Stock Market

Economists discuss impact of negative interest rates on growth

In past several years global economy has given jitters either because Central Banks were hiking rates or because of not hiking rate. Just around nine months back it looked like gloom and doom for major economies – recession in major economies, devaluation by China. However, suddenly the global economies seem to be in shipshape – does this mean all global problems are behind us?
To get a 360 degree perspective of the global economy, the emerging market economies and the Indian economy, CNBC-TV18’s Latha Venkatesh spoke to Luis Oganes, Head-Emerging Markets and Jahangir Aziz, MD-Emerging Markets, Asia, JPMorgan.


Oganes says there seems to be some stability in global markets and some improvement at the margin, which has come after three years of deceleration. So, one could say that the worst is behind but that does not mean that we will see boom in the years ahead but markets seem to be taking comfort from that.


According to Aziz, the growth dynamics of the emerging markets and developed markets have changed. There is a widening gap in growth differentials between the EMs and DMs.


When asked about his views on the negative interest rates, Oganes said it was unprecedented but they are here to stay and won’t be going away anytime soon. According to him with negative interest rates is not only hampering global growth but the European Central Bank and Bank of Japan have dug themselves into a hole, which will be very hard to come out of.


Talking on growth in India, Aziz says growth can be revived only through private investments which is still remains elusive. There is no visibility of sustained demand yet. The dynamics of growth is lopsided in India because government cannot carry on pumping up investments, private investment is imperative for growth.


Below is the verbatim transcript of Luis Oganes, Jahangir Aziz and Kalpana Morparia’s interview to Latha Venkatesh on CNBC-TV18.

Q: Like I said, we saw this debilitating picture of the global economy just as recently as December last and the fears of devaluation in China. Are things really back in place or can we yet again see recessionary trends because there are still negative yields?

Oganes: What we are seeing this year is some sort of inflection point in which this dynamics you describing which actually were prevalent for over three years of constant growth disappointments, constant deceleration and forcing us to keep downgrading of our position across emerging markets (EMs) all of a sudden stop some months ago. We stopped downgrading our own growth projections why because the data has started to validate whatever we have on paper which was good news and over the past month or so some clients started to increase their growth projections, which is something we had not done at least in 3 years.

I think the message from that is that we are seeing stability, some improvement of the margin, but this is of course after a 3 years of deceleration, so it is not that we are expecting a boom in the quarters and years ahead, but we can at least say that the worst is behind and I think that market take comfort from that, so the fact that the worst is behind and maybe this is then a time to start to get back into EMs and this is why probably we are seeing more inflows coming back in.

Q: Clearly the emerging market inflection points started when crude bottomed out, commodities bottomed out, restocking of steel and iron ore began probably in January or February. Now has it already played out or do we have to see much more improvement in commodities than we have factored in?

Aziz: Look on one hand we stabilise our growth forecast, there wasn’t relentless downgrading. More importantly we have actually come to a point where the negative surprises on the developed market growth, which is we were putting out a developed market growth number and it was always coming below that.

We have also adjusted to that by actually trimming down our developed market trend growth. So, if you look at our 2-3 year growth trend this is not just to JP Morgan for everybody else. We are looking at US no longer at 2 percent, but 1.5 percent. We are looking at Europe at 1 percent and Japan at 0.5 percent and what that does is that and this is where Luis and I have been working on this for quite some time – that it actually changes the dynamics between emerging market growth and developed market growth.

So if you look at over the last many years from early 2002-2015 you have one phase in which emerging market growth minus developed market growth, so emerging market developed market growth differential went in favour of emerging markets and what you saw as a result of that every emerging market asset continued to outperform – FX, equity, rate you just name it. Then from around 2010, which is what Luis was referring to you saw that growth differential continuing to go against emerging markets at every asset class doesn’t really matter what asset class you are underperforming.

Q: My point is now we have seen commodity improvement and therefore you all are correctly factoring in growth, but now are we overstating?

Aziz: No, we are not overstating. So, if you look at our 2017 and 2018 actual growth forecast of emerging markets except for I would say for Brazil and Russia almost all our growth forecast are just either lower or just about the same level of 2015. What has happened is the growth differential between emerging markets and developed market that’s gone widening and that widening is going to steepen and continue to happen throughout this 2-3 year projection period.

So it isn’t that we are gone and said that India is going to grow at 10 percent or China at 10 percent or Brazil at 5 percent etc, we are just seeing that the growth differential, so there is lot of relative underperformance and over performance. We are not even saying that if the absolute returns are going to go from 5-10 percent.

