Posts tagged ‘currencies’

Quite A Pounding

At midnight last Thursday, the pound fell by more than 6% against the dollar. Its intraday (intranight?) low was 1.1841. Since then, cable has stabilized somewhat. It currently prices at about 1.22, up from a closing low of 1.2123 reached on Tuesday. So what does the pound’s latest “31-year low” – or even “168-year low” – signify, if anything?

First let us consider the very straightforward economic consequences, which are twofold.

On the positive side, the cost of buying British goods and services from abroad, from JCBs to tour bus tickets, falls. This is growth positive. It is also why currency devaluation is one of the most obvious and best understood forms of monetary easing.

On the negative side, the cost of buying foreign goods and services in Britain, from rice to Ritalin, increases. This is growth negative since it compresses margins for importers and makes consumers poorer. This is also why currency devaluation is a risky and unpredictable means of monetary easing.

One key question for the British economy is: which of these two effects will predominate? That depends purely on the inflationary impact. If this is relatively modest then devaluation will increase growth without hitting people’s pockets, or firms’ margins, too forcefully. If it is significant, however, then the devaluation will depress overall economic activity since domestic demand accounts for a far more substantial part of output than exports (62% versus 30% on Q2 GDP data).

It is hazardous to speculate as to which outcome Britain will face. On the one hand, supranationalist media sources are sure the export benefits will be slight and the inflationary impact severe. On the other, Brexiteering sources seem not to have considered the inflation question at all.

One thing we can do is examine the scale of the pound’s recent fall with some detached perspective.

Cable has fallen by 29% since the high of 1.7166 it reached in early July 2014. Its all-time closing low was posted on 26 February 1985 at 1.0520. However the pound has not yet broken through its December 2008 low against the euro (€1.025) or its more recent (2011) low against the yen. Looking at the Bank of England’s trade weighted index, which pits the pound against a basket of other currencies, this week’s low was barely through the previous record level reached in 2008 (73.3 versus 73.4 back then).

It is understandable that the focus of the media should be on the sterling exchange rate which has moved the most dramatically. However, again with some detachment we ought to observe that cable’s recent history has been affected by dollar strength as well as sterling weakness. The Federal Reserve’s trade weighted dollar index has risen by more than 21% since its 2014 low. Indeed, while the pound has fallen by 29% against the greenback the euro has not been far behind, dropping 21% since its own 2014 high point (from $1.39 to $1.10 today). Without wishing to overdo the point about press coverage one does not see headlines in The Economist about “votes of confidence” in the single currency.

Some sources have taken things further, with Bloomberg claiming that the pound has become an emerging market currency: “the new Mexican peso”. Now at the time of the “tequila crisis” back in 1994 the peso more than halved in value against the dollar in under three months. More recently, the Brazilian real almost halved in value as commodity markets collapsed in 2014-15. Again, a little more perspective would be nice.

This is not to downplay the risks arising from imported inflation. The UK’s next CPI and RPI prints will come out on Tuesday. PPI input prices in particular will merit close attention. Year on year they have already rocketed up from -15% to +8% in the space of 12 months. That inflation has to go somewhere: again, either into shrunken margins or consumer’s pockets (and if it persists, most likely both). Back in 2007, RPI inflation rose at around 4-5% and food prices were making tabloid headlines. Inflation also means higher pensions, higher gilt yields and higher public sector wages, all of which is bad news for Britain’s strained fiscal arithmetic.

Furthermore, Mark Carney today confirmed the Bank of England’s insouciant attitude to inflation at a “public roundtable”, saying that while he appreciated that it could cause problems he was willing to see the Bank miss its target to protect against the supposed loss of jobs into next year. (Readers of this blog will know that the MPC officially abandoned its founding mandate back in August). Markets are less complacent: expectations for a further cut in the base rate have evaporated, and the ten year gilt yield has risen to 1.1% from the record low of 0.52% it established only a couple of months ago.

