Showing posts with label EU. Show all posts
Showing posts with label EU. Show all posts

Thursday, July 21, 2022

An English summer

Last night I got a call from a friend who had been staying in London for the past 3years. He wanted to know what type of air-conditioner is better – window or split type. He sounded quite hassled as he was figuring out how the air conditioner would be installed in his rented apartment; what kind of permissions would be required; whether he can get a skilled technician to install an air conditioner; and how much would be the operational cost (electricity bill) for using an air-conditioner in London. I am sure he was overreacting to an ordinary situation, because the situation is dramatically asymmetrical to his perception of life in London.

This summer seems to be particularly hard for the Britons. The mercury has soared past 40 degree Celsius, apparently for the first time ever in history. The native white population is particularly perturbed as they are finding the heat unbearable. Citizens are commonly reporting problems like skin burns, dehydration, breathlessness, nausea, exhaustion etc. Schools are shut down. Advisory has been issued to avoid rail travel. It is not the UK alone; this summer is unusually hot in many parts of the European continent. Also, it is not something that has happened suddenly. The weather has been hitting the extremes both in winters and summers for the past few years.

Arguably, on an average, use of 3 air-conditioners creates demand for the fourth air conditioner, as the heat emitted by air conditioners in 3 houses makes the life tougher for dwellers in the fourth house. Multiple air conditioners in a single house, in the dense London city, could damage the climate much faster and more permanently.

The soaring prices of energy are not helping either. There are reports that some countries in Europe might increase the use of coal in their energy mix, till the time Russia-Ukraine war ends and the energy supplies from Russia normalize.

Obviously, an average London resident is not comfortable. We would have to wait for a couple of years to see if people leave London to settle in the cooler and wetter countryside or they stay and endure the tougher living conditions by paying more. For example, Mumbaikars stayed back in such a situation in the 1980s – perennially cribbing and whining about worsening climate and rising cost of living. At stake in the short term are the prices of London real estate, labor shortages, and consumer demand (hence economic growth). Though, academically we can discuss the sustainability of the European continent per se.

In fact, on the policy front, many European governments may be struggling with this Catch-22 situation. The prudence wants them to increase focus on renewables and climate control efforts; whereas the political compulsion may be forcing them to ignore the rising use of conventional fuels coal, biomass and wood.

As if to make things even worse, the political environment in the UK has also become unusually hot. The white natives, who were perturbed by the prospects of influx of ethnic immigrants from the poorer EU member states and voted overwhelmingly in favor of Brexit, are faced with the prospects of a brown person from a minority ethnicity becoming head of the government. Even this thought would have been a punishable blasphemy a few decades ago. 

Friday, May 7, 2021

Covid, Cyclicals and Consumers

 The localized lockdown and mobility restrictions in past 6weeks have led to scaling down of FY22 GDP growth estimates. The new estimates mostly imply that Indian economy may record marginally negative growth during two period from April 2020 to March 2022. These estimates though assume (i) No community transmission of infections; (ii) no nationwide lockdown; (iii) no wider shutdown of industries and construction work; and (iv) normalization of mobility restriction in 2HFY22. Any further worsening of pandemic situation may lead to further downgrade of growth estimates resulting in spillover impact over FY23 as well.

The global rating agency S&P, recently published a note saying, “The possibility the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability.” The note further stated that agency is “looking at two scenarios, both entailing a cut in its GDP growth forecast for India:

·         In a moderate scenario, new infections peak in May 2021. If that happens, the hit to India’s GDP growth is estimated at 1.2 percentage points, indicating that India’s GDP is likely to grow 9.8% in FY22 compared with 11% growth estimated previously.

·         In a more severe scenario, new infections peak in late June 2021. In this case, the hit is estimated at 2.8 percentage points, with growth of 8.2%.”

As reported by Bloomberg, the scenario projections by S&P assume that initial shocks to private consumption and investment filter through to the rest of the economy. For instance, lower consumption will mean less hiring, lower wages, and a second hit to consumption, the note said. The severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks. Leverage remains elevate.

Incidentally, the current estimates appear to assuming a fast normalizing developed world, and hence buoyant export sector and capital flows.

IMF has projected US and China economies to move beyond their pre-Covid levels in 2021 itself, led by sharp rise in both consumption and investment. Even EU that bore the brunt of pandemic in 2020, is expected to reach near pre-covid level in 2021. This essentially implies rising global inflationary pressures creating possibilities for an earlier than currently forecasted monetary tightening. The capital flows to emerging market may there get impacted, if these forecast come true.

What no one is forecasting is a re-lapse of pandemic in the developed world. Rationally, it does not look likely, given the speed of vaccination, development of preventive ecosystem and treatment protocols. However given that the virus is mutating itself fast, assigning zero probability to this occurrence in economic forecasts may not be fully appropriate. God forbid, if this happens, Indian economy may decline rather precipitously.

The government had surprised the markets by maintaining strict fiscal discipline in Union Budget for FY22. So far we have not heard any relaxation in budget estimates of fiscal deficit. However, any worsening of conditions from here may require another dose of fiscal stimulus. It is pertinent to note that the fiscal stimulus last year was mostly focused on capacity building and easing liquidity. The present conditions require strong social sector spending program, which primarily aims at cash handouts. The recent setback to the ruling BJP in UP local body elections and West Bengal assembly elections; and continuing farmers’ agitation may motivate the government to consider material cash subsidies to poor and farmer ahead of critical state assembly elections in UP, Punjab, Odisha, Goa and Uttrkhand. All these elections are due in February/March 2022.

 

Insofar as stock market is concerned, the consensus appears to be leaning towards the strategy that the localized lockdowns may not hamper the industrial and construction sector like 2020, as the government has spared the manufacturing and infrastructure activities from lockdown restrictions. The consumption may however get impacted materially. Cyclical over Consumers appears the preferred trade as of now.



More on this next week.