Q: This negative interest rates should we worry that it is a sign of recession or is this is a sign of some altogether different demand supply dynamics that there are simply more old people and simply more pension funds and simply more central banks worried about banks and forcing them to buy sovereign paper. How should we read negative yields?

Oganes: The yields I think are the result of in a number of dynamics and I can bring up probably two main ones. One is the fact that we have come out of deep recession caused by the financial crisis in 2008-09. The recovery since then has been quite shallow, so there are insufficient sources of growth in the world these days and this applies both for emerging markets and for developed markets.

Central Banks have provided the biggest policy response and the biggest support for growth and to the extent that they reach the zero level they decided to pierce it which is unprecedented. We have never seen central bank policy reach this kind of expansionism, asset purchases plus negative rates. This is an experiment and we should think it as such, we don’t know so far it probably avoided recession, so I won’t put a recession in the radar of concerns at this moment still, but it certainly has underwhelmed in terms of reigniting growth in a way in which we would all like to see and that is why you saw that a little bit in that G20 meeting recently there has been more frenetic debate even though the policymakers are not reacting yet as to whether monetary policy has exhausted itself and now we should go back to think about fiscal policy.

Now the problem with fiscal policy is that many parts of the world are still trying to reduce government balance sheet, they are still trying to reduce deficits, peripheral Europe, emerging market etc and not everyone has the capacity to do expansionary fiscal policy. Weighing in this debate that I think is going to take some time to sort out, I don’t think that the negative rates that we are seeing right now is going to disappear anytime soon and if anything you can think about the central banks in Europe, Japan kind of digging themselves in a hole that is going to be very hard to come out to be honest.


Q: Basically what we are reaching is a situation where the central banks have run out of tools and the fiscal side is not prepared with any fresh tools, no surprise economics is a dismal science.

Aziz: There is still one tool left which is what we have been calling helicopter drop environment, right?

Q: If this is the situation that you are looking at that negative interest rates and possible helicopter money which means that growth has not picked up globally, it is below past century growth rates for developed markets and emerging markets. Therefore what happens to the India piece? Are we being too ambitious by looking at 7.5 or even 8 percent growth? Should we moderate expectations, it is possible for a economy to grow only this much in a world that is not picking up.

Aziz: Let us forget about the levels of growth, let us talk about can growth rate move up. Let us talk about what is it that allowed growth in last two years. One of the big factors that drove growth positively in the last two years was this massive positive terms of credit shock that came from this huge decline in commodity prices. Now that is gone. So, you need to look forward to what is going to replace that. So, we have a bit coming out from monsoon, government spending is probably going to struggle given where the fiscal deficit is, so you are not going to get anything out for public investment itself. So, you really have to go back and look at private investment. For the last 4-5 years the private investment has continued to languish and slow and has come to a point where unless that moves up it is very hard to see growth moving up. I am not even going where the level should be.

Q: We are still at 70 percent and under 70 percent capacity utilisation.

Aziz: That is exactly the point. The point is that what is the reason why private sector is not investing. I would say that apart from the various supply side impediments that the government is addressing through reforms etc, I think the bigger thing is that and it is a global phenomenon, is that there is no visibility of sustained demand which goes back to the growth slowdown story. If there is no demand, as a private sector why would I expand capacity.

Q: You think we could end up in disruptive policies if we chased 8 percent?

Oganes: The focus should not be in obsessing about targeting a high rate of growth but rather how to get there. How to get there is, there has got to be a re-ignition of private sector investment. There is a lopsided growth dynamics in India right now which is excessively relying on consumption which is product of positive terms of credit shock that is now exhausting itself. There is an attempt by this administration of trying to narrow the fiscal deficit which means that fiscal policy will not be providing the same support to growth that it has up until now as well. So, what is going to replace that? Global trade is weak, so exports maybe they have some room to recover but it is difficult to imagine that, that being the source of growth going forward. So, it has got to be private investment and for that you need more reforms to make private investment more viable, more attractive, more appealing and for the private sector to feel that there is some money making opportunities to be pursued given the reforms.

Q: We will be in Budget exercise in the next two or three months, will it make sense therefore to increase the fiscal deficit going by the lingo of economists globally will it be suffered if it happened in India?

Oganes: I don’t think that is a wise thing because the fiscal deficit is already quite large. Yes, because of high nominal growth the public debt to GDP has been shrinking which is good news and this is what in a way is anchoring the credit ratings of India as a sovereign. However let us not get overly excited about that. That does not mean that the fiscal space is ample. There is a debate to be had about what pace you want to reduce the fiscal deficit. I don’t think that the way should be let us expand it.