Now price increases were back in the tabloids again just this week. If imported inflation does cause problems, and the Bank does nothing to stop it, then the ugly devaluation scenario may well end up playing out.  Looking at the bigger picture for sterling, and not just the cable rate, we ought not perhaps to panic overmuch. But even at a princely 1.1% the gilt market is not remotely priced either for an uncomfortable patch of price behaviour or the policy normalization required to deal with it. There could be some interesting developments ahead.

14/10/2016 at 5:11 pm

Eastern Peril Still Biding Its Time

At this time last year, markets were preoccupied by the bear case on China. The stock market had collapsed, the yuan was devalued and the country stood supposedly on the brink of a major banking crisis brought on by bad lending and vanishing growth. So appalling were the consequences of such a crisis that the Fed explicitly linked US monetary policy to the wild ride offered by the Shanghai Stock Exchange.

What a difference a year makes! There is the occasional susurration over the Chinese Peril discernible by those who listen intently, but panic on the subject, having waxed to hysteria last summer, has since waned to nothing.

At the same time, Chinese data has continued to be published as before. So what has it been telling us? Are we being complacent to ignore a threat which only twelve months ago was thought to imperil the world? Or was it all nonsense?

A year ago this blog took something of a sceptical stance on the Chinese Peril. On the subject of devaluation in particular we said that “exports matter to the Chinese economy, devaluation ought to help exporters, and monetary softening elsewhere ought to ease some of the pain in the property market and contribute to lending growth.”

Lo and behold, those macroeconomics textbooks turn out not to be a waste of shelf space after all. Trade figures out from China yesterday showed the pace of decline continuing to slow; both export and import numbers exceeded forecasters’ expectations. It is instructive too that the latest bout of renminbi weakness has passed without much comment: the yuan is just under 3% weaker against the dollar for the year to date, almost matching the pace of its decline last year when it made for headline news. (Just as importantly it is also 6% weaker against the euro and 21% weaker against the yen.) So far there is no sign of this translating into higher prices: CPI inflation was +1.3% on the year to August, towards the bottom of its recent range and well below the levels of 5-6% which provoked a policy response in 2010-11.

Further evidence of economic woe last year came from output indexes. It was seen as more surprising than it should have been at the time that a sharp strengthening of the currency had hurt manufacturing. Similarly, when last week’s manufacturing PMI number came out at 50.4 for August – not earth-shattering, but the highest level for two years – it not only beat expectations but fell outside the entire forecast range.

Another area of concern was the property market. Signs of weakness last year were misinterpreted as a dangerous, balance-sheet-threatening bubble collapse. Yet the market has since steadied following its correction and some cities are imposing ownership curbs in an effort to curb precisely the kind of overextension which so many observers thought they had noticed twelve months ago. As to balance sheets, figures out last month showed that the bad loan ratio for the Chinese commercial banking system actually stabilized in the second quarter at 1.75%. (That’s still a large figure in dollar terms – $215bn – but then China has fifteen times that amount in sovereign reserves.)

Looking at some other indicators, retail sales growth has remained steady at levels of +10% on the year and more throughout 2016, and July’s passenger car sales figure (+26.5% on the year) was the highest posted for three and a half years. On the industrial side of things, electricity consumption came in at +8.2% on the year to July, up from -0.2% back in December and the highest print since February 2014; headline industrial production itself seems to have bottomed out last year and has turned out at +6% and better for 2016 so far.

None of this is to say that China does not have her economic issues, like every other country. Here one might think of SOE inefficiency, frustrations to some monetary transmission mechanisms, over-reliance on particular sources of growth, grim demographics and developing world problems such as questionable building standards and the frictional effects of political corruption. But if we are to find the source of the next global catastrophe it seems we must look elsewhere. The Chinese Peril, if such a thing really exists at all, is still biding its time.

