Global growth is tracking above 4% in the second quarter: Chetan Ahya, Morgan Stanley

In an interview with ET Now, Chetan Ahya, Morgan Stanley, speaks about global growth and the acceleration in EM, DM economies: Edited excerpts:

It is really about growth expectations is not it right now? It is really about how world economists are measuring the potential of growth and the rebound there of in lieu of central bank policy action.

Mythili Bhusnurmath: Well yes certainly I think most economists are far more optimistic today than they were a little earlier - may be a year or so ago - but in fact the IMF in its latest update has lowered its projections a little bit. So I think the IMF after having been very optimistic initially about the recovery, now is seeming to having second thoughts.

Mythili Bhusnurmath: In fact that is what I would like to ask Chetan to say two big differences that I thought he perhaps has not mentioned in that list, what is different between 2017 and 2012 to my mind we now have President Trump in the White House as against Barack Obama and also on China, Chetan we have Xi Jinping much more strident and it is not just with India that China seems to have territorial problems, it is with Japan, it is with whole host of other countries and the way that Chinese have been extending influence and the way China is getting increasingly more strident about its ambitions I think the fears are more not in the economic sphere itself, but in the geopolitical sphere and that could have a huge impact on what happens in the economics also affects global growth. Would you share that slight bit of pessimism?

Chetan Ahya: Yes I would agree that the risks are really more on the geopolitical front, but from the economic standpoint you mentioned IMF, I am not sure exactly IMF’s tone but the numbers are I think pretty decent in terms of the growth that they are forecasting for 2017 and 2018. Just hear me out in terms of the way we see last five years versus what we are doing now in 2017, some of the characteristics of the numbers that we see for 2017 are very different from what we have seen in the last five years. So here are the four points on that front. So global growth is tracking above 4% in the second quarter right now on QoQ basis seasonally adjusted which is the highest we have seen since 2011. Similarly global nominal GDP growth is also the best that we have seen since 2011 so that is the first. Second is that global trade volume is growing at 5% year on year right now that is also the best that we have seen since 2011. And the third is the breadth of recovery in terms of the number of countries that are seeing acceleration in growth in DM and EM and that is quite wide as well. The best since 2011. This is the first time that we are seeing this synchronous recovery in EM and DM since 2011 and the fourth is that we are seeing actually investment recovery in the global economy that is also the first time we are seeing after many years of deceleration. So this makes us feel that this is not the usual small bump recovery that we used to see in 2012 to 2016. This far more robust trend that we are seeing right now in the global macro.

Mythili Bhusnurmath: I would agree with you on all the points that you have mentioned in fact I would love to have myself prove wrong but just to play devil’s advocate are we again in danger of seeing a disconnect between financial markets and I swap particularly about bond markets and equity markets not just in India but all over the world with the underlying real economy fundamentals. There is a fear that are we in bubble territory and if so is it more on the equity markets or in the bond markets. In fact recently Argentina which had become a pariah in international markets actually managed to rate a 100-year bond and at a fairly attractive price so are we once again in danger of entering bubble territory, bond markets, equity markets or is it a question of just time will the real economy catch up and I hope they do but I am not so sure what about you?

Chetan Ahya: I would say that the real economy is also doing well. Individual asset markets and countries assets I think I am not exactly best positioned whether they are overvalued or fairly valued. But I would just say that look, I mean from the policy makers perspective, whether they would get worried about this asset market rise and that would sort of be showing some disconnect to them for them to jump in and tighten aggressively what would matter is really is what the Fed is thinking on that front and our sense is that they are looking at actually the pace of leverage, so when you see asset price rise alongside a big pick up in leverage that is what worries the central banks but right now in fact the leverage has just started to pick up after multiple years of deleveraging. In all of the DMs US, Europe, Japan and UK so we suspect that they are watchful of the financial stability risk but we do not think that they are going to jump in aggressively because the leverage has just started to pick up.

Mythili Bhusnurmath: Is it a little bit ironical that unfortunately in India our business cycle seems quite different from that or the rest of the world all over the world while growth is picking up in India growth seems to be slowing at least as per the latest numbers and the first quarter numbers that we get in August are not likely to be very much more positive given the fact that it will show the impact of perhaps fears about GST also about the delayed impact of demonetisation and we want our corporates to leverage down whereas the rest of the world wants the corporate to start leveraging. Does that make it more difficult for us in India that we seem to be at a completely different point of our business cycle?

