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Global
EconomicOutlook 1st Quarter 2014
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Contents
1st Quarter 2014
China: Stepping into the unknown | 6By Dr. Ira Kalish
Chinas government recently announced ambitious plans that could make the Chinese economy moremarket driven, consumer driven, transparent, and prone to profitable investing. Implementation remainsa significant challenge, but it is crucial to rectiying the countrys currently unbalanced system.
United States: Breaking the holiday traditionringing in the New Year withless fiscal stress | 12By Dr. Patricia Buckley
Te United States celebrated the New Year with economic pain rather than champagne as it coped, onceagain, with the fiscal crisis that never was. However, undamentals remain strong, and growth enginesshould begin to pick up steam by the second hal o 2014.
Eurozone: Three areas to watch in 2014 | 20By Alexander Brsch
Tree interrelated actors are critical to the Eurozones growth perormance in 2014 and beyond: acceler-ating business investments, stabilizing credit conditions, and decreasing uncertainty.
Japan: Inflation returns | 26By Dr. Ira Kalish
With inflation accelerating consumer spending and a declining yen boosting exports, Abenomics seemsto be working. However, uncertainties about an anticipated tax increase and the degree to which thegovernment will engage in deregulation continue to cloud the countrys growth projections.
India: Can India overcome adversities and bounce back? | 30By Dr. Rumki Majumdar
Despite a period o slow growth, high inflation, fiscal deficits, external imbalances, political uncertainty,and poor business confidence, India has an opportunity to restore growth by implementing policies thatmake better use o its considerable assets.
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644430206
Russia: No quick fix | 38By Akrur Barua
Subdued investment, weak export markets, rising household debt, declining confidence, and deteriorat-ing demographics continue to weigh on Russias economy.
United Kingdom: Gaining momentum | 44By Ian Stewart
Britain is expected to have the astest growing economy in Europe in 2014, but growth remains histori-cally modest. Te United Kingdom will need a strong rebound in capital spending and in consumerincomes to maintain its improving prospects.
Brazil: Festive season blues | 48By Navya Kumar
Deteriorating fiscal balances, an increasing external deficit, high inflation, poor business investment, andcurrency troubles continue to hamper Brazils economy.
Special topics
The boom and beyond: Managing commodity price cycles | 52By Navya Kumar and Akrur Barua
Te end o the commodity price boom is leaving many countries scrambling or ways to diversiytheir economies accordingly.
Are emerging markets losing their brand appeal? | 64By Dr. Rumki Majumdar
Many emerging markets aced financial volatility in the wake o the US Federal Reserves discussion
about tapering. Countries with poor undamentals and weak policies have been hardest hit duringthis period o uncertainty, and sustaining growth will require a renewed ocus on undamentals.
Economic indices | 74GDP growth rates, inflation rates, major currencies versus the US dollar, yield curves, composite median
GDP orecasts, composite median currency orecasts, OECD composite leading indicators
Additional resources | 78
Contact information | 79
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Dr. Ira Kalish is chief globaleconomist, Deloitte ToucheTohmatsu Limited
PREFACE
Global Economic Outlook1st Quarter 2014
SEVERAL countries have passed significant hurdles lately. In China, the government finally announcedlong-awaited reorms that are intended to change the structure o the Chinese economy and allowgrowth to continue at a rapid pace. In the United States, a severe crisis was averted, but a government
shutdown did have a negative impact on economic activity. In Japan, inflation has returned, and there
continue to be signs that Abenomics is having a positive impact. Te Eurozone has exited rom a long
and deep recession. Finally, a number o major emerging markets have quickly gone rom an environ-ment o optimism about uture growth to one o uncertainty. Clearly, the world is once again at a turning
point, and it is the job o economists to figure out which direction things are moving. In this issue o the
Global Economic Outlook, we examine the state o the global economy as 2014 begins.
We start with China. I provide a discussion about the proposed reorms and the potential impact they
could have on economic perormance and structure. I note that there remains uncertainty as to when
or how these reorms will be implemented, or whether the government will generate sufficient internal
support to make these reorms happen. Still, I conclude that China could become more market driven,
more consumer driven, more transparent, and more prone to invest in projects with a positive return.
Next, we turn to the United States. Patricia Buckley writes about the crisis that never was, but the
considerable impact that the government shutdown had. Moreover, Patricia notes the potential allout i
other budget crises emerge. Patricia also notes that while unemployment is declining, underlying weak-ness persists in the job market, and it may influence decisions by the Federal Reserve.
In our third article, Alexander Brsch notes that the Eurozone has come out o recession only to
experience disappointing growth. He says that growing at this speed will not be enough to heal the
wounds o the recession. Alexander goes on to discuss the three things needed to generate more robust
growth: accelerating business investment, stabilized credit conditions, and less uncertainty.
Next, I review Japans economic situation. With inflation finally returning, it appears that Abenomics
is having the desired impact. Indeed, a lower yen has boosted exports, and consumer spending has
accelerated. However, that spending may be due to an anticipated tax increase. In addition, uncertainties
about the potential impact o that tax increase as well as the degree to which the government will engage
in deregulation are weighing on the countrys growth projections.
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In our fifh article, Rumki Majumdar examines the Indian economy. She
notes that India has lately experienced a period o slow growth, high inflation,
fiscal deficits, external imbalances, and poor business confidence. In addition,
political uncertainty has only added to such woes. Despite these problems,
Rumki suggests that India has considerable assets, including human capitaland a strong financial sector, which can be utilized to restore strong growth.
She discusses policies that could effectively utilize these assets in the uture.
Next, Akrur Barua discusses the disappointing growth o the Russian econ-
omy. He points to subdued investment, weak export markets, rising house-
hold debt, and declining confidence as contributors to the weak perormance.
Government stimulus spending, however, might alleviate some o the slow-
down. Going orward, Akrur notes several challenges to aster growth, includ-
ing increased global competition in the energy market, declining availability o
cheap hydrocarbons, weak investment, and deteriorating demographics.
In our seventh article, Ian Stewart discusses the surprisingly robust recov-
ery o the UK economy. Indeed, Britain is expected to have the astest growingeconomy in Europe in 2014. Nevertheless, Ian notes that celebration may not
be warranted, considering that growth remains low by historic standards and
is only now about to exceed the modest growth experienced in 2007. In his
article, Ian explains the reasons behind the recovery and discusses what must
happen or growth to be sustained.
In our last geographic article, Navya Kumar examines the considerable
weakness in the Brazilian economy. She notes the causes o the slowdown and
suggests that the situation will not be turned around quickly. A combination
o troubling actors is hurting Brazil, including deteriorating fiscal balances,
an increasing external deficit, high inflation, poor business investment, and
currency troubles.
In our first topical article, Navya Kumar and Akrur Barua consider the
plight o commodity-exporting countries that now ace a likely end to the
commodity price boom o recent years. Tey discuss the experience o such
countries, the causes or the reversal, and the implications or commodity-
exporting countries. In addition, they offer some suggestions or how such
countries might shif ocus and diversiy away rom commodity dependence.
Finally, in our last article Rumki Majumdar asks i emerging markets
are losing their brand appeal. She discusses the financial market volatility in
emerging markets that ollowed the US Federal Reserves discussion about
tapering. She then examines how countries responded to this period o uncer-tainty and why some countries have recovered more quickly than others. She
suggests that countries with poor undamentals and weak policies have ared
worse than others. Clearly, this has implications or the types o policies that
emerging nations ought to ollow going orward.