09/09/2016 at 4:57 pm

Fair Winds and Following Seas

Market chat on the subject of the eurozone has tended to be rather downbeat over the last few years. Some observers have focused on its benighted wrangling over sovereign debt; others, more recently, on the supposed millstone of deflation. And there have of course been those who have questioned the zone’s very future. Narrative gloom set in well before the double dip recession’s second leg, persisted throughout it (Q4 2011 – Q1 2013) and has continued since. Today, however, the fundamentals are refusing to play ball even more stubbornly than they usually can, when the mood takes them.

Earlier this month we saw the ECB revise its growth forecast for 2015 up from 1.0% to 1.5%. Just this week, consumer confidence in the eurozone hit its highest level since the short-lived spike up into July 2007. And the composite output indicator showed the strongest level of growth since May 2011, before the market crash and pandemonium which dominated the second half of that year.

There are three major reasons for this.

  • The euro has depreciated. It has fallen by over 20% against the dollar over the last nine months (from 1.365 to 1.088) and more modestly against sterling and the yen also (-8.7% and -6.5%).
  • This real world monetary easing has been matched by the ECB’s first foray into quantitative easing. Dubious though the policy’s concept and effects may be, markets have tended to approve of this.
  • The eurozone collectively is the world’s largest net importer of crude oil. Though the euro has got cheaper, oil has got cheaper still: the near Brent crude future is 36% lower in euro terms today than it was nine months ago.

Against this background the strong performance of European equity markets versus their developed-world peers is understandable. (The Stoxx 50 is up by 17% so far this year as against 11% for the Nikkei, 4% for the FTSE 100 and zero for the S&P.) The question is: can it last?

Disaster notwithstanding, the answer might just be “yes”.

The benign effects of cheap oil on the US as another significant net importer are offset by fears over monetary tightening in the face of a galloping labour market. These intensified last week when the word “patient” was removed from the formal description of the Fed’s present monetary stance. The Bank of England is similarly looking to tighten policy at some point as affirmed by Governor Carney only this morning. Before the oil price collapse began to be felt in earnest there were signs of price pressure in these economies and should the collapse unwind at all into the end of this year those signals will get stronger and stronger.

The unemployment rate in the eurozone, by contrast, fell by only 0.6% over the whole of last year to end it at 11.3%. This brings with it all sorts of other problems, of course, but from an inflationary perspective it leaves a lot of slack in the labour market. It looks likely to be some considerable time before investors need to worry about monetary tightening from the ECB.

On a similar note: with oil and other commodities having fallen or – at best – stabilized in price over the last few months, there is little danger of the weak euro having an inflationary effect. At the same time, the pitch of its descent means it has been winning that notorious game of “beggar my neighbour” for its exporters on the major currency markets. (This is not such great news for some far eastern countries, including China, whose exchange rates have strengthened impressively against the euro.)

There are always risks and Europe faces its own particular demons. But the speed of the turnaround there has been impressive: it was only back in November that the EU Commission last cut its forecast for 2015 growth. Like good news, quick turnarounds might well strike readers as a most un-European phenomenon. It has been most welcome to see the Continent delivering such pleasant surprises for a change.

27/03/2015 at 4:41 pm

Sterling Stuff

The British Isles have been living through some historically significant weeks. The Scottish referendum resulted in the continued existence of Great Britain as a nation, but only by a narrow margin. To say therefore that politics has been interesting here lately would be an understatement. But market behaviour, on the other hand, has not been terribly volatile. The stock market has remained completely range-bound. Gilt yields did reach new lows for the year to date in August, but there were never any signs of panic. In both cases prices have been moving in the same direction as other major markets.

Where there was some more eye-catching behaviour was in the currency.

Given the focus on the pound throughout much of the political campaign this is satisfyingly appropriate (and of course its international trading symbol clearly reads: “GBP”). The sharpest move against sterling came after a weekend poll published by the Sunday Times on 7 September showed a narrow lead for the Yes campaign. Monday saw the pound fall by 0.9% on a trade-weighted basis, its biggest one-day tumble for well over a year.

We should not get too carried away here: the euro has fallen further against the dollar since mid-year and shown almost equally great volatility this month, in no small measure due to the operations of the ECB. Still, the pound has experienced a material shift over the past twelve months and this begs the question: what is its fair value?