Chetan Ahya: I would put the world in three groups DM, EM, EM ex-China and China and India falls into the EM ex-China group which was going through a four year adjustment period and then recovering out of that. So clearly EM ex-China Group is the last one to recover out of the trough that they had seen in the last four years so India is not different from that. India of course has been going through two additional idiosyncratic events in its own cycle one is demonetisation and then of course the GST which we think has sort of given us push back on the delay in terms of recovery. But right now that both those events are behind us we think that exports and consumption which are the two main drivers you need once you have output gap and once you have capacity utilisation at lower levels both those drivers were held back. Initially it was weakness in exports but as exports recovered we had demonetisation and then now GST, now that both those events are out you probably will see an improvement in capacity utilisation over the next six months helping corporate sector to rehabilitate their balance sheet. At the same time, you do have support from lower interest rates so we think India is well on its track. And in terms of the GDP data that you have mentioned, second quarter we think will be better than the first quarter significantly better. There was a GDP deflator effect in the first quarter which has actually gone so there was some bit statistical problem in the first quarter but even in terms of the underlying sectoral data points whether you look at exports, you look at two-wheeler sales, you look at non-oil imports, electricity etc, we do think that on an average second quarter has been better than first quarter so we should see a pick up in the second quarter but of course that has been again hampered a bit in July because of GST but going forward we should see the recovery numbers coming through in terms of the GDP growth acceleration.

Mythili Bhusnurmath: As they say in these parts, aapke muh me ghee shakkar but you spoke of exports and export being a driver for growth but are you not worried about the fact that even though the rest of the world economic growth is recovering the strengthening of the rupee does not do anything very much for our exports, in fact it really hurts our competitiveness, add to that the kind of restrictions coming from the US then can exports really fill that void?

Chetan Ahya: Ultimately we have seen that bulk of the explanation in terms of the movement in export growth trend has been largely explained by the end demand in the rest of the world. Currency does impact over a longer term, let us say call it in one to two years time but the impact of currency overvaluation and market share on exports tends be much more smaller than the end demand effect and that is the reason why it was not really, as you know the currency was very weak, we were down to Rs 68 to a dollar but exports were still weak in 2015-16 so it is really the end demand and the rest of the world doing well now should help to keep exports growths into positive territory. We still would not see the same kind of growth that we had seen in 2003-2007 when exports were growing at an average of about 20-25% in dollar terms but you will definitely see export growth much better than what it was in the last four years. And I have been on your show discussing that note of ours earlier when we were seen making this call that external dynamic is improving and we still stand by that view that external dynamics will be much better now going forward compared to what we have seen in the last five years. So assume an export of growth of around 7-10% in dollar terms at the minimum to continue to support the growth dynamics versus what we had seen in 2015-16 which was a contraction in dollar terms y-o-y.

Mythili Bhusnurmath: Ultimately the fact is regardless how the rest of the world is doing, a country can only grow that much with external support, you need to have some kind of domestic investment and we are seeing that is just not happening at all. What can the government or anybody do get private investment revive again and if it does not or till such time as private investment steps into the gap should public investment increase even if it means breaching the fiscal deficit cap?

Chetan Ahya: I think there are two aspects to it; one is that there is an element of adjustment that economy has to go through, there is not shortcut to that and we had to go through an adjustment in consumption because that was a big driver post credit crisis through fiscal expansion but once we had to make the adjustment we had to tighten monetary policy, fiscal policy, we had to adjust the labour market policies and take real wage growth down in line with productivity, in fact it was even lower than real output in rural India. So we had gone through that adjustment which took down consumption and therefore capacity utilisation. In that environment the corporate sector is not going to invest. And now what we are seeing consumption is picking up, it got delayed with, as I mentioned earlier, demonetisation issue and we are also seeing better external dynamics. So only when these two drivers of growth help improve capacity utilisation over the next six to 12 months can then we really hope for private sector to begin to do some investment and we do think that that will happen in the first half of 2018. It will not be a full blown private capex recovery but you will see second order derivate change, right now if you look CMI’s data nominal corporate capex under implementation is declining year-on-year but we would expect that by the first half of 2018 this should go back into positive territory because by that time consumption and exports would have helped improve capacity utilisation. And at the same time, the second thing which we need to see is the effort from RBI on resolution of nonperforming loans and with addressing of the twin balance sheet issues which deputy governor referring in his comments recently in the media which is the corporate sector balance sheet and the banking sector balance sheets and that is work in progress. We think that will be a drag because it will take some time but at least the demand aspect will help to improve the investment cycle from the first half of 2018.