DBS report points to economic headwinds

Moneylife Digital Team 10 June 2016

Development Bank of Singapore Ltd (DBS) has forecasted 7.8% GDP growth for India in FY15-16, pointing out that the recovery would be gradual and uneven. A pick-up in auto sales and consumer goods production is a good indicator of the improvement of urban spending, it says. The upcoming pay commission hikes and a normal monsoon will lift consumption both in urban and rural areas.

However, the report raised the concern that there is a clear disconnect between industrial production and manufacturing GDP. If we ignore base effect differences, industrial production rose by merely 2.2%, while manufacturing GDP jumped by 9.3%

Indian rupee has remained the worst performing currency in Asia in 2016. The report further forecasts rupee depreciation in the next few quarters and greater volatility in Q3CY2016. Non-resident deposits maturing in September-November 2016 is as event risk. The potential outflows on account of the maturity of these deposits could lead to a number of consequences. Firstly, there may be a short-term impact on domestic liquidity and a squeeze on the balance of payments position. It could also hurt banks' deposits growth. It estimates that USD/INR is estimated to trade between 66.5 and 72.3 for the rest of 2016. It estimates a rupee to dollar conversion rate of 69.6 in Q3CY15-16 and a rate below 70 in the next three quarters.

On the fixed income front, the report estimates that the 2-year and 10-year bond yields will reach 7% and 7.6% respectively by mid-2017. There is a small window for policy easing in Q3FY15-16 as disinflation has passed. It estimates that net exports will remain flat/ slightly negative. With respect to corporate earnings, there were early indications of a turnaround. However, a rise in input prices in the future may adversely affect margins.

On a global scale, the report raises concerns about the decline in working age population in many countries. For instance, the working age population is falling by 1% every year in Japan. In Europe too, the working age population growth has fallen to zero/slightly below zero. In the US too, the working age population growth has slowed down to 0.4% currently from 1.3% in 2000. Labour force growth and productivity growth are components of GDP growth. The report states that due to the low labour force growth, the potential GDP growth rate in these countries is low. The potential GDP growth rates in Japan, Europe and US comes at merely 0.5% p.a, 1.5% pa. and 1.9% p.a., if we were to assume 1.5% productivity growth. The actual GDP growth rates in these countries exceed the potential GDP growth rates. Given this harsh reality in these countries, the report grimly states, “In short if you are worried about slow growth today, get used to it.” It states that rather than worrying about global growth being too slow, market participants and central bankers must consider the possibility that it is running pretty fast.

With respect to Asia, the report mentions, “Asia's growth today amounts to US $ 1 trillion each year. This is equivalent to adding the GDP of an entire Germany to the world's economic map once in every 3.2 years. Even after estimates of slower growth, 10 years down the lane, Asia will add one Germany every 2.2 years. Asians should not worry about Brexit as Asia would replace UK and add 3 more on top of that, in the next 8 years.

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