Trading ranges are one obvious place to look for guidance. Against the dollar, sterling almost fell to parity in 1985, and peaked at over $2 in 2007. The average cable rate for the past thirty years is parked in the middle of this range at $1.64. For almost exactly one half of that three-decade period, the pound has traded within ten cents either side of the average rate, which is remarkable. At its current price of $1.63, therefore, it looks fairly valued.

The euro rate is harder to pin down on this basis. From the launch of the single currency in 1999 to mid-2007 the pound held a range of €1.40-€1.70, broadly speaking; then it weakened dramatically towards parity in 2008 and has occupied a range of between about €1.05 and €1.30 ever since. At €1.28 currently sterling therefore looks a bit toppy on a purely post-crisis view, but a bargain relative to its pre-2008 levels. (The latter also applies if one charts the pound against the old European benchmark of the Deutschmark. If the DEM still existed a pound would buy 2.5 of them, below its averages over both the past twenty and thirty years.)

Fixating on ranges, however, is the proper preserve of traders, technical analysts and all those trying to make short term sense of the foreign exchange market (there but for the grace of God … ) The long run – and textbook – point of reference is the currency’s purchasing power parity. The theory behind PPP is that the same goods and services should cost similar amounts in different countries, assuming perfect freedom of trade between them. In practice, PPP valuations are therefore calculated by reference to the relative costs of similar items of consumption and to inflation rate differentials over time. OECD PPP estimates for the equilibrium sterling exchange rates against the dollar and the euro are $1.38 and €1.11, so the pound is actually looking expensive on this measure at the moment.

More interestingly, perhaps, are the implications of PPP for long term trading ranges. Using the OECD estimates, sterling is about 13% overvalued against the dollar. When it hit the same kind of levels about nine years ago the actual exchange rate was nudging $1.80. In other words, the somewhat higher rate of inflation in the UK relative to the US over that period has shifted the PPP valuation of the pound by about fifteen cents. Another way of looking at this is that the high reached recently of $1.72 is equivalent to $1.87 a few years ago.

Over the last three decades the UK and US economies have exhibited identical average rates of CPI inflation (2.8%), which is consistent with the stability of the cable rate’s trading range over the period. Turn to Europe, however, and the picture is rather different: over the last ten years, the annual rate of CPI inflation in the UK has on average been higher than that in the eurozone by 0.8% (2.7% as against 1.9%). Going back much further is problematic as zone-wide data is not available prior to 1997 and back in the 1980s there was the matter of the separation between East and West Germany. But the twenty year average rates of CPI inflation in France and Germany are 1.5%, compared with 2.2% here in Britain.

This means that the 14.5% undervaluation of the euro against sterling on the OECD measure pits the current rate of €1.28 against a rate of almost €1.60 when the same level of undervaluation could be observed in the autumn of 2002. So while the trading range of the currency alone might suggest that the pound is priced at a rather weak level against the euro, PPP tells us that we need to shift our assumptions to take account of the material inflation differential between the UK and Europe over the last ten to twenty years and perhaps adjust ourselves to something along the lines of the post-2008 range as the new normal.

Between the long-run PPP and the short term trading view of the world are a handful of other significant forces on the exchange rate. The desirability of UK assets, the attractiveness of the country as a place to do business, the development of views on the likely future path of interest rates and (joining all these dots together) the outlook for economic growth are hugely important considerations. But the impact of PPP, and inflation, is observably apparent.

On that basis it is not quite reasonable to interpret the recent fall in the value of the pound as a conspicuous buying opportunity. And when looking at the currency diversification of a portfolio on a medium to long term investment horizon, it is worth bearing in mind the stubborn tendency of the UK economy to inflate more quickly than its major market peers over the last decade or so, especially in the case of Europe, and to consider the possibility that this might persist.

