Globonomics!

Consulting|Technology|International business

Some macro economic predictions for 2008

with 9 comments

https://ecofin.wordpress.com/2008/10/09/are-we-staring-in-the-face-of-a-depression-in-2008/

Here’s a caveat: I fully understand economic predictions are foolhardy and its a bunch of crap since it is not something that can be predicted. Famous investors such as billionnaire Warren Buffett etc. also share the same viewpoints about economic predictions not being practical due to the changing dynamics of economies worldwide!

I still choose to defy this and some of my predictions for 2008 are as follows. Do not worry – I will not try to state the obvious and this is a result of some tad bit of analytical analysis thrown in for it to have some meaning.

1. There is going to be an economic recession in the United States in the 3rd quarter of 2008. 4th quarter of 2007 escaped with a mere 0.6% GDP growth. the 1st and the 2nd quarter of 2008 will almost be 0%. The 3rd and 4th quarter will be in negative GDP growth. Its very presumptuous on my part but I have a gut feel I am right for various macro economic factors that point in that direction.

2. Will India get affected? Yes and no.

Yes because we rely on exports to some extent though it is minimal as a percentage of our GDP (about 15%) and we will face various challenges in exports (not restricted to our IT sector alone).

No, because our large domestic consumption (contributing to over 64% of GDP growth) will absorb most of this shock of a reduced GDP growth against what is predicted. PC predicts our GDP to grow at over 9% pa. I feel it will be more conservative at about 8% this year (2008-2009 fiscal). This domestic consumption compares itself to 58% of Europe, 55% for Japan and 42% for China (coincidentally, this is the first time, Chinese consumption overtook its investment).

This prediction is in line with what has been predicted by the impact of the impending US recession on Asia’s two tiger economies – India and China. China is predominantly an export driven economy whose GDP growth may slow from 11% to 8.5% while India’s may drop by a slightly lesser margin from 9.5% to 8.1% for 2008. In the current macro economic environment, India’s so called weakness has become its strength and it will emerge as the only Asian economy to weather a rough US economic downturn!

http://www.newsweek.com/id/43340

http://www.foreignaffairs.org/20060701faessay85401-p10/gurcharan-das/the-india-model.html

Furthermore, India focuses on an enterpreneurial setup against the Chinese state centered model driven by exports of Private and Foreign companies.

3. Will IT exports get affected? Yes. Indian IT co’s still rely heavily on the US and Europe (both of which will contract in 2008). This will make their respective co’s cut back on their IT budgets/spending and this will affect our IT service co’s bottomline. I am sure. This is what happened in 2001 and will repeat itself. IT exports contributes to about 5.4% of India’s GDP growth.

4. I read a very interesting article on spam emails giving us the present trend in the overall health of the economy. This can be a topic for our concept of “Freakonomics” but its true! I receive 1000 emails on my office id daily and out of which 90% is spam! If I look at the pattern, most of it is focused on lower mortgage interests, credit card debt (true, people have taken huge loads of debt on their credit cards), banks offering loans at cheap credit etc. that is actually a leaf taken out of the Fed’s book because they have indeed slashed rates which makes it easier to borrow (encourage spending). This will be observed more closely hereon by me – at least. I can definitely give this concept (spam emails not really being worthless but a valid indicator of the overall health and state of our local economy) as my “Globonomics award for 2008 for the best freakish innovation!

5. Will the depressed housing sector in the US revive? No. Not for the next 5 years for sure. Not just this, it will go and hit even the UK and other countries in Europe that have a sub prime sector where cheap credit is being given. I did some research if India is exposed to this as well. Thankfully, our only sub prime (unsecured sector) is our personal loan sector which is not that large. Otherwise, for housing, we still have a strictly regulated policy and there is no sub prime sector in the Indian Real Estate industry. I can almost hear you all heave a sigh of relief!

6. Will the housing boom in India continue? Yes. this is not akin to the US housing boom where sub prime mortgages and the corresponding mortgage backed securities sold to institutions clearly lost all their value once the sub prime sector started defaulting on their mortgage payments as the reset clauses on their mortgages came into effect.

Ours is more a local consumption driven economy. Yes, we are NOT immune to the US and Europe happenings but the point I am trying to make is that our real estate boom is triggered by local consumption and infrastructure needs and the simply supply/demand equation with supply still in short supply and demand only increasing thereby leading to a rise in prices!

Lets look at the individual cities.