Dr. Ira KalishChie Global Economist o
Deloitte ouch ohmatsu Limited
Global Economic Outlook
published quarterly by
Deloitte Research
Editor-in-chief
Dr. Ira Kalish
Managing editor
Ryan Alvanos
Contributors
Dr. Patricia Buckley
Dr. Alexander Brsch
Ian Stewart
Dr. Rumki Majumdar
Akrur Barua
Navya Kumar
Editorial address
350 South Grand Street
Los Angeles, CA 90013
Tel: +1 213 688 4765
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China: Stepping intothe unknownBy Dr. Ira Kalish
CHINAS leaders have finally provided somedetails about the nature o the reorms theyintend to implement. Tey havent said when
or how these reorms will take place, nor is it
known to which degree Chinese leaders will
generate the internal support necessary or the
reorms. But what we do know is that the plans
are ambitious and, i ully undertaken, couldlead to a very different Chinese economy. China
could become more market driven, consumer
driven, transparent, and prone to investing in
projects with a positive return. Tis is all or the
better. Te real question, however, is whether
China can implement its plans in time to avoid
the problems that might arise rom the currently
unbalanced system.
For now, Chinas economy is growing rela-
tively slowly compared to the past. oo much
o its growth is coming rom actors that
contribute to imbalances and set the
stage or uture problems, such as fixed
asset investment, especially in construction.
Conversely, not enough growth is coming rom
actors that ought to be sustained in the long run,
such as consumer spending. Additionally, the
critical export sector is providing mixed signals.
However, a recent purchasing managers indexsuggested a slowdown in exports.2
Reform intentions
Te reorm program proposed by the Chinese
government is radical yet cautious. It proposes
increased competition or state-owned enter-
prises (SOEs), yet ails to propose privatization o
SOEs. It proposes the protection o private prop-
erty rights, yet ails to give up state ownership
o land. It does much to decentralize economic
CHINA
Its about cutting power, its a self-imposedrevolution. It will be very painful and evenfeel like cutting ones wrist.
Premier Li Keqiang speaking in March 2013 on what reform will entail1
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power by empowering the private sector, yet it
pulls more power into the hands o the central
government, ofen at the expense o local and
regional governments. As such, it is a mixed bag
o reorms.
Despite this ambiguity, it is clear what the
government generally hopes to achieve. Te
reorms, i implemented successully, should
lead to aster economic growth, less financial
risk to the economy, and a shif in growth away
rom investment in fixed assets. In addition, the
reorms tackle a variety o social issuespro-
moting more income equality as well as a more
powerul and less corrupt judiciary. Finally, the
reorms are somewhat conservative in that they
aim to stabilize the economy and society by
engendering greater predictability. Tere should
be more transparency o financial markets and
SOE finances, more proessional management o
SOEs, less reliance on the decisions o fickle local
officials, and more reliance on market orces to
determine the allocation o resources.
As to the potential impact o the reorms, this
depends on how ast and the degree to which
they are implemented. Many reorms will only
bear ruit over a relatively long period o time.
Reorm o the financial system, on the other
hand, might have more immediate implications
or the unctioning o financial markets. Given
the problems in the banking system that have
already been discussed in past editions o this
publication, the aster China improves the effi-
ciency o its financial services industry, the better.
CHINA
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Reform details
Here are some details released by
the government:
China will change the governments relation-
ship with SOEs. Going orward, SOEs will be
required to return 30 percent o their profitsto the government. Currently, they return
between 0 and 15 percent. Te added income
to the government will be used to und
improvements in public services. Moreover,
some state-owned capital will be transerred
to state-run pension plans. All o this is
meant to partially address the issue o income
inequality. In addition, China will allow pri-
vate investors to take equity stakes in projects
unded by SOEs. Tis will create more o a
mixed economy, one not as dominated by
SOEs. However, the government did not dis-
cuss urther privatization o SOEsalthough
this could come later.
Meanwhile, the government said that it wants
to introduce more competition to break up
the monopolist practices o SOEs. Some SOEs
will be broken up in order to create competi-
tion. Others that are natural monopolies will
be more closely monitored by the govern-
ment, with government responsibilitiesseparated rom commercial responsibilities.
In addition, the government will encourage
hiring o proessional managers rom outside
SOEs to run these enterprises, rather than
relying on Communist Party officials. Te
idea is to engender proessional manage-
ment. Finally, the government pledged to
strengthen SOEs' investment accountability
and explore ways to publicize important
inormation.
Te government will try to promote a more
competitive market with market-determined
prices. Specifically, the government said that
any price that can be affected by the market
must be lef to the market. Areas in which
the government sets prices will be confined
to public utilities, public service, and areas
that are naturally monopolized. In addition,the government pledged to erase regional
protection, illegitimate avorable policies,
and monopoly. It will perect the market
exit mechanism to promote the survival o
the fittest.3In other words, businesses will be
permitted to ail. It is not clear i this includes
state-owned businesses.
China will allow private investors to estab-
lish commercial banks in competition withstate-run banks. In addition, the government
will build a deposit insurance system and
complete the market-based exit system or
financial institutions.4Tese actions could
potentially create a more competitive market
or bank deposits and commercial lending.
Deposit insurance will set the stage or easing
control o deposit interest rates and allow
banks to ail or shrink without substantial
risk to depositors. Still, more financial market
reorms will be needed to curtail the risksassociated with the financial system.
China will promote the protection o private
property. It said that armers will be given
more property rights and that they should
have the right o succession. Moreover, a
rural property rights trading market will be
established. Tis means that armers will be
able to bequeath or sell their land rights. As
such, they will have an incentive to invest in
boosting arm productivity. Te results should
Te reorms, i implemented successully, should lead to
aster economic growth, less financial risk to the economy,
and a shif in growth away rom investment in fixed assets.
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CHINA
be higher ood production, lower ood prices,
greater arm productivity, more rural-urban
migration, and less income inequality. Beyond
the rights o armers, the government said
the property rights o the public economyare inviolable, as are the property rights o
the non-public economy. Te government
protects the property rights and legitimate
interests o all kinds o ownership by ensur-
ing that various ownerships have equal access
to production actors, open and air market
competition, and the same legal protection
and supervision.5Tus, while there is no talk
about urther privatization o state-owned
assets, there is implicit recognition that
the rights o private property owners mustbe protected.
China will relax the system o residency
permits known as the hukousystem. Rural
residents will be ree to migrate to small
and medium-sized towns and have access to
public services in such towns (unlike the cur-
rent situation in which migrants are treated
as second-class citizens without access to ser-
vices). However, restrictions on migration to
megacities will remain. Evidently, the leader-
ship wants to encourage rural-urban migra-
tion, but not to the biggest cities. Tis means
that labor shortages in big cities may persist.
In addition, by providing public services to
migrants in other cities, the government is
implicitly pledging to boost spending on
such services. As discussed earlier, taxing
the profits o SOEs will be intended to und
such services.
Te government pledged to establish a
special court to handle disputes concerning
intellectual property. While it is too early to
know how serious this pledge is, it suggests
a desire to deal with this estering issue. Te
statement specifically alluded to an intention
to stimulate innovation. Without protec-
tion o intellectual property, innovation will
clearly stagnate.
Te government will change the one-childpolicy. Currently, i neither spouse in a mar-
ried couple has siblings, the couple is per-
mitted to have more than one child. Going
orward, they will be permitted more than
one child i only one parent is an only child.
Tis is clearly aimed at correcting the labor
shortage that the old policy created. However,
it will take another generation to have a
real impact.
Te government will address problems in
the health care system. Specifically, it will
encourage private investment in the medi-
cal sector and prioritize supporting nonprofit
hospitals run by private investors.6
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Currency reform
One o the notable areas or reorm not
covered in the governments statement relates
to the currency. However, the government hasseparately addressed this issue in recent weeks.
Indeed, Chinas government continues to set
the stage or eventual flotation o the currency.