26/09/2014 at 4:04 pm

A Cold Start

Yesterday came the news that the US economy grew at a 3.2% annualised pace in the fourth quarter of last year. This encouraging sign came on top of Tuesday’s Q4 GDP data for the UK, which capped off the strongest year since before the Great Recession. Yet markets hardly noticed. Perhaps it’s the freak winter weather over the Atlantic, but January has got 2014 off to a bearish start.

At the time of writing the S&P 500, the FTSE 100 and the Euro Stoxx 50 are all down by 4-5% so far this year and the Nikkei has dropped by over 8%. Ten year yields in safe haven markets are about 0.3%-0.4% lower; Greek debt has sold off. Emerging market debt is weaker, and EM equity is also off, especially in Latin America. The trade weighted yen has strengthened for the first month since August, and the dollar has risen too. Highest profile currency losers have been Argentina and a few other EM nations. Gold is up; industrial metals, down. Credit spreads are wider.

Risk, in other words, is off again.

Explanations for this sorry start vary, as ever. There is a vague consensus that emerging markets are a problem, and talk of capital flight and current account deficits. Unfortunately this doesn’t quite add up though. Turkey saw its currency lose nearly 9% of its value against the dollar by the end of last week and yes, it runs a material current account deficit – 7.2% of GDP at the last count – but it hasn’t run a surplus since 2002, so it is not clear why this measure should suddenly assume overriding relevance. For that matter, the Russian rouble has fallen by over 7% against the dollar so far this year, and yet Russia has posted a current account surplus each quarter since the crisis of 1998 (amassing some of the most substantial reserve assets in the world as it did so). Then there is the other North American dollar. Yes, Canada also has a current account deficit – but nobody seems to be talking about that in relation to the 5.5% sell off worn by the poor old loonie. In fact, coupled with more moderate weakness in the Aussie dollar, the real currency story begins to look like US dollar strength with EM specifics a bit of a side-show. Though again, that might not square with higher gold.

The half-hearted media attention given to EM is understandable. There is no news like bad news: crises shift copy. Away from emerging-land, however, there are plenty of other discrepancies which have gone unnoticed. In the UK we have had real evidence of the extent to which stronger growth is good news for sovereign debt, and with recovery on the Continent picking up, Spanish and Portuguese bonds have outperformed German bunds in this month’s rally. Ten year Portuguese debt came within a hair’s breadth of knocking through 5% today and has made new post-bailout lows. And yet Greek debt, as we have seen, has sold off – while the Athens Stock Exchange has outperformed all major markets, currently standing a little higher on the year to date.

In the US, stock market weakness has been accompanied by earnings reports which have surprised to the upside 72% of the time. As of this afternoon 250 of the member companies of the S&P 500 index have reported EPS for Q4 and have managed a +10.5% share-weighted change on the year since Q4 2012. Both of these percentages compare favourably with the picture at the end of January 2013, a month which saw the S&P rise by more than 5%.

There is more that could be said along these lines but the picture is clear – which is to say, not very clear at all, and subjected to interpretations which barely convince even at a superficial level.

What can perhaps be observed is that 2013 saw some unequivocal behaviour from asset classes and that uncertainty has reasserted itself since. We should not expect markets to move in straight lines. Sometimes this sets them against the grain of the fundamentals – and that, of course, can present opportunities.

31/01/2014 at 3:30 pm

The Year That Was

With 2014 now a few days old it is time to have a look at what markets delivered during 2013. (All returns data is given in GBP terms.)


The risk-on pattern established from the summer of 2012 continued, with the MSCI World Index returning exactly 25%. Of this, 23% had been reached by the time of the Japanese market crash towards the end of May. Risk-on was highly selective, however. By the same point, the MSCI Emerging Markets Index had lagged on concerns over growth in developed markets, delivering only 8.1%. EM took a particularly hard battering in the weeks that followed. With recovery into year end only partial, returns for the whole period were modestly negative and trailed the World Index by a staggering 29.3%.