Take Delhi. The NHAI super highway has just been built but I read somewhere that the traffic density/propensity predicted for 2011 is already the current traffic density on those roads. This is a major issue. Supply of infrastructure is clearly still lagging even at the frenetic pace at which the Delhi urban landscape is changing! Demand is still there. Yes, some correction has occurred on Real Estate prices in Delhi and pockets of Gurgaon but has it really reduced in the congested areas of central Delhi or the Diplomatic enclave etc? No. This will ALWAYS have a demand and the price will always be at a premium. The Delhi Metro will also soon start getting over crowded as there will be more people who wish to move from point A to point B. Demand will always exist and the NCR remote areas start getting better connectivity to city center.

Next, lets move on to Bombay/Mumbai.

Public mass transport systems exist but are archaic and over crowded. The objective in building mass transit systems is the volume of people they can successfully transfer from point A to point B. This is where Delhi got it horribly wrong in predicting the volume of cars that will ply on the Delhi-Gurgaon super highway. Mumbai is like a pipe. The only place where Mumbai can expand is really into the sea. Global warming is not helping Mumbai’s cause either as the sea levels rise and land gets flooded. This is already apparent in the monsoons every June-July since the devastating monsoon we saw in 2005. 

In fact real estate is so scarce in Mumbai South that in the business district, square foot of land is valued at over Rs. 70000 ($1750)! Think about affordability. This is almost the same price as that of a square foot of land in Manhattan, New York! Price of real estate in areas I have lived before (Bandra – West and East) has skyrocketed to about Rs. 6000-Rs. 20000 per sq ft. The famed BKC – Bandra Kurla complex itself has astronomical prices being quoted and taken!

Now, come to Bangalore. Bangalore has been the poster child of the Indian IT story. The IT boom began here and is here to stay. Infrastructure is pathetic but is that in anyway reducing the interest of any IT companies? No. Talent is available here in large numbers when compared to any other city of India and companies are willing to set up their facilities here even though travel times have tripled in the last 2 years from point A to point B due to the migrant workers coming into this city. The Bangalore international airport will only add to the traffic woes but that will still not deter the migration of co’s and people to this IT city. The city is making some progress on mass transit systems at a snail’s pace with the Bangalore Metro etc.

In all my hunt for real estate in this city in the last 2 years, I can say very confidently that unless one is prepared to pay a premium (over and above the market rate) on land in Bangalore, most land pieces are either under litigation or some dispute or some issue of acquisition etc. Therefore, logically, again this is a short supply commodity and hence the demand is clearly still existing and therefore, the land will definitely became more and more scarce and the only solution is to go the New York way and the Bombay way (that boomed in the 1980’s) with the construction of sky scrapers and apartment complexes for both residential and commercial interests.

The conclusion is that India will benefit from local consumption and our corporate sector will do well to cater to needs of this local consumption (driven largely by local consumption and housing booms). Think about this: Housing sectors in India and China are said to add 2 billion homes in the next decade! Think about rise in commodity prices due to this? Steel prices, oil prices etc.?

I will refrain from making a comment about the Indian stock market as that is NOT going to be immune to the global trends and will adjust accordingly. Moreover, I am not a firm believer in the stock market euphoria and the “India growth story” as yet until it is seen on the ground – which is yet to happen. Like Mr. N R Narayana Murthy says, – We should let others pat us on the back and applaud our efforts for the India growth story not pat ourselves on the back.

7. Will Oil continue at over $100 a barrel? Yes. It will be close to this in 2008. The OPEC (the cartel of the oil exporting countries) will keep oil prices high due to increased oil needs of the ever burgeoning demand of automobiles of developing countries.

8. Will the greenback continue its southward journey? Yes. I predict it will hit a new low of about $1 = Rs. 35 by the end of 2008.

9. Are we staring at the face of a great depression (they say, the depressions occur once in every human lifetime). Not yet.

The last one occurred in 1929. Add 80 years to it. It comes upto 2009. So, we are somewhere near that window though this is not a prediction and merely a hypothesis!

I am not a fond believer of the adage “If your neighbour loses his job, its a recession, if you lose your job, you know a depression has arrived!

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9 Responses

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  1. One thing you need to factor into your equation for this year, is that this is an election year with a lot of vulnerable incumbents. What this means is that the money spigot will be turned on. The stimulus package, big budget, lower interest rates and an increasing money supply will have a major effect. It’s hard to predict exactly what they will mean but it could be major.