For years, the central bank has purchased
oreign currency reserves in order to suppress
the value o the renminbi, thereby maintain-
ing the competitiveness o Chinese exports. Te
deputy governor o the Peoples Bank o China
(PBOC) recently said that it is no longer in
Chinas avor to accumulate oreign-exchange
reserves. He said, We will increase the role o
market exchange rates, and the central bank willbasically exit rom normal oreign-exchange
market intervention.7He also said that apprecia-
tion o the currency would benefit more people
than it hurts. He is right. Afer years o currency
market intervention, China has accumulated
$3.6 trillion in reserves. One way to look at
this is to say that China has sold $3.6 trillion in
I China stops intervening, the currency will rise
in value, boosting consumer spending, suppressing
inflation, and helping China shif toward a
consumer-driven economy.
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CHINA
Endnotes
1. Emma Rowley, Chinas new premier Li Keqiang to cut state control over economy, elegraph, March 17,2013, http://www.telegraph.co.uk/finance/china-business/9936059/Chinas-new-premier-Li-Keqiang-to-cut-state-control-over-economy.html.
2. Markit Economics, press releases, http://www.markiteconomics.com/Public/Page.mvc/PressReleases,accessed December 17, 2013.
3. Te decision on major issues concerning comprehensively deepening reorms in brie, China Daily,November 16, 2013, http://www.china.org.cn/china/third_plenary_session/2013-11/16/content_30620736.htm.
4. Ibid.5. Ibid.6. Ibid.7. Ibid.
8. James Regan, PBOC will basically end normal yuan intervention, Bloomberg News, November 19, 2013,http://www.bloomberg.com/news/2013-11-19/pboc-will-basically-exit-normal-yuan-intervention-zhou-
says.html.
apparel and electronics to US consumers in
exchange or US government securities, the
value o which is bound to decrease. While this
has kept Chinese workers employed, it has hurt
Chinese consumer purchasing power and causeda substantial distortion o the Chinese economy.
Te act that the government is now willing to
address this issue is good news.
I China stops intervening, the currency will
rise in value, boosting consumer spending, sup-
pressing inflation, and helping China shif toward
a consumer-driven economy. For the rest o the
world, a higher-valued renminbi means that
exports to China will be more competitive. Still,
the PBOC gave no indication about the timing
o a shif in policy. Meanwhile, it is likely thatspeculative capital will flow into China in antici-
pation o this policy shif. Until the new policy
is implemented, this could mean even more
currency intervention will have to take place to
avoid currency appreciation.
All o this is highly significant because it
moves China closer to its ultimate goal o mak-
ing the renminbi a convertible currency thatis widely traded and used as a global asset. Yet
exchange rate flexibility is only one part o this
move. Te deputy governor o the central bank
also said that the bank will no longer restrict the
volume o oreign investment.8It will also gradu-
ally end caps on deposit interest rates. Te latter
would be the most significant action because it
would go a long way toward fixing what is wrong
with the banking system. However, no time
rame was given or the latter reorm, and so a
degree o uncertainty remains. Still, it is clear thatthe leadership intends to move the country in a
ar more market-oriented direction.
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United States: Breakingthe holiday traditionringing in the New Yearwith less fiscal stressBy Dr. Patricia Buckley
Dr. Patricia Buckley isdirector of Economic Policy andAnalysis at Deloitte Research,Deloitte Services LP
2013 began with a last-minute deal to mitigate some o the impact o the fiscal cliff and concluded with a budget deal that sets overall spending levels or the remain-der o fiscal year 2014 and all o fiscal year 2015. Tis is significant; these cliff hangers
have been costly to the US economy. Beyond the direct impacts resulting rom what has
evolved into an austerity agenda, these crises and near-crises have damaged consumer
and business confidence, thereby serving as a urther constraint on growth. However,
ambiguity as to what path the Fed will ollow as it scales back on its current course o
monetary easing still remains.
USA
Te United States has narrowly avoided
beginning the New Year with another
budgetary stalemate, setting the stage or
almost two years o relative budget calm.
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From fiscal cliff to governmentshutdown and beyond:Tracking the course
Te United States came perilously close to
deault in the summer o 2011 and only avoided
this unprecedented event when the president
and Congress agreed to the Budget Control Act
(BCA) o 2011. Tis act provided an increase in
the debt ceiling in exchange or caps on ederal
spending or the next 10 years, to be enorced by
the threat o sequestrationacross-the-board
cuts in most discretionary programs. Since
Congress ailed to pass a spending bill that met
the BCAs criteria by January 15, 2012, sequestra-
tion was set to begin on January 2, 2013.1
A broadseries o tax cuts were also scheduled to expire
at the start o 2013, including the Bush income
tax cuts, the 2 percent payroll tax holiday, capital
gains tax, the estate tax, and the R&D tax credit.
Adding to the uncertainty was the act that the
country was, once again, bumping up against the
debt ceiling.
Te resolution o the fiscal cliff on January
1, 2013 was a modest deal that allowed only a
small number o the scheduled tax expirations to
occur (the income tax on high earners and thepayroll tax holiday) and delayed the sequesters
deep spending cuts or two months in hopes that
a budget could be developed that honored the
BCAs spending caps without making the across-
the-board cuts. Tat effort was unsuccessul, so
ederal agencies had to reduce spending or the
remainder o fiscal year 2013. According to the
White House Office o Management and Budget,
the effective reductions were approximately 13
percent or nonexempt deense spending and 9
percent or nonexempt nondeense spending.2
In February 2013, Congress suspended the
debt ceiling until mid-May. As a result o some
very large repayments to the reasury rom the
government-sponsored housing agencies (Fannie
Mae and Freddie Mac) and by using extraordi-
nary measures to move unds between govern-
ment accounts, the reasury was able to keep
the debt below the ceiling until mid-October.
Meanwhile, Congress did not produce a budget
to und fiscal year 2014, and the ederal govern-ment went into a partial shutdown on October 1.3
Afer a 16-day shutdown and with a govern-
ment deault looming, Congress passed another
temporary fix, unding the ederal government
through January 15. In a rare but welcome move,
a bipartisan budget plan was passed in advance
o that deadline, providing a spending ramework
through September 2015. However, the debt ceil-
ing, which has been suspended through February
7, was not addressed, and it remains a source o
uncertainty on the horizon.
UNITED STATES
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According to the
Congressional Budget
Office (CBO), these
fiscal impasses and their
ongoing, partial resolu-tions have negatively
impacted the US econ-
omy. CBO estimates
that economic growth
in fiscal year 2013 (Q4
o calendar year 2012
to Q4 o calendar year
2013) would be roughly
1.5 percent higher, i not
or the fiscal tightening
required by the BCA.4More recently, the CBO
estimated that, i the
spending limits mandated by the BCA had been
eliminated starting August 1, 2013, real GDP
would be 0.7 percent higher, and employment
would increase by 900,000 in Q3 o calendar year
2014 (the end o fiscal year 2014) relative to the
levels projected under current law.5
Impact on confidence
However, it is not only the actual resolutions
that become law that are negatively affecting the
US economy. It is the process through whichthese results are achieved. Both the brinksman-
ship over the debt ceiling in 2011 and 2013 and
the government shutdown in October 2013
affected consumer and business confidence. As
the country approached deault during the sum-
mer o 2011, consumer confidence ell sharply,
and it took months to recover. With the govern-
ment shutdown and another threat o imminent
deault, consumer confidence again dropped
abruptly this past October, with a urther decline
in November.Business confidence also was adversely
impacted (see figure 1). Deloittes quarterly
survey o chie financial officers o major North
American companies illustrates how execu-
tives perceptions o their businesses outlook are
affected by actions in Washington.6Clear dips
occurred at the debt ceiling showdown in 2011,
the fiscal cliff debate at the end o 2012, and
Tese fiscal
impasses
and theirongoing, partial
resolutions
have negatively
impacted the
US economy.