Variety within these numbers was enormous. While markets in Nigeria, Bulgaria and Argentina all returned around 40-45%, stock indices in Brazil, Turkey and Peru lost around 30%. Among developed markets the US did best, delivering 29.7%. The Nikkei 225 and Euro Stoxx 50 were close behind, returning 26.5% and 25.8% respectively; and the FTSE 100 turned in a most respectable 19.2%.

Fixed Income

Major government markets generally had a poor year. The 10-year gilt yield rose by 1.2% to close at 3% – exactly the same story as for the 10-year US treasury. Japan did better, closing broadly flat at 0.7%, and Germany wound up somewhere in between, with the 10-year bund yield creeping up from 1.3% to 1.9%.

In returns terms the top performers came from the eurozone periphery, with the Greek market delivering an extremely un-bondlike 40%. Spanish and Irish markets returned 14%, paltry by comparison, but again, rather extraordinary for government markets. Allowing for currency weakness the poorest performers were South Africa, Australia and Japan, which lost 18-20%; in local currency terms, however, it was the big developed markets which fared worst.

Credit generally had a storming time. The iTraxx main index of European CDS prices registered a fall in investment-grade spreads from 117bp to 70bp, only 5bp above the post-crunch low seen in January 2010. The crossover index, a measure of high yield risk pricing, saw spreads fall by almost 2%, smashing through similar lows to reach 282bp, a level not witnessed since late 2007. The exception was emerging market sovereign debt. Here, the BofA / Merrill Lynch index of hard-currency-denominated bonds from EM issuers saw spreads rise from 248bp to 297bp with the weakness concentrated in the first half of the year.


After a shaky start the pound had a respectable year, closing 1.7% higher on a trade-weighted basis. It was little changed against the dollar and the euro (about 2% stronger and 2% weaker respectively), though put on 19% against the yen. In fact, only a handful of what Bloomberg calls the “expanded majors” beat it, with the top performer in that basket being the Israeli shekel, which topped sterling by 5.5%. The Chinese yuan, subject as it is to a policy of gradual, managed revaluation, gained 1% against the GBP, and a couple of the emerging European countries squeaked a little higher too.

At the bottom of the pile the action was much more dramatic: emerging market currencies from South America to the Far East tumbled by as much as 20+%.


Appearing as they now do on various currency screens it seems appropriate to link this section with the last one by starting out with a look at gold and silver. And what an unpleasant sight meets the eyes: gold dropped by 29% against the pound and silver by 37%. In fact, in its “home” currency of US dollars, gold saw a twelve-year bull run end in 2013 and its biggest yearly percentage fall since 1981. (The latter point also goes for silver.)

It was a quiet year for oil, with the near Brent future flat over a year which saw price volatility reach some key lows. More interesting was the gas market, with the NYMEX future rising by 26%, its second consecutive annual increase.

Less interesting from an investment point of view but of some economic interest, the Bloomberg index of industrial metals prices dropped by 8% while the Baltic Dry Index of freight more than tripled (+226%).


Last, but for UK investors especially, far from least: bricks and mortar. The Nationwide index of house prices for December was out this morning and showed an increase of 8.4% on the year, the highest rate since June 2010.

Commercial property has had a duller time. IPD data for December is not yet available but the trend in recent months has been positive and we are on course for an increase in capital value across all sectors (retail, office and industrial) of about 2.5% for the year. Interestingly, this index remains 36% below its 2007 peak, and lower even than the previous high reached in 1989.

In Conclusion …

2013 presented investors with a decidedly mixed bag of results. Past performance is of course no guide to future returns and it would be otiose to extrapolate from or over-interpret them. What is clear, however, is that trends in some markets have been much more pronounced than others; and although much market behaviour has been logically and intuitively correlative, in some cases these trends have diverged to the point of incompatibility. Should they reconverge in 2014 it could be a good year for investors – if we manage to find ourselves on the right side of the reconvergence …

03/01/2014 at 4:22 pm

Indian Winter

One of the effects of the market’s recent taper tantrum has been to depreciate developing-world currencies, provoking fears in some quarters that we are on the cusp of a re-run of the events of 1997 which saw various tiger-shaped dominos tumble across the Asian part of the emerging market landscape. Particularly badly hit has been India. At one point on Wednesday the rupee stood 31% weaker against the dollar than it had done at the beginning of May, when the panic kicked off. Despite a muted recovery it is still down about 25% at present. Is the writing on the wall for the BRICs? Is it the Asian crisis all over again?

