Will lower growth be the norm for US, Europe? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Will lower growth be the norm for US, Europe? 

A  A  A
In this issue:
» Britain has the highest exposure to Eurozone
» RBI keeps rates unchanged
» Do electricity assets need to be privatised?
» Measures being thought of to tide over drought crisis
» ...and more!

----------------------------- Get FREE: The Guide to Gold -----------------------------

Will the gold prices keep rising in the future too?

Is it better to invest in gold or stocks? ...

'Gold Bug' Bill Bonner, answers these questions for you in the exclusive publication - The Guide to Gold

Quick! Sign up for our FREE newsletter, The Daily Reckoning and get this Guide FREE!


Compared to the growth seen in the 1980s and the 1990s, the countries of the West are staring at a gloomy prospect of a slower growth over the next years till 2017. Indeed, the Financial Times reports that in the periods 1983-88 and 1994-99, leading Western economies enjoyed average growth rates of around 3.9% and 2.9% respectively. This average rate is expected to drop sharply to around 1.5% in the three years 2011-13 before improving a bit to 2.5% in the period 2014-17. What this basically means is that the growth seen in previous decades is unlikely to be replicated in the coming years. Does this growth signify a 'new normal' for the West? Is it time for them to adjust to this phenomenon?

Looks quite likely. The current weak economic conditions are being attributed to lack of demand on account of the global financial crisis and large scale retrenchments. But this argument may not hold true when taken in context of global growth. For although growth has sputtered in the West, emerging economies have grown rather well. With the result that in the period 2011-13, the global growth rate is still averaging at around 3.5%, quite comparable to 3.3% long term average for the preceding three decades.

Thus, rather than blame lack of demand, developed countries of the West will have to consider the challenge of structural adjustment. Indeed, most of the growth in the past few decades especially the 1990s was a result of cheap monetary policies and easy money. The governments in the meanwhile have sought to solve current problems by loosening monetary policies further. But policies which caused the crisis in the first place cannot be used to solve those very issues. Thus, it appears for now that slow growth and increased volatility could be the 'new normal' for the Western economies. Unless they come out with entirely new and meaningful strategies that will fuel growth. Probably then, a sustained growth of the kind seen in the previous decades could just be possible. One thing is for certain: keeping interest rates low, printing more money and other such tools of quantitative easing are not going to take them on the path to high growth.

Do you think that the rate of growth being seen in the Western countries is a trend we shall see in the coming years as well? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:26  Chart of the day
Given that the Eurozone is down in the dumps on account of the severe debt crisis there, countries exposed to this region are bound to suffer as well. So it becomes important to note the level of exposure for each country. Today's chart of the day shows that Britain is most at risk since it has the highest exposure to Europe. In contrast, the BRIC countries fare better although they are not entirely immune from the events unfolding in that region.

Data Source: The Economist

For the second time running since April, the central bank decided to keep rates unchanged. Under current circumstances, the Reserve Bank of India (RBI) believes that easing policy rates would only aggravate inflation and not necessarily stimulate growth. The RBI maintained status quo on the policy front. It kept the cash reserve ratio (CRR) for banks at 4.75% and the repo rate unchanged at 8%. This was in line with the general market expectation. But, there was some liquidity enhancement undertaken by the central bank. The RBI slashed the statutory liquidity ratio (SLR) of scheduled commercial banks from 24% to 23% of their deposits with effect from mid August. The SLR is the percentage of total deposits that banks need to invest in the government bonds. The reduction will help in the flow of credit through the system. A 1% cut, based on the total deposits in the country, will help inject around Rs 620 bn of liquidity into the system.

Monday morning, all of us woke up to the collapse of the northern electricity grid. What it did was that it plunged nine states into total darkness with absolutely no availability of electricity. This is certainly no small matter. And given how important the business of electricity is, this event should be dealt with all the seriousness it deserves. But are we taking all the right steps to ensure that such a tragedy does not occur again? Well, the answer seems to be in the negative. And it is none other than the former Chairman of the Central Electricity Regulatory Commission who gave this view.

