Will 2016 be the next Recession?

George Soros, a major hedge fund investor who once towed down Bank of England has predicted over next slowdown in 2016 (published in The Economist). And the likely indicators are Chinese slowdown, negative interest rates in Europe and Japan, low commodity prices. But, at the same time there seems to be some bright spots like US and India with decent growth numbers. But is that so? When India is performing below its potential growth rate (8% on basis of incremental capital output ratio) or US showing low consumption demand (recently concluded Christmas month), Can we count on these bright spots? Or when China is putting best effort to shift to consumption driven economy rather than export driven, Can’t we wrong in putting it into dark spot? Let’s start from last century debacle and learning (1930 Great Depression)

The world has followed the learning of 1930s Great Depression crisis in the post 2008 Great Recession through Keynesian approach aided with monetarists (linked with fiscal expansionism and monetary easing). After Great Depression of 1930, New Deal of FDR (Roosevelt) focused on public expenditure adding jobs and increased buying power of people in USA. It was a major event in bringing American economy out of recession. After 2008 recession, following same lines of boosting demand to recover economy has been followed. And this has been tried through monetary easing, buying toxic assets from market by Fed and giving easy money in hands of people (Keynesian approach includes targeting demand rather than supply in an economy). And this approach is based on assumption that public expenditure will crowd in private investment and private production and economy start rolling.

In 1930s it was direct government involvement or fiscal route while in post 2008 it was through monetary route. This easy money has been offloaded to developing nations like India, China and ASEAN in search for better returns. And since financial markets are dominated by few investment giants (in words of Piketty, another case of rising inequality), this has not been a difficult task. As a result, crowd in effect has not been that substantial as expected. And recent low consumption data and poor output data in US points to same (US still not recovered). What was successful in 1930s and subsequently can't be repeated again in this financially connected global economy.

In aftermath of 2008, there appeared many other dark spots in various other parts of world. The Europe has still not recovered of Greece crisis of 2010-11 owing to poor coordination, negotiation and understanding. And recent Refugee crisis of 2015 has imposed existential threat to Euro area with ban on free movement of labour. Also, low commodity prices specially of crude oil has further limit the development expenditure of oil rich nations (like OPEC and Russia). This has negatively impacted the infrastructure firms to its maximum (like that of L&T, with major orders in Gulf countries). This very low (<$30) price of oil is although good for importing nations like India and China; but on global level this is hurting. In fact, crude oil price <$40 and >$80 always hurts the global economy. Too low a price, hamper global expenditure while too high a price, a drain of resources.

Amidst all this, China which was earlier the major bright spot of world economy (when India was suffering with scams and policy paralysis) has also cooled down. With global demand declining for Chinese exports (US and Europe distress) and production shifting to consuming nations (thanks to 3D printing technology alike), Chinese economy is shifting its gear towards consumption driven. And change of economy fundamentals is time taking and rough. If not handled soundly, China can become the trigger of another slowdown.

The only bright spot available are India and Africa, but they are too small to boost the global economy. They are always in the shadow of political instability or policy paralysis.

Taking account of all the recent events, data and economic health of nations; the world seems to be at the brink of another recession. And so is any normal economy, which runs on a knife edge equilibrium of trusts and faith between suppliers and consumers. If that trust and faith are being restored by political class of world, there will be instead a growth story. And that faith can be restored through easy landing of Chinese economy without hampering other nation’s growth (through avoiding deliberate devaluation), making monetary decisions on global cues and not just domestic, global mutual solution to refugee crisis and economic interests over political ones (US-Russia and Iran-Saudi Arabia enmity). 