Source: CFO Signals, What North Americas top finance executives are thinkingand doing, Q3 2013, Deloitte.
Graphic: Deloitte University Press | DUPress.com
Figure 1. Own company optimism: CFO optimism relative to previous quarter
S&P 500 price at surveyperiod midpoint
More optimistic Less optimistic Net optimisim (% moreoptimistic minus % lessoptimistic)
500
700
900
1,100
1,900
1,300
1,500
1,700
80%
-40%
-20%
0%
20%
40%
60%
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
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the approach o the government shutdown in
October 2013.7
One maniestation o the damage these
actions do to confidence is visible in the recent
relationship between job openings and hires, as
measured by the Bureau o Labor Statistics Job
Openings and Labor urnover survey (see figure
2). In recent months, the job opening rate has
increased much more quickly than the rate o
hiring. Tis implies that companies are seeing the
need to increase employment and are thereore
posting job openings and conducting interviews,
but that uncertainty is making them reluctant to
actually make job offers. Additionally, employeeuncertainty about other job prospects is keeping
the quit rate low.8
Implications for the outlook
However, even with the uncertainty being
generated by Washington, the US economys
undamentals continue to improve. Growth
accelerated during 2013 and averaged 2.6 percent
through the third quarter (annualized basis),
unemployment continues to all, and inflation
remains in check. With the unemployment rate
reaching 7 percent, the Fed decided to make a
slight downward adjustment to its current pro-
gram o quantitative easing.
However, many aspects o employment point
to a labor market that may be weaker than the
top-line unemployment rate suggests. Tese
include high numbers o people who have been
unemployed or extended periods or are work-
ing part-time because they cannot find ull-
time work.
Another actor that suggests that the labor
market is sofer than apparent at first glance is the
decline in the labor orce participation rate. Aferpeaking in 2000, the United States labor orce
participation rate declined slowly, then stabilized
between 2004 and the onset o the recession
(December 2007). However, during the recession
and through the current recovery, the labor orce
participation rate has been declining at a airly
rapid paceand it is now 5 percent lower
than it was prior to the onset o the recession (see
figure 3).9
Te proportion o people in the economy who
are working or looking or work can change over
UNITED STATES
Source: Bureau of Labor Statistics,Job openings and labor turnover survey, November 22, 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 2. Total private job openings, hires, and quits
Seasonally adjusted in thousands
QuitsOpeningsHires
Dec2000
Jul2001
Feb2002
Sep2002
Apr2003
Jun2004
Jan2005
Aug2005
Mar2006
Oct2006
May2007
Dec2007
Jul2008
Feb2009
Sep2009
Arp2010
Nov2010
Jun2011
Jan2012
Aug2012
Mar2013
6,000
0
1,000
2,000
3,000
4,000
5,000
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time or many reasons. For example, much o the
growth in labor orce participation beginning
in the mid-1960s reflected the large number o
women entering the labor orce. Contributing to
the current periods decline is a higher propor-
tion o young people choosing to go to college
and the retirement o the Baby Boomers. But
these actors account or only part o the reduc-
tion. Te decline in labor orce participation or
those between the ages o 16 and 24, or instance,
does reflect an increase in the collegiate popula-
tion, both at the graduate and undergraduate
levels (see figure 4). However, the decline in labor
orce participation rates or this group halted in2010 and has been airly stable over the past three
years. Meanwhile, the labor orce participation
rate o those 55 and over actually continued to
increase during the recession beore stabilizing
at around 40 percent (see figure 5). With this
groups average participation rate so much lower
than that o the other age groups, the greater
the proportion o people in this age group, the
lower the overall labor market participation rate
will be.
While there are many explanations or the
shifs in labor orce participation rates among
1624-year-olds and those aged 55 and over
ranging rom the benign or positive (e.g.,
attending college or having sufficient resources
to retire) to the negative (e.g., dropping out o
the labor market because job prospects are very
poor)the change in the labor orce participa-
tion rate among 2554-year-olds is more likely to
have been caused by poor labor market condi-
tions (see figure 6). While certainly some in this
group returned to school or retired, poor jobprospects seem to be a more likely explanation,
given the magnitude o the shif.
Te big question or policymakers at the
Fed as they ponder urther reductions to their
monthly purchases o bonds and mortgage back
securities is, what proportion o those who lef
the labor orce in recent years will decide to
reenter the market and look or a job when they
Source: Bureau of Labor Statistics, Current Population Survey, 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 3. Labor force participation rate
Ages 16 and above
Jan2
00
0
Jul200
0
Jan2
00
2
Jul200
2
Jan2
00
1
Jul200
1
Jan2
00
3
Jul200
3
Jan2
00
4
Jul200
4
Jan2
00
6
Jul200
6
Jan2
00
5
Jul200
5
Jan2
00
7
Jul200
7
Jan2
00
8
Jul200
8
Jan2
01
0
Jul201
0
Jan2
00
9
Jul200
9
Jan2
01
1
Jul201
1
Jan2
01
2
Jul201
2
Jan2
01
3
Jul201
3
68.0
60.0
61.0
62.0
63.0
64.0
65.0
66.0
67.0
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UNITED STATES
Source: Bureau of Labor Statistics, Current Population Survey, 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 4. Labor force participation rate
Ages 1624
Jan
2000
Jul2000
Jan
2002
Jul2002
Jan
2001
Jul2001
Jan
2003
Jul2003
Jan
2004
Jul2004
Jan
2006
Jul2006
Jan
2005
Jul2005
Jan
2007
Jul2007
Jan
2008
Jul2008
Jan
2010
Jul2010
Jan
2009
Jul2009
Jan
2011
Jul2011
Jan
2012
Jul2012
Jan
2013
Jul2013
68.0
50.0
52.0
54.0
56.0
58.0
60.0
62.0
64.0
66.0
Source: Bureau of Labor Statistics, Current Population Survey, 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 5. Labor force participation rate
Ages 55 and over
Jan
2000
Jul2000
42.0
30.0
32.0
34.0
36.0
38.0
40.0
Jan
2002
Jul2002
Jan
2001
Jul2001
Jan
2003
Jul2003
Jan
2004
Jul2004
Jan
2006
Jul2006
Jan
2005
Jul2005
Jan
2007
Jul2007
Jan
2008
Jul2008
Jan
2010
Jul2010
Jan
2009
Jul2009
Jan
2011
Jul2011
Jan
2012
Jul2012
Jan
2013
Jul2013
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think that the market has sufficiently improved?
Te actual size o the labor orce between the ages
o 25 and 54 is 4.5 million below its prerecession
peak, but the total population in this age group
only decreased by 1.5 million over the sameperiod. Tis creates a pool o approximately 3
million people that could move rom outside the
labor orce into the ranks o either the employed
or the unemployedwhich, in turn, could move
a 7 percent unemployment rate upward very
quickly. Tis analysis suggests that the Fed will
move more slowly than some observers expect.
But irrespective o the exact path that the
tapering o the current round o quantitative eas-
ing will take, the United States growth enginesshould begin to pick up steam during 2014. Near-
term growth prospects improved since Congress
and the Administration made a New Years reso-
lution, o sorts, to provide or relative budgetary
calmat least or the next two years.
But irrespective o exactly when the current round o
quantitative easing will start to taper off, the UnitedStates growth engines should begin to pick up steam
during 2014.