    Finally, it was a different world in 1929. There are too many factors that just aren’t the same. In fact, the depression would have been over sooner and been a lot worse if it hadn’t been for poor and changing policies in the US after 1930.

    Oh, one more thing. We still have 77 million baby boomers who will be retiring in the next few years. The next generation of 55 million can’t replace them. This means a continued need to outsource.

    Steve Rosenbaum

    February 9, 2008 at 10:19 pm

  2. Well said, all.
    I am making a personal study of the US economy for my own protection (I live in Florida, USA). I am reading Catherine Austin Fitts, Sean David Morton, and the fascinating web site http://www.Trendsresearch.com.
    Most independent observers of the USA see several past trends of excess and neglect coming hoom to roost in 2008. US residents on pensions and such entitlements will suffer a major decline of standard of living as the dollar suffers due to horrific mis-management of the cyber-money-supply not to mention excessive M3 printed-dollar growth (no longer even reported by the US). Gold and especially silver will appreciate markedly, silver possibly more so due to a smaller market in silver. However all useful industrial commodities will continue to appreciate.
    The US recession and dollar depreciation will accelerate the ‘green’ sector and companies making green products will fare quite well.
    One of the results, to me, of the English language in India is that India is much closer if not ahead of the advancing edge of Western technology. China is, I think, handicapped by their cryptic characters and secrecy.

    Charles

    February 10, 2008 at 9:24 pm

  3. Charles – In your study, two of the best sources of unbiased information about the US are published by the Bureau of Labor Statistics and the U.S. Census Bureau. Often claims are made on intrepreted data or even stuff made up. These sources take away several levels of filters.

    Your point about language is interesting. English like many language is based on sounds. A small number of sounds put in different arrangments gives you endless numbers of words that are easy to memorize and work well on a keyboard. Chinese is based on pictographs which means you need a lot of characters. This does make things like keyboarding very difficult.

    Steve Rosenbaum

    February 10, 2008 at 9:31 pm

  4. Steve, Charles, To add to what you folks just said, I also did some research on the current US trend and it is said that the first of our baby boomers would start retiring now. These chaps would dig into the social security kitty shortly and we are talking of trillions of dollars over the next decade.

    Greenspan did talk about this in his speech to the Congress some years back and the big hole that exists in the social security. Would appreciate further insight into this complex issue.

    Naveen

    Naveen Athresh

    February 10, 2008 at 11:02 pm

  5. This is a growing problem. Less so of social security and more around medicare. However, nothing will happen until when and if a crisis actually hits. It’s too politically hot to tamper with.

    The big effect of the retiring baby boomers is the effect it is already having on the job market. We have 77 million retiring and 55 million to replace them. If jobs only grow modestly, the math doesn’t work out very well. In fact, you can see some of this in our historic low unemployment rates. 5% is considered full employment.

    Industries like the railroad industry report that they will lose 50% of their management in the next 3 years.

    Steve Rosenbaum

    February 11, 2008 at 12:14 am

  6. I am just getting into economics and am having a little bit of a hard time with your lingo. What are IT exports and why is India such a big deal?

    David

    February 20, 2008 at 11:23 am

  7. David,

    Thanks for writing in.

    IT exports refer to the Information technology products and services. India is a big deal because it represents the face of the changing world. Of course, China is leagues ahead of India in the manufacturing sector and more than 1 economics reports have suggested that the next revolution is tipped to occur in these two countries in terms of GDP growth.

    I was trying to relate to India’s contribution and the degree to which it would get affected as a result of the US economic slowdown and what are the subsequent repercussions.

    I will touch upon other countries such as those from Europe esp. the UK, Germany etc. in the days to come so watch this space for more.

    Cheers!
    Naveen

    Naveen

    February 20, 2008 at 11:58 am

  8. Thank you and I look foward to reading more.

    David

    david

    February 21, 2008 at 3:11 pm

  9. Great piece of writing and some great points you made. The economic slowdown of the US will have an impact on India, just how much, I don’t know.

    Like you said about oil, it will continue to rise and rise. Gold will continue to rise and rise as well. The US dollar will level out.

    The baby boomers will have a tremendous affect on the US economy. I am having to resort to unconventional means to grow my import/export business like http://importexport.konnects.com. The entire economy of the import/export business is changing with India growing so fast in the IT sector.

    No way to slice it, but the next couple of years will be interesting.

    Jeff

    February 26, 2008 at 3:22 am


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