He opines that the Government controls nearly 90% of the country's electricity assets. Therefore, there is a complete lack of accountability and indiscipline, which can then lead to events like the one that happened yesterday. Thus, privatisation of all electricity assets is a must as per him if the problem were to be solved at the most fundamental level. This is not all. He further added that the regulator must have very strong penal powers so that not only the companies are punished but the CEOs as well be made personally liable. We hope the Government will listen to this gentleman while it formulates steps to avoid such catastrophes in the future.

The European Central Bank (ECB) seems to be running out of options to resolve the Euro crisis. It has cut down interest rates to 0.75%. It has bailed out the troubled nations but their troubles are far from over. It gave cheap funds to the European banks to bail them out. But nothing seems to be working. All of its efforts can at best be described as short term fixes. Now it appears that it would use another option, that used by the United States. It plans to come up with a quantitative easing and print money to bail the Euro zone out. The ECB President has hinted that he may look at buying sovereign bonds in the zone and in effect pump money into it. However, before planning it, he has to get Germany to agree to the plan. But we feel that someone needs to go and tell the ECB President that money printing is again nothing but a short term fix. In the long run, it really does not help much. Something the US realized after embarking on two rounds of quantitative easing.

There was little doubt in investors' minds that Indian banks, especially PSUs are into troubled waters. The June 2012 quarter results further confirmed the same. The near term outlook does not look rosy either. Policymakers have cut the GDP (Gross Domestic Product) growth forecasts. Further, an unfortunate mishmash of high inflation, stagnant capex plans and the economic turmoil in the developed economies could worsen credit growth. This has led many Indian companies to either restructure or default on their debt. As a result, the non-performing assets have been piling up on the balance sheets of Indian banks. As per a report on Mint, PSU banks' NPA provisions saw a rise of 129% YoY in the June quarter. Further, the gross NPA ratio went up from 1.5% in June 2011 to 1.8% in June 2012. Even large PSU banks like Bank of Baroda (BOB) and Oriental Bank (OBC) were badly hit. Given that the NPA writeoffs take a direct toll on bank's networth, investors can expect returns to remain muted for the time being.

Monsoons have had a weak start this year. This time around the annual monsoon rains are 21% below normal since June. As a result, a drought like situation is being feared in the country. And India is bracing for a contingency plan to deal with this. Indian ministers are likely to have a meeting soon to discuss measures to deal with the feared drought situation. Some of these measures include extending extra subsidies to farmers and curbing trades on commodity derivatives. Curbing commodity trades will prevent excessive speculation in essential commodities. In the past too, government had orchestrated such measures to prevent excessive volatility in food grain prices. Though a complete ban on crop exports is not expected if the situation does not improve, concrete steps will have to be taken in that regards as well. Further, the government is also considering providing diesel and electricity subsidy to certain worst hit states. It may be noted that diesel and electricity are used by farmers to pump ground water if the rains are insufficient. Presently, these contingency plans seem adequate. However, unless the rain gods shower their mercy soon, current situation may turn from bad to worse.

In the meanwhile, the Indian equity markets were trading just above the dotted line today. At the time of writing, BSE Sensex was up by 15 points (0.1%). There was mixed performance among sectors. IT and FMCG stocks were the top gainers while metals and banking stocks registered fall. Barring Singapore and China, Asian stock markets traded firm.

04:56  Today's investing mantra
"Sell a stock because the company's fundamentals deteriorate, not because the sky is falling." - Peter Lynch
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
Were You Lured By Mr Market's Bait?
August 23, 2017
Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

Equitymaster requests your view! Post a comment on "Will lower growth be the norm for US, Europe?". Click here!

1 Responses to "Will lower growth be the norm for US, Europe?"

ajay kaul

Jul 31, 2012

BRIC could be the game changer for the Global Economy.
It can create growth in US and Europe especially thru
Environmental,Healthcare/Pharma,Scientific Research and High Tech. Industry.Organised retail thru trained labour can be another learning and cooperative employment creator.

Equitymaster requests your view! Post a comment on "Will lower growth be the norm for US, Europe?". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407