US Economy
It’s no longer the driver of global economic growth…
The July update of IMF was revealing in more ways than one. Firstly, the IMF expects that neither the US nor the UK is likely to drive global growth in the next couple of years. In fact, the US economy is likely to grow at just about 2.3% in the current year while the world economy will grow at around 3.5%. Secondly, the growth is going to be driven by Western Europe, Japan and China. Interestingly, Western Europe could emerge as a beneficiary of BREXIT and a strong dollar. Thirdly, India will continue to be the fastest growing large economy in the world with real GDP growth rate of 7.5%. So, why exactly is the US going to be less of an influence on global growth?
Getting on without the US…
In the last 9 months since Trump was voted to power, the US has gradually weaned itself away from world affairs. It has walked out of the Trans-Pacific trade deal and is now threatening to walk out of the NAFTA. The US has also expressed serious reservations about the Paris Climate Accord. All these actions have indirectly opened the door for China to exert a much greater influence on world growth. The inward-looking “America First” policy is forcing nations to look for alternatives platforms to cooperate. Mexico cooperating with Russia and OPEC on oil supply is one such instance. The bottom-line is that the US is becoming a less influential force in global decision making.
Global Oil Demand
Why oil demand could peak by 2024…
A recent report by Goldman Sachs has estimated that oil could touch peak demand by 2024. That is not great news for the billions of dollars that are currently being invested in prospecting and extracting new sources of oil. The US has virtually spurred a shale boom supported by low interest rates and better directional drilling technology. So, why exactly is the investment bank expecting peak oil demand by 2024? There are 3 broad reasons …
Cartelization could emerge…
Even though crude oil prices may not get back to the peak levels of 2014 in a hurry, there is always the threat of peak oil demand. That worry will force most oil extractors to make the best of the oil reserves while the party still lasts. Currently, the crude oil prices are hovering in the range of $45-$50/bbl. However, this is more because the OPEC is gradually losing out on its bargaining power as it accounts for just about 35% of the world oil production.
But if oil was to have a shorter life span, then even the US and Canada will look to make the most in terms of oil prices. Even if the prices eventually settle at around the $60-$70/bbl mark, the US and other oil producing economies stand to benefit immensely. It is therefore not entirely inconceivable that the US may also cooperate with the OPEC to restrict supply to have a better control over oil prices. Higher crude prices will depress global demand in a big way!
Demonetization
Did it actually lead to a shift in savings pattern?
A full 9 months after the demonetization drive was announced, the jury is still out on the relative merits and demerits of the drive. The supporters of the drive argue that demonetization has surely helped in slamming the brakes on the creation of black money as well as the circulation of black money. They also point to the rapid growth in digital transactions leading to better audit trails. The critics still hold on to the view that demonetization put industry in general and SMEs in particular behind on the growth curve. But the real question is whether demonetization led to savings shifting from real asset to financial assets?
Dr. Viral Acharya thinks so…
The deputy governor of the RBI, Dr. Viral Acharya, strongly believes that the demonetization drive had the effect of catalyzing a shift in the asset mix. For a long time, the Indian households preferred the safety of property and gold. With demonetization putting the brakes on cash transactions, both these asset classes have got impacted. The result is that money is flowing into financial assets. If the massive response to IPOs is any indication, then Dr. Acharya surely has a point. The second indicator is the way mutual fund inflows have picked up in the last couple of years. Increasingly, investors prefer the financial assets route where the KYC norms will ensure that they do not worry about the taxman.