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UNITED STATES
Endnotes
1. Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan, Te Budget Control Act o 2011, Congres-
sional Research Service, August 19, 2011, http://www.as.org/sgp/crs/misc/R41965.pd.2. Karen Spar, Budget sequestration and selected program exemptions and special rules, Congressional
Research Service, June 13, 2013, http://www.as.org/sgp/crs/misc/R42050.pd.
3. Approximately one-third o the civilian ederal workorce (approximately 800,000 workers) was urloughedthe first week o the shutdown (uesday, October 1 through Friday, October 4). Workers deemed es-sential, defined as those who provide or the national security" or or the "saety o lie and property,"remained on the job. At the start o the second week o the shutdown, the Secretary o Deense declaredalmost all civilian Department o Deense employees to be essential. Tereore, as o Monday, October7, an additional 350,000 ederal workers were back on the job, reducing the total number o urloughedworkers to 450,000.
4. Wendy Edelberg, Automatic reductions in government spendingaka sequestration, CongressionalBudget Office blog post, February 28, 2013, http://www.cbo.gov/publication/43961.
5. Congressional Budget Office, letter to Congressman Christopher Van Hollen, Eliminating the automaticspending reductions specified by the Budget Control Act would affect the US economy in 2014, July 25,2013, http://www.cbo.gov/sites/deault/files/cbofiles/attachments/44445-SpendReductions_1.pd.
6. CFO Signals, What North Americas top finance executives are thinkingand doing, Q3 2013, http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/CFO_Center_F/us_CFO_Signals_3Q13_HighLevelReport_091913.pd, accessed December 17, 2013.
7. Ibid.
8. Bureau o Labor Statistics,Job openings and labor turnover survey, November 22, 2013.
9. Bureau o Labor Statistics,Labor force statistics from the current population survey, United States Depart-ment o Labor, http://www.bls.gov/cps/, accessed December 17, 2013.
Source: Bureau of Labor Statistics, Current Population Survey, 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 6. Labor force participation rate
Ages 25-54
Jan2
000
Jul2000
85.0
80.0
80.5
81.0
81.5
83.0
84.0
Jan2
002
Jul2002
Jan2
001
Jul2001
Jan2
003
Jul2003
Jan2
004
Jul2004
Jan2
006
Jul2006
Jan2
005
Jul2005
Jan2
007
Jul2007
Jan2
008
Jul2008
Jan2
010
Jul2010
Jan2
009
Jul2009
Jan2
011
Jul2011
Jan2
012
Jul2012
Jan2
013
Jul2013
84.5
83.5
82.0
82.5
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Eurozone: Three areasto watch in 2014By Alexander Brsch
2013 was a year o transition or theEurozone. On the positive side, a seeminglyendless recession came to an end, and tepidgrowth set in. Moreover, the main early busi-
ness cycle indicators have been showing a clear
and intact upward trend since the middle o the
year. On the negative side, the overall growth rate
or 2013 was still negative (0.4 percent). Going
orward, most orecasts or 2014 oresee a growth
rate in the region o around 1 percent.
Growing at this speed will not be enough
to heal the wounds o the recession. Eurozone
citizens are poorer than they were beore the
financial crisis. Between 2008 and 2013, GDP
per capita ell by 3.5 percent. By comparison,
US GDP per capita rose by 1.2 percent over
the same period. While some members o the
larger European Union, especially Poland, could
substantially increase their
GDP per capita over the same
period, o the Eurozone mem-bers only Slovakia experienced
an increase o more than 5
percent. Countries such as the
Netherlands, Spain, and Italy
saw their wealth decreasing between 5 and 9
percent over the last five years.1
Several well-known actors, such as ongoing
deleveraging and fiscal
consolidation, are still a
drag on the recovery in
the Eurozone. However,looking ahead, things
could also play out more
positively than projected.
Te strength o recoveries is rarely accurately
predicted. Te remainder o this article consid-
ers what would need to happen or growth in the
Eurozone to exceed expectations. Tree interre-
lated actors are critical or the Eurozones growth
perormance in 2014 and beyond: accelerating
business investments, stabilizing credit condi-
tions, and decreasing uncertainty.
EUROZONEDr. Alexander Brsch ishead of research, DeloitteGermany
Growing at this speed will not be enough toheal the wounds o the recession.
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Business investments
So ar, the Eurozone recovery has been almost
exclusively export-based (see the second quarter
edition o Global Economic Outlook).2Higher
competitiveness in the tradables sector helped
the crisis countries to substantially improve their
current account balances. Te resulting higher
independence rom oreign capital contributed
considerably to the relative calm on the financial
markets in 2013. At the same time, increasing
exports drove growth in Northern European
countries, but they resulted in heightened depen-
dency on emerging markets.
A prooundly low rate o business investments
has the biggest potential or positive surprises.
Compared to the pre-crisis year 2007, invest-
ments as a share o GDP ell rom 21.8 percent
to 17.2 percent in 2013. Behind that decrease are
actors like declining construction investments
in countries such as Spain, which have experi-
enced a real estate bubble. However, investment
in equipment, which is decisive or economic
growth potential and productivity, continues to
all in the Eurozone (see figure 1).
Weak investment rates are not limited to the
crisis countries. Despite a period o economic
strength, Germanys investment rate, overall
and in equipment, has been much lower than
the Eurozone average over the last decade. For
the most part, Germanys substantial savings
have been invested abroad rather than domesti-
cally. Given the ongoing investment weakness in
Germany, there is the danger that the low interest
rates, currently at 0.25 percent afer the latest
interest rate decrease in November, are mainly
EUROZONE
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used to finance construction investments, thereby
possibly eeding a new real estate bubble.
However, there are signs that investment
weakness in Germany could be coming to
an end, which would considerably help theEurozone recovery as a whole. Te investment
plans o German CFOs or 2014 reached clearly
positive territory and are accelerating or the
first time, according to the Deloitte CFO Survey
taken at the end o the third quarter (see figure
2). Te results, reveal that investment propensity
doubled and CFOs plan to use their high capital
reserves to und investment at home and abroad.3
Te crisis countries are also at a critical juncture
in terms o investments. Higher competitive-
ness in their tradable sectors could increase their
exports and improve their current accounts. In
a second step, improved export perormance
should stimulate investments, which contributes
to the upside potential o the Eurozone economy.
Credit conditions
Te ragility o the Eurozone banking
system has significantly obstructed growth.
Te Eurozone has been severely affected by thefinancial and banking crises because European
corporates rely on credit to a much higher degree
than, or example, US firms. Investment, there-
ore, has been held back by difficult financing
conditions in the crisis countries and the rag-
mentation o European financial markets during
the euro crisis.
Te process o restructuring banks in the
Eurozone and increasing systemic financial
stability is ar rom
finished. Te ragmenta-tion o bank unding
markets continues,
bank restructuring
remains incomplete,
and discussions about
the orm o a banking
union are ongoing. 2014 will see the European
Central Bank assume responsibility or supervis-
ing banks and reviewing asset quality. Te goal o
the review is to increase transparency about bank
balance sheets and repair them when needed.
Nevertheless, while the Eurozones banking
sector is still vulnerable and financial ragmenta-
tion and differing financing conditions pose a
very serious problem, several areas are improv-
ing. Te European Central Bank notes positive
developments in systemic banking sector stress
as well as in banking unding challenges in
stressed countries. Te indicator that measures
systemic banking sector stress has been decreas-
ing substantially. At the end o 2013, it reachedits lowest level since mid-2011, when the crisis
intensified. Similarly, average bank unding
costs reached their lowest level or more than
three years, implying a normalization o bank
unding conditions.4
At the same time, credit conditions in the
Eurozone as a whole are improving, thereby
supporting higher investment activity. According
to the Bank Lending Survey o the European
Central Bank, banks expected an easing o credit
standards on loans to enterprises in the ourthquarter or the first time since 2009.5In other
Te process o restructuring banks in theEurozone and increasing systemic financial
stability is ar rom finished.
