Economic Woes of Developing Nations
With China’s market making a massive move downward, I thought it would be appropriate to address the woes of developing nations that have expanded so quickly that they are now struggling to keep the growth story alive. Anyone who has opened up a newspaper or turned on a TV in the United States in recent years knows that there is plenty to be mad about. Truth is such an abstract concept these days, it is doubtful anyone would ever recognize it if it reared its head. America was built on the concept of not trusting authority; it’s ingrained in our culture. Such a notion is still new in some international markets that are growing too much, and too fast. Billions of workers around the globe feel fear and anxiety to maintain production levels to keep their country’s economy strong. Some are experiencing the stress from a new leader who may appear to be out to ruin the economy, but in reality is seeking long-term stability. Consumers are cringing at ever-rising prices even when all seemed to be going smoothly with their country’s economy on the surface. Trust issues in the United States will likely always exist, however we are not alone in the world. China, India, and Brazil are huge economic powers experiencing epic amounts of stress and, in turn, distrust towards their economic leadership.
Across the globe, there are plenty of culprits for the lack of trust towards government bodies and central banks. Here in the homeland, we have Janet Yellen speaking softly but she certainly doesn’t carry a big stick. How exactly are we to know when and if interest rate hikes will be the true solution to our own monetary issues and the Great Recession? The truth is all around us, but we must proceed with caution.
Not that long ago, it was reported that a high-profile banking regulator in China literally died at his desk as he was rushing to submit a report early in the morning. The man was 48 years old, and spent 26 of those years “putting the cause of the [communist] party and the people first.” This is not an isolated incident as the China Youth Daily reported: about 600,000 Chinese workers die every year from working themselves to death. As the China Radio International reported in April, that amounts to a death toll about of 1,600 workers each day. However, these are state-controlled sources so the actual number could very well be higher. Part of the pressure from 2015, in particular, is that China was attempting to attain a GDP growth target of around 7.0 percent at a time when their economy is experiencing credit, spending, and lending issues. At the moment, China has made a more realistic target of 6.5 percent growth for 2016, but even that might be a stretch. Tucked away in this issue is a need for China to shift away from extreme levels of manufacturing not only to combat pollution, but to utilize a more plentiful resource: people. The service sector has been outpacing the manufacturing sector for some time, but as with most developed economies, it is the production of durable goods that drives strength and revenues. China’s government is pushing its citizens to grow the service sector at an equal or greater pace than the manufacturing sector and the result is wiped-out citizens knocking on death’s door. Below is a chart from the beginning of 2011 that compares the PMI of the manufacturing versus the non-manufacturing index (or services). The manufacturing index has hovered around the line of contraction (50) for some time, while the services component has remained in an unnatural expansionary phase over the same time frame. It shall be interesting to see where it goes from here, but in an ideal world, the two lines should ultimately converge to a level of balance.
Way back in May 2014, in a rather revolutionary move, the people of India moved away from the dynasty ruling Indian Congress Party that caused skyrocketing inflation by instead electing Narendra Modi, leader of the Barath iya Janta Party (BJP) in a record landslide victory. The country is now prepared to move away from the political party that put a damper on their economic movement, in an effort to create the world’s largest democracy, supported by a huge middle-class. Modi has made a strong stance supporting free markets, minimal intervention by the state, more manufacturing jobs, and infrastructure projects across the country. In addition, his election brought about India’s first fiscal budget, which the nation has been tightly adhering to, and so far their stock market has been ripping.
Below is a chart of the Indian Stock Market relative to the national interest rate set by their central bank. Inflation had run amok in India for some time, and so rates needed to increase in order to bring inflation down to a manageable level. The unfortunate result was a dive in the stock market that took several years to recover. Rates were raised again late last year, which many believed would cause the market to tank again, but they were proven wrong – in fact, the Indian stock market reached its highest level in the last 5 years in 2015 even as the national interest rate continued to decline. Short-term pain really proved to be long-term gain for the Indian investor. Modi’s budget plan is the cherry on top of this monetary-reparation sundae. Our own Federal Reserve could certainly learn a thing or two about “tough love”.
All of the hype surrounding the 2014 World Cup and the Summer Olympic Games in 2016 has not been enough to keep South America’s largest country on solid ground. Brazil's central bank recently cut its economic growth forecast for 2016 into negative territory and expects inflation to subside after a temporary peak this year. This should reinforce expectations that policymakers will keep interest rates steady for some time. The central bank lowered its 2016 economic growth (GDP) forecast to -1.0 percent from -3.0 percent in 2015, at the same time the bank raised its 2016 inflation forecast to a whopping 9.0 percent from around 6.0 percent just two years earlier, but they still expect inflation pressures will subside. Brazil continues to possess some of the highest interest rates in the world at approximately 14.25 percent; however those numbers were much worse pre-2008. Below is a chart of Brazil’s GDP growth rate relative the central bank’s established interest rate. Interest rates have been flying high for quite some time and this is clearly weighing on the country’s growth rate. The goal of higher interest rates is to bring down inflation, but Brazil’s CPI remains quite high without much sign of coming down. Such activity has much of the country frustrated; there is great potential for broader industrial activity if only their policymakers would set up a system that actually demonstrated high-growth progress within a decade.