Inflation

1. Inflation is the phenomenon of rise in prices of the goods and services over a period of time. It can be both desirable and non-desirable depending upon the quantitative limit of Inflation and is caused out of a number of reasons from demand supply gap more often, rise in prices of raw materials, disdain in the supply chain of the system, black-marketing and hoarding and many others.
2. Inflation can be measured in a variety of different ways. One way is to measure it at different levels of supply chain like at whole price level and is known as Wholesale Price Index (WPI) and at retailer level called as Consumer Price Index (CPI). Also number of goods and services included inside them can vary depending on the decision making body of the country or the state. It can be calculated differently for different sets of people depending on their consumption pattern like CPI-Industrial workers (CPI-IW) and CPI-Agricultural Labors (CPI-AL). In India they are collected and published by different organizations from Ministry of Statistics to Ministry of Labor.
3. Inflation is desirable when it is in limits and in coherence with development and growth in terms of production and demand. Different central banks across the world target a sustainable inflation rate which is normally in the range of 2-4% year on year. Such inflation rate has proven to be in line with growth in GDP and assures benefit to all the stakeholders of the system. Federal Bank of US target inflation rate of 1--2% to sustain a growth rate of 3-5% of their economy, similarly European Central Bank targets inflation rate of 2% to sustain growth rate of 3-4%. German Bundesbank (before formation of ECB) has proved its mettle in fighting inflation to keep it below 2% and this sustained high growth for german manufacturers throughout the cold war period.
4. While on the other hand inflation may proved to be undesirable when it is beyond the comfortable range of 4-6%. Such inflation rate is not sustainable and mainly caused out of abrupt hike in prices of raw materials, increased cost of production out of regulatory reasons, hoarding, black-marketing or may be because of lack of competition in the market. Such high rate of inflation is harmful  because of increase in prices of goods and thus hampering its consumption and thus hampering the demand and ultimately growth of the sector. It also erodes the faith of foreign investors into the economy of the country and lead to flight off of foreign investors. Along with high inflation, demand of the goods come down and as per Demand Supply curve; this will further pull down production leading to unemployment and less investment into the economy. In the short run, this will cause slowdown and high inflation prolonged for a long time duration will push the sector into recession.
5. In context of India, since independence inflation has been predominant out of number of factors. At some instant, inflation is there in food grains in pre green revolution era out of drought and crop failure limiting the supply of food grains; at other instant inflation is there in capital and durable items because of increase in prices of raw materials and regulatory reasons like that of vehicles because of shortage of coal and electricity inflating price of steel and then to vehicles. Inflation has thus, a wide reaching affect to multiple sectors. The worst form of inflation is due to malpractices like hoarding of goods creating artificial shortage with motives of earning high profits. Such practices are very common to India from the time of britishers and specially in the food grains as they are essential items of consumption.
6. In the current scenario, inflation is high and is hovering around 8-12% in case of CPI because of reasons including high govt. expenditure through MGNREGA and other social assistance programmes pushing more money into the market, continuous increase in MSP (minimum support price) of cereals and other food items pushing cost at the procurement level, as well as malpractices of hoarding.
7. Although all sections of society is affected by high inflation as it leads to wiping off the savings of the families and individuals. But the worst effected people are marginally poor who are continuously moving in and out of the poverty line and specially because of high inflation in case of foods and essential items. In the absence of govt. support, they have been pushed below the subsistence level
8. Govt. across the world use to take multiple steps to check high inflation. The leading fight against inflation is carried on by central banks who through target based inflation increase/decrease the interest rates to control the flow of money into the market (more money in the hands of people pushes up the demand of the goods). This they do through changing the rates at which they lend money to the banks and other regulated institutions and thus affecting cost to money. In case of India, Reserve Bank of India is leading in this fight with target inflation of 4+_2%, through repo and reverse repo rates.
9. Besides this, govt. across the world ensure the prices of the goods and commodities not to breach a certain level by controlling the import and export of those goods and commodities. Further controlling the prices of essential commodities through acts and laws like Essential Commodities Act in case of India. Laws across the world have been made to check hoarding of commodities and black-marketing of such goods.
10. In-spite of such measures high inflation is prevalent in society sometimes because of poor implementation of laws and rules, poor forecasting in case of central banks, natural calamities and poor planning at production level. The war against high inflation has to be continuously fought through existing and innovative tools with firm hands in the interest of the society and economy as a whole.