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EUROZONE
Source: EU Commission, Euro area data for 2011 is not available.
Graphic: Deloitte University Press | DUPress.com
Figure 1. Investments in equipment as % of GDP
Germany Spain Italy Euro areaFrance
10%
4%
5%
6%
7%
8%
9%
2003 20132004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Deloitte CFO Survey Germany.
Gra hic: Deloitte Universit Press DUPress.com
Figure 2. Investment propensity of German corporates Question: How will investments of your company change over the next 12 months
Net balance of investment propensity (Percentage of CFOs who plan to increase investmentsminus the percentage of CFOs who plan to decrease investments
20%
-60%
-50%
-40%
-30%
-20%
10%
Q2 2012 Q4 2013
0%
-10%
Q4 2012 Q2 2013
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words, credit conditions and credit supply are
stabilizing. Loan demand, on the other hand,
is still weak. Nevertheless, i there is urther
progress on both dimensions, systemic stability,
and credit conditions, a stable basis or a strongerrecovery would be established.
Uncertainty
Te length and the depth o the Eurozone
recession was, to a high degree, due to uncer-
tainty regarding the uture shape o the Eurozone
and the tail risks associated with it. Tis uncer-
tainty affected consumers, corporates, and
financial market participants alike, holding back
consumption and investments and endangeringfinancial stability. It also reinorced the effects o
credit constraints and weak balance sheets.
Current developments suggest that uncer-
tainty is on the decline. At the end o 2013, it
is much lower than in the beginning. In the
financial markets, the spreads o the Eurozones
crisis countries vis-a-vis German bunds havenarrowed substantially since the beginning o the
year. For example, the spread o Spanish 10-year
bonds over German bunds shrank by around
30 percent.
Te same mechanism is visible in the real
economy. Te degree o uncertainty that German
CFOs see themselves exposed to decreased in a
remarkable way. Between late 2012 and late 2013,
those who elt that uncertainty in the economic
and financial environment was high or very high
ell to 18 percent rom 49 percent. Compared toearly 2012, the decrease is even more dramatic
(see figure 3).
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EUROZONE
Endnotes
1. Economic growth in the European Union, Lisbon Council 2013, http://www.lisboncouncil.net/publication/
publication/100-economic-growth-in-the-european-union.html.
2. Alexander Brsch, Eurozone: A silver lining on the growth horizon, Global Economic Outlook, April 15,2013, accessed December 16, 2013, http://dupress.com/articles/ eurozone-a-silver-lining-on-the-growth-horizon, accessed December 16, 2013.
3. CFO Survey 2/2013, Unternehmen erhhen die Schlagzahl, Deloitte, http://www.deloitte.com/assets/Dcom-Germany/Local%20Assets/Documents/18_Growth%20Platorms/CFO-Services/CFO_2-2013.pd.
4. European Central Bank, Financial Stability Review, November 2013.
5. European Central Bank, Te Euro Area Bank Lending Survey, 3rd quarter, October 2013.
Source: Deloitte CFO Survey Germany.
Graphic: Deloitte University Press | DUPress.com
Figure 3. Level of uncertainty Question: How do you rate the level of uncertainty in the financial and economic environment?
NormalLow Very HighIncreased High
100%
0%
10%
30%
40%
50%
90%
H1 2012 H2 2013
70%
60%
H2 2012 H1 2013
80%
3%
17%
0%
73%
6%
2%
7%
43%
43%
6% 1%
31%
55%
0%
12%
1%
17%
61%
0%
21%
I this trend continues, reduced macro
uncertainty and greater stability could help the
Eurozones growth in 2014. By releasing catch-up
and pent-up growth dynamics, it could lif the
Eurozones growth above current orecasts.Investments, credit conditions, and uncer-
tainty are closely interrelated. Tis opens up the
possibility o positive eedback loops among
them. For example, i political uncertainty
urther decreases and credit conditions improve,
a rise in investments is set to ollow. For growth
in the Eurozone to exceed expectations in 2014,urther positive changes in each o these three
areas would be valuable signposts.
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Japan: Inflation returnsBy Dr. Ira Kalish
AFTER growing at a rate o about 4 percentin the first hal o the year, the Japaneseeconomy grew at an annualized rate o 1.9
percent in the third quarter. Surprisingly, there
was a decline in exports and very weak growth in
consumer spend-
ing. Business
investment slowed
down as well. On
the other hand,residential invest-
ment significantly
accelerated. Most
o the economys
growth could
be attributed to
inventory accu-
mulationnot a
sustainable way to
grow in the longer
run. On the posi-
tive side, this was
the ourth consecu-
tive quarter o posi-
tive GDP growth,
the first time this has happened in three years.
Looking toward the ourth quarter, there
are some indications o improvement. For
example, inflation has evidently returned to
Japan. Excluding volatile energy and ood prices,
the consumer price index was up 0.3 percent in
October rom a year ago. Tis was
the first time since October 2008
that this indicator had risen year
over year. Moreover, it was the
astest rate o increase since 1998.
When energy prices are included,
the CPI was up 0.9 percent rom a
year ago. Tis was the highest rate
o inflation in five years. Clearly,
the new central bank policy ounlimited asset purchases is hav-
ing the desired effect. Te drop in
the yen is boosting import prices,
especially o energy products. Tat,
in turn, is eeding through to other
prices in the economy.
Japanese consumers are also
responding to the new economic
policy. In October, household
spending, adjusted or inflation,
was up 0.9 percent rom a year
earlier. Tere was a sizable increase
in spending on homes, home-
related products, and automo-
biles. It is likely that some o this
increased spending was in anticipa-
tion o the sales tax increase that
will take place in April. As such,
it is not necessarily indicative o
an underlying improvement in
consumer spending. In act, there
JAPAN
Most o the
economys growthcould be attributed
to inventory
accumulation
not a sustainable
way to grow in the
longer run.
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is reason to worry. Afer adjusting or inflation,
household incomes continue to decline. Te
average real income o wage earning households
ell 1.3 percent rom a year ago. Tis reflects the
act that, despite rising prices, businesses are notresponding with wage increases. I this trend
persists, there could be negative implications or
household spending. Moreover, a lack o wage
inflation means that the positive inflation Japan is
now experiencing could be ephemeral. Inflation
cannot rely on a declining yen to be sustained.
Tere needs to be wage pressure as well. Te
government has pressured businesses to increase
wages and has promised to enact legislation that
will offer incentives or wage increases. It remains
to be seen whether such efforts will bear ruit.
One positive impact o the declining yen hasbeen an improvement in export perormance.
Japanese exports grew in October at their ast-
est pace in three years. Exports were up 18.6
percent rom a year earlier, ar aster than the
11.5 percent increase in September. As exports
are generally priced in dollars, the increase in the
yen value o exports was largely due to the impact
o a weaker yen. However, even the volume o
exports was up 4.4 percent rom a year earlier,
suggesting that the declining yen is starting to
have an impact on overseas demand. It meansthat exporters are offering oreigners lower
prices in order to move goods. It also means
that Abenomics is having the desired effect on
trade. Te volume o exports to the United States
increased 5.3 percent while the volume to Europe
increased 8.0 percent. Volume to Asia, however,
increased only 2.0 percent. Interestingly, despite
the rapid rise in exports, imports grew even
aster as Japan continued to import more uel to
offset the shutdown o nuclear power plants. As
such, the trade deficit expanded in October to
a record level. Te main reason to worry about
a trade deficit is that Japans government runs a
large deficit and has a large stock o debt. Until
now, this has mainly been unded domestically
by tapping into Japans vast pool o savings. Yet a
trade deficit will ultimately lead to net external
borrowing. In other words, Japan will have to
borrow rom oreigners to meet its obligations. I
Japan must rely on borrowing rom abroad, this
could lead to an increase in the cost o borrow-ing, thereby exacerbating the deficit.
JAPAN
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Deregulation
Tere is growing concern that the third
arrow o Abenomics (deregulation and reorm)
will not be as aggressive or as urgent as manypeople hope. Indeed, the government has
postponed details about many o the reorms
that it intends to implement until June o 2014.
Nonetheless, there are positive signs. Japans
government said it will end subsidies or small
rice armers by the end o the decade. Why is
this important? Tere are two reasons. First, this
action will lead to consolidation o rice arm-
ing rom the current situation where 72 percent
o rice arms are one hectare or less. Tis will
boost productivity, expand production, reduce
ood prices, and render a considerable amount o
agricultural land useless. Tat, in turn, could lead
to a reduction in land prices in urban areas. Tis
is because land that previously was used or rice
arming will be converted to other uses. Tere isa surprising amount o urban and suburban land
currently used or rice arming. Second, the act
that Japan announced such a significant reorm
indicates a willingness to take on vested interests.
Tis bodes well or urther important reorms as
part o Abenomics. Nonetheless, the government
did not announce any change to import tariffs
on rice and other oods. Currently, there is a 778
percent tariff on imported rice. Tis ensures that
Japan will maintain a domestic rice industry.
Te main reason to worry about a trade deficit is that
Japans government runs a large deficit and has a large
stock o debt.
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JAPAN
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India: Can Indiaovercome adversitiesand bounce back?By Dr. Rumki Majumdar
FISCAL year 2013 has been tumultuous orIndia. For the first time in a decade, Indias
economic growth ell below 5 percent, growing
4.6 percent year over year in the first hal o
FY 20132014 relative to
last year.1Unortunately,
growth is not Indias only
challenge. Te economy
is burdened with per-
sistently high inflation,
rising fiscal deficit, and
excessive imbalance in its
current account, expos-
ing internal challenges
that are affecting inves-
tors confidence in the
economys ability to grow. Political challenges are
creating more conusion and skepticism, with
India just a ew months away rom its general
government election. Global economic uncer-
tainties are aggravating Indias internal troubles:
India was among the worst hit o the emergingeconomies whose currency, stock, and bond
markets experienced extremevolatility this past summer due
to the US Federal Reserves
(Feds) tapering signal. Its cur-
rency depreciated more than
20 percent, while stock markets ell 10 percent
during MaySeptember 2013 because o heavy
capital outflows.
Economic and political challenges rom all
ronts are making it difficult or policy mak-
ers to promote growth and ensure stability. Te
question is, how prepared is the economy to ace
its challenges head-on and bounce back? Will
India be able to regain its lost position as one
o the astest-growing nations? Indias ability
to overcome its adversities lies in its inherent
strengths and potential. India has gone through
difficult times beore, which makes it resilient
and better able to overcome economic chal-
lenges. It is no surprise, then, that it is one o the
ew major emerging economies to make a strong
comeback afer the Fed announced that it wasdeerring tapering.2
Dr. Rumki Majumdar is amacroeconomist and amanager at Deloitte Research,Deloitte Services LP
INDIA
Unortunately,
growth is
not Indiasonly challenge.
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Economy muddledwith challenges
Te growth in Q2 FY 20132014 improved
slightly, to 4.8 percent, relative to the previous
quarters low growth. Tis improvement was due
to stronger growth in the agricultural and con-struction sectors, but domestic activities in most
o the real sectors continue to underperorm, as
seen in figure 1. Growth in the industrial sector
remains sluggish due to poor growth in the man-
uacturing, mining, and quarrying sectors, while
growth in the services sector is also showing
signs o weaknesses. Industrial sector growth has
been hit by poor growth in consumer durables
and basic goods, which account or 54 percent
o Indias industrial products, while the capital
goods sector has been highly volatile. Te onlyrelie is that a avorable monsoon has improved
the scope or a good agricultural output, which
will probably continue to boost the economys
growth in the coming quarters as well. Real
growth has been alling continually, and accord-
ing to the IMF, which recently revised down its
GDP orecast or India, the growth outlook is not
very positive.
According to the latest figures, wholesale price
inflation (WPI) touched 7 percent in October,
while consumer price inflation (CPI) continued
to remain in double digits at 11.6 percent (see
figure 2). Inflation is expected to rise urther, as
suggested by a survey conducted by the Reserve
Bank o India (RBI).3According to the survey,
92.5 percent o respondents expect prices to
increase in the next year.4Te meteoric rise o
ood prices is the biggest reason or the rise in
prices in India, which is likely to ease, owingto better agricultural output. Te RBIs newly
INDIA
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Source: Handbook of Statistics on Indian Economy, RBI, Ministry of Statistics and ProgrammeImplementation, and Deloitte Services LP economic analysis, December 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 1. Domestic activities slowing down
GDP (RHS)Industrial production (LHS)
15
-15
-5
0
5
3.0
3.5
4.0
4.5
5.0
5.5
Jan 2012 Apr 2012 Oct 2012 Jul 2013 Oct 2013Jan 2013
-10
10
Jul 2012 Apr 2013
%, YoY %, YoY
Source: Labour Bureau of India, Government of India, Deloitte Services LP economic analysis, December 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 2. Rising inflation is a worry
WPICPI industrial worker
14
4
6
8
10
12
Jan 2012 Apr 2012 Oct 2012 Jul 2013 Oct 2013Jan 2013Jul 2012 Apr 2013
%, YoY
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elected governor Raghuram Rajan has clearly
signaled in the last ew monetary policy state-
ments that he will ocus on price stability, which
implies that policy rates are likely to remain high.
Te industrial sector is already reeling rom thehigh cost o capital and low availability in a tight
liquidity situation, and high rates will only hurt
growth urther.
Te rising fiscal and current account imbal-
ances have been among the greatest macroeco-
nomic worries or India (see figure 3). Indias
fiscal gap widened sharply in the first six months
o FY 20132014, and was estimated to be 76percent o the budget estimate and approximately
8.3 percent o GDP in the first hal o FY 2013
2014. Tis implies that the government has to
spend less in the run-up to national elections or
risk missing its stated aim o cutting the budget
deficit to 4.8 percentwith the latter seeming
more probable.
Te current account deficit also widened in
Q1 FY 20132014 relative to the previous quar-
ter, and it remains close to its historically high
levels. Te good news is that it is likely to ease,going by recent signs o correction in the trade
account deficit (see figure 4). Policy measures by
the RBI to curb gold imports and actors such as
slowing domestic demand and lower oil prices
due to reduced external risks have helped contain
import bill growth. At the same time, exportshave grown aster in the first hal o the current
fiscal year relative to FY 20122013 due to cur-
rency depreciation and improved global demand.
Remittance flows to India have surged as the
countrys overseas population took advantage o
the weaker domestic currency.
Te high current account deficit is one o
the biggest reasons or the increased vulner-ability in the capital outflow witnessed in recent
months. Net portolio investment accounts or
the majority o capital flow in the economy, o
which 98 percent is oreign institutional invest-
ment (see figure 5). Due to the inherent nature o
institutional investments, capital flows in India
are highly vulnerable to global liquidity and
international investors sentiments. On the other
hand, the proportion o direct capital invest-
ment is a mere raction o GDP, which implies
a very small proportion o the capital account is
INDIA
Source: RBI, Press Information Bureau, Government of India, Oxford Economics andDeloitte Services LP economic analysis, December 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 3. Twin deficits are a challenge
Current account balanceFiscal balance
0.0
-12.0
-10.0
-8.0
-6.0
-4.0
Sep 2008 Sep 2009 Sep 2010 Sep 2012 Sep 2013Sep 2011
-2.0
% of GDP
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Source: RBI, Press Information Bureau, Government of India, Oxford Economics andDeloitte Services LP economic analysis, December 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 4. Trade deficit is narrowing
Trade balance
60
-60
-40
-20
20
40
Apr 2012 Oct 2012 Apr 2013 Oct 2013
0
%, YoY
Source: RBI Bulletin, Press Information Bureau, Government of India, Bloomberg and DeloitteServices LP economic analysis, December 2013.
