debt burdens bring out the structural nature of the problem. Unlike Japan and US, EU is trying to resolve its problem by trying to deliberate what take action. This slow paced policy measures continue to keep the markets nervous about the future of Euro.

Not all is bad in EU. First, the overall trend of falling bond yields in Spain and Italy and the progressive return of French yields to “normal” are encouraging.  Second, amidst the worst crisis in European Union the Euro has been self supporting. EUR/USD traded around 1.35 in the worst of times; far better than January 2001 price of 0.95 when the situation in EU wasn’t as bad.

Japan: Recovery alongside problem.

With 200 % Net Debt to GDP, huge fiscal deficit, weather disasters and aging problem ensure that the problem is long lasting. The fiscal initiatives post earthquake would support investment but at the expense of fiscal deficit. This increase in fiscal deficit results in the likelihood of future tax hikes; which curtails spending.  The existent deflation further leads to expectation of lower future prices which discourage spending. Also, discourages borrowing as lower prices in the future increase the real value to be repaid.  Amidst all this turmoil, exports are slowly picking up. Although they contribute only around 10 percent to GDP they could play an important role in the coming year when the domestic demand is subdued.  Also, manufacturing could benefit later in 2012, with the slow recovery of global trade. However, this would be capped by the strong yen. The Japanese Finance Minister Azumi has also said that 2012 could witness policy interventions like quantitative easing, which should infuse liquidity into the markets and increase spending.

China: Strong but slowing growth

 China is growing at 8.5 percent approximately lesser than 2010 levels but still a very good rate of growth. It surely isn’t “crash-landing” but controlled deceleration. The Chinese economy has been almost continuously slowing down since 2010, as a result of tight monetary and credit policies imposed to curb inflation. Credit has been restricted mostly by administrative means and primarily to the property sector. Falling inflation should turn things around in 2012.  The authorities may loosen the policies once they are certain that inflation is down and stable.

India: Inflation pulling growth

After a sustained period of high interest rates to control inflation, the Reserve Bank of India has reduced CRR by 50 basis points and is expected to reduce other rates in the coming year. India short term money market yields fell yesterday (Feb maturity yields were down by 10-15 bps) on RBI Governor’s statement, expectation of improved fiscal deficit to response and expectations of policy easing. The Governor also hinted towards a strong government bias to tackle inflation over growth management. 2012 is going to be a rather calm and uneventful year in India as multiple elections across the country guarantee the absence of any radical change. I do expect the Rs to become stronger and settle at Rs 46- 47 per US $ and inflation and slower growth rate is expected

Smaller Asian Economies

The rate of growth of smaller Asian economies has varied widely reflecting the differences in their structure and fundamentals. In particular, difference in drivers of growth and export dependency has played a crucial role in deciding the growth rate of these economies. Indonesia, Malaysia, Thailand and Philippines have performed well in the volatile period (2009-11) Thailand particularly defied political uncertainty and floods while Indonesia registered a consistent and strong performance along with Malaysia and Philippines. All the four economies are benefiting from strong bank loans growth and the central banks flexibility to ease monetary policy in 2012.

2012 would be a flat uneventful year around the world with no boom and hopefully no major busts. It makes me wonder is the world actually becoming flatter??