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Richard Jerram says the dynamic for growth is shifting from the domestic factors that have dominated in recent years towards exports as the developed economies recover.
Richard Jerram says the dynamic for growth is shifting from the domestic factors that have dominated in recent years towards exports as the developed economies recover.

Don’t expect too much of a pick-up in India’s growth: Richard Jerram

Bank of Singapore's chief economist sees China's growth slowing, India's accelerating a bit, and overall Asia's prospects unchanged in 2014

Singapore: China’s growth will slow in 2014, while India’s will accelerate a bit, but overall Asia’s economic prospects will remain unchanged in the coming year, said Richard Jerram, chief economist at Bank of Singapore, the private banking arm of Oversea-Chinese Banking Corp. Ltd. In an interview, Jerram said growth in Asia will be much faster in absolute terms than in developed economies, but said he was more positive on the latter’s prospects in 2014. In India’s case, Jerram does not see any easy solution to supply-side barriers to growth and warned that the situation may worsen if the general election, due by mid-2014, produces an inconclusive result.

Edited excerpts:

You have been maintaining that developed markets will lead global growth in 2014—why do you say so? Why do you think the developed world will see better prospects than Asia?

Our positive view on the outlook for developed economies is largely a reflection of a more growth-friendly policy environment. This mainly comes down to fiscal policy settings. Europe is already starting to see the benefit of a less aggressive austerity and the 18-month-long “double-dip" recession came to an end in 2013. The US economy has been held back by tax hikes and spending cuts related to the fiscal cliff, but that headwind will fade in 2014 and open the way for US growth to approach the 3% pace. We can already see signs that US growth is picking up and this should continue, assuming the issues of the budget and the debt ceiling can be resolved without too much stress in the coming weeks. In the case of Japan, it is more an issue of exchange rate weakness driving export competitiveness, which then flows into the domestic economy, rather than a more supportive fiscal policy. In fact, with the sales tax set to rise in April, this will be a drag on growth, although I think that people have a false memory of the recession that happened in 1997, the last time the sales tax went up.

In fact, the sales tax only represented about one-third of fiscal tightening at the time, and of course it was soon followed by the Asian financial crisis and the failure of a few Japanese banks. The sales tax hike has received more than its fair share of the blame. It is largely a policy story in Asia as well. Of course, growth here will be much faster in absolute terms than in the developed economies, but we do not expect much of a pick-up from 2013. China will be slower; India will be a bit faster, Asean (Association of South-East Asian Nations) will be about the same as 2013; so overall growth in the region will be similar. The region has enjoyed a fantastic performance in recent years—industrial production is already more than 50% above pre-Lehman shock levels—but some areas are looking rather stretched, such as some credit measures.

Are you concerned that the ongoing dispute between China and Japan, the second and third largest economies, will be a major geopolitical risk that can derail 2014?

One of the factors that supported an increase in market valuations over the past year was a decline in “tail risks"; so we have to be sensitive to anything that might reverse that trend. At the moment, the China–Japan dispute is one of the more concerning situations, due to the size of the two countries and their vital roles in global production chains. We know that Japan wants cheap Chinese imports and that China needs Japanese components for its electronics industry; but, at the moment, that mutual dependency seems to be a secondary issue for the politicians in both countries. After the Japanese earthquake, tsunami and nuclear shock in March 2011, we saw how the disruption to supply chains affected a range of countries around the region. Outright conflict would probably have a much deeper impact, and the tensions are so great that a small miscalculation or accident could have significant repercussions.

What is your view for emerging markets for 2014?

We are not particularly positive on emerging markets, but it is also important to realize that the dynamic for growth is shifting from the domestic factors that have dominated in recent years towards exports as the developed economies recover. We would be particularly cautious on commodity-related economies, or on those running substantial current account deficits—and there is (an) overlap between these two categories. However, we should also recognize that some large economies such as Brazil, India and Russia have been facing a structural slowdown for some time, and the situation seems unlikely to worsen. The emerging markets will have to deal with tapering (of US economic stimulus) as well, which could involve some short-term volatility even though much of the adjustment seems to be in the price already.

When do you think tapering will happen?

The precise timing of tapering is not particularly important—it is clearly not far away: our guess is March 2014—and it already seems to be largely priced into financial markets. When (Federal Reserve chairman Ben) Bernanke raised the idea in May, it came as a surprise to markets, and this led to rising US bond yields and pressure on some emerging economies. Much of that adjustment is now complete. Another reason to be relatively relaxed is that the Fed has managed to convince markets that tapering is not the same as tightening. It looks like they will emphasize this by cutting the threshold for the unemployment rate they want to see before interest rate rise. At the moment this stands at 6.5%, and they are likely to cut it to 6.0% or perhaps even 5.5%.

There is a lot of debate that tapering of quantitative easing (QE) might be deflationary. What is your take?

QE has been inflationary for asset prices and that gives some support to the real economy, so I would say that it has been a useful barrier against deflation. Of course, the first round of QE was much more significant than the ones that followed, because it stabilized the global financial system. Ultimately, I think, that the path for interest rates is more important than QE and all of the major economies are making it clear that rate will stay near zero for years to come—essentially until deflationary risks have been averted.

Many analysts are of the view that commodities in 2013 will again turn out to be the worst-performing asset class in terms of risk-adjusted returns—do you agree that this will happen for the second consecutive year? Do you see this continuing in 2014?

We are not positive on commodity prices. Precious metals should keep falling due to the fading risk of a global inflation surge, or repeated financial crisis. As gold’s value as a hedge against inflation or crisis erodes, we would expect prices to head back to levels associated with marginal production costs, or in line with its role as a store of value. We calculate that this is around $900-1,000/oz. It is probably not going there any time soon, but the tone should be weak. More generally, commodity prices will not benefit too much from stronger global growth as it comes from the developed world, which is relatively light in its commodity use. At the same time, the maturing Chinese economy is likely to become less intensive in its use of commodities—this is at the heart of the rebalancing story. So oil, for example, does not have much demand support and it has supply-side risks from both Iran’s improving relations with the West and from a gradual substitution by cheaper forms of energy, such as shale gas.

Is the worst really over for the Indian economy? Recently, finance minister P. Chidambaram said India’s economy will grow 5% in the fiscal ending March 2014.

I don’t expect too much of a pick-up in Indian growth. There is no easy solution to supply-side barriers to growth and if the general election produces an inconclusive result, then the situation could even worsen. The RBI (Reserve Bank of India) has done a good job of stabilizing the exchange rate, but this is at the cost of high interest rates, which will be a drag on growth. Weak public finances mean that there is not much room for manoeuvre on government spending policy and the risk of a rating agency downgrade will persist.

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