Graphic: Deloitte University Press | DUPress.com
Figure 5. High proportion of portfolio investment affecting currency stability
Net FPI (LHS)Net FDI (LHS) Exchange rate (RHS)
10
-10
-5
0
5
45
50
55
60
65
70
Jan 2012 Apr 2012 Oct 2012 Jul 2013Jan 2013Jul 2012 Apr 2013
USD billion INR/USD
Dec
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INDIA
being invested in production and building long-
term assets.
Te recent capital outflow resulted in a sharp
depreciation in Indias currency22.5 percent
this year. Te Indian rupee hit a record low onAugust 28, 2013, although it has recovered some
o its lost ground since then. However, as long
as the current account and proportion o oreign
institutional investments in total capital flow
are high, the currency will remain vulnerable to
external shocks; any events similar to the Feds
hint o tapering, or actual tapering by the Fed,
can upset the currencys stability.
Impact on sentiments
Poor growth and economic challenges are
affecting consumer and business sentiments.
According to an RBI survey, consumer confi-
dence diminished in September, with around 60
percent o respondents expecting that economic
conditions will worsen.5Te consumer confi-
dence measured by the current situation index
declined due to the worsening perception o
household circumstances, income, spending, and
employment (see figure 6). On the other hand,
the industrial outlook or the overall business
situation is at its lowest level since 2005 due to
the pessimistic assessment o and expectations
or exports, imports, and the overall financialsituation. Te Business Expectation Index ell
below the threshold level o 100 to 97.3 or the
first time since 2008, indicating that businesses
are highly pessimistic about the economic out-
look and investment prospects.6Rising interest
rates and the perceived rise in external finance
costs are impacting investment decisions, while
the perception o profit margins continues to
remain negative. All these actors have led topoor production and employment outlooks.
Simple strategies withgreater benefits
Tough overwhelming, these challenges
must be fixed i India wants strong and stable
growth. Some must be addressed immediately,
while others require more ocused attention and
structural intervention.
Source: RBI survey and Deloitte Services LP economic analysis, December 2013.
Figure 6. Consumer and business confidence fell but are expected to improve
Business expectation indexCurrent situation index
115
85
95
105
Mar 2012 Jun 2012 Sep 2012 Jun 2013 Sep 2013Dec 2012 Mar 2013 Dec 2013
Index
Expected
Expected
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The immediate tasks
For the most part, resolving Indias slow-
ing growth, high inflation, and widening fiscal
and current account deficits requires immediate
initiatives beyond the measures already taken.
Tese include promptly removing bottlenecks
to the existing inrastruc-
ture and manuacturing
investments, improving
the allocation o subsi-
dies, and curbing external
deficits by improving
export competitiveness
and reducing imports.
Measures should be takento curb gold imports by
imposing restrictions
and promoting alternate
investment options among
retail investors. In addi-
tion, uel imports should
be contained by removing
subsidies on uel products
and encouraging the use
o alternate and environ-
mentally riendly sourceso energy. Monetary and
fiscal policies should be
coordinated so that i mon-
etary actions provide the
first line o deense, they
are ollowed by immediate
and credible government
action. Te government
needs to communicate its
policies effectively to con-
tain the current account
deficit and inflation, as
well as ocus on quick implementation o reorms
without watering down the reorm process.
Strategies for the long run
With the rising population and a growing
market potential, improved inrastructure and
connectivity are a must. While large inrastruc-
ture projects are being undertaken currently, thequality and scale is not enough considering the
size o the population. Despite reorms being
introduced, Indias system o acquiring land and
allocating natural resources remains suboptimal,
and bureaucracy and corruption prevent new
laws rom being unctional. While the govern-ment has recently created institutions to acceler-
ate decision making and implement transparent
processes, the effort in this direction has to be
more assertive.
One important concern is that a large propor-
tion o Indias national income comes rom the
inormation technology and sofware industry,
while contributions rom the manuacturing and
services sectors remain low. India cannot sustain
growth i its growth model continues to ocus
on only a ew sectors that employ a small part othe population. A majority o Indias population
lives in rural areas and does not have access to
basic health acilities and primary education. o
ensure stable, sustainable, and equitable growth,
the country needs to employ its growing popu-
lation, which means that it has to develop its
manuacturing and services sector to diversiy its
growth model.
One important solution lies in encouraging
small-scale industries, which have been gen-
erating employment and promoting balanced
regional development. Indias industrial policy
resolution has, rom time to time, encouraged
the growth o small-scale industries. However,
to oster growth, the country must now ocus on
technologies that are flexible and can be adopted
to different mass production processes, as well as
improve productivity in manuacturing, agricul-
ture, and agro-based industries.
India can learn a great deal rom policies
in other countries. For instance, Japan recentlyput in place a policy to end subsidies to some
sections o armers, which is expected to help
consolidate arming, boost productivity, expand
production, and reduce ood prices.7Tis policy
is likely to ree a considerable amount o unpro-
ductive agricultural land or better alternate use,
thus reducing land prices in urban areas, which is
a big concern in India as well. At the same time,
the government o Japan is also providing protec-
tion to armers through import tariffs and other
measures. India can benefit a great deal rom
For the most
part, resolving
Indias slowing
growth, highinflation, and
widening fiscal
and current
account deficits
requires
immediate
initiatives
beyond the
measures
already taken.
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implementing, with necessary adaptations, some
eatures o Japans policy.
Building on its strength
A countrys most important resource is its
people, and India has this resource in abundance.
Indias young and diverse population, with a
quickly growing middle-income group, pro-
vides the economy with a big potential market,
as well as productive resources to serve this
market. I this population is tapped effectively,
India has the ability to develop a sel-sustaining
growth model and reduce its dependence on the
global market. Te availability o quality edu-
cation, labor reorms, and financial inclusioncan help the economy reap the advantages o a
growing population.
Indias healthy financial and banking sec-
tor is its other strength. Tis sector has shown
immense resilience in the ace o the global finan-
cial crisis, and the RBI has played an important
role in preserving financial stability through a
unique combination o monetary policies and
macro-prudential regulations. While the banking
sector has experienced an increase in bad loans
in recent years, it is not cause or concern yet.
However, with rising global policy uncertainties
and Indias strong linkage to the global finan-
cial system, India should keep a close check on
liquidity and the stability o the banking system.
Appropriate measures such as increased competi-
tion and supervision can improve banks effi-ciency and access to markets, as well as contain
the contagion risk o any global financial crises.
Indias finances are relatively stronger than its
peers. Te countrys overall public debt to GDP
has been declining since 2006 and is currently
66 percent o GDP, o which only 46 percent is
held by the central government. Moreover, the
debt is denominated in rupees and has an average
maturity o more than nine years. Indias external
debt burden is also low, with only 5.2 percent o
the debt being short term. Indias strong oreigncurrency reserve implies that its sovereign risk
rating is stable, and the economy has the abil-
ity to borrow without a significant rise in risk
premium. However, India should improve its
fiscal balance to improve investors perceptions o
sovereign risks.
Tere is no doubt that the Indian economy
is challenged. However, i the economy can
strengthen its inherent potency and plan effec-
tively to