The short answers are “no”, and “no”.

It is true that Indian GDP has slowed and that today’s release for the year to Q2 came in below expectations. On the other hand, 4.4% annual growth in real terms doesn’t look so bad from a developed-world perspective, disappointing though it is set against an average rate for India over the last ten years of 8%.

It is also true that the Indian balance sheet is not as strong as some of its EM peers, with IMF putting its gross government debt to GDP ratio for 2012 at 67%. And India is running a budget deficit of about 5% of GDP at the same time – though again, these figures look downright enviable if you’re the US, Eurozone, UK or Japan.

So far, so worrying. But we are still some distance from 1997 and here’s why.

Going into the ’90s collapse the Asian tigers had been over-hyped and over-invested in by exuberant developed-world investors drunk on low inflationary growth and technological advancement. At the same time they had begun to have the rug pulled under them in certain industries by lower-wage China through an insistent combination of economic liberalisation and currency devaluation. (When Thailand, first casualty of the 1997 collapse, stood on the brink of annihilation in June of that year its economy was already in recession.)

Furthermore, the level of foreign currency debt at the time was huge, and countries including Thailand were trying to maintain currency pegs against the dollar with derisory levels of foreign exchange reserves to back them. On the way into the crisis, external debt to GDP in Thailand and elsewhere in the region was running at over 60%.

Today the attitude towards emerging market investment is far from exuberant – indeed has been relatively gloomy since the crash of 2011. And even with debt to GDP of 67% India has gold and foreign exchange reserves of almost $300bn. That’s much less than China, or Russia, but brings the net debt position down to under 50% of GDP. In addition, with budget deficits and real GDP growth balancing each other out, that debt ratio is not increasing.

Neither is there a sudden attack on a currency peg to contend with. The rupee already devalued from 45 to 55 against the dollar in 2011-12 and inflation at that time peaked just shy of 11%. There seems little reason to expect the current devaluation to 65 to result in something much more dramatic.

At the same time, export growth has bounced: up 11.6% on the year to July, an eighteen-month high. We should expect that kind of thing in a period of material currency weakness. (This is exactly the supposed cure-all remedy some have in mind for the beleaguered members of the eurozone periphery.)

It is precisely when we come to exports and growth, however, that we stumble over the real disconnect between fantasies about a reprise of the Asian crisis and the reality of the situation today. When India was booming back in 2010 and the rupee was moving sedately sideways, US monetary policy was in very much the same position as it is today. It has not changed in the interim. Therefore, the slowdown in the Indian economy cannot reasonably be attributed to a change in American monetary tapering, tinkering or anything else. Therefore, there is no reason necessarily to expect the Indian economy either to benefit or to suffer from changes in the US monetary environment over the next few quarters.

What has changed since 2010, however, is that Europe (including the UK) re-entered recession, Japan joined them in the aftermath of a calamitous natural disaster, the US recovery slowed, Greece defaulted and confidence collapsed. If we seek the cause of strain on the economy of India as elsewhere in the developing world, it is surely here that we find it – not in the press releases of the Federal Reserve.

Which brings us back to the present. It is not 1997 which lies around the corner, but 2014. So far – further shocks permitting – the coming period looks likely to be one of continued recovery. This will make an especial change coming from Europe, though if this week’s GDP revision for Q2 is anything to go by the pace might be picking up in the US too.

Can the Indian economy benefit from stronger growth across the developed world without reacting to changes in quantitative easing by the Fed any more than it has done so already?

Now there is a question to which the answer might just be, “yes”.

30/08/2013 at 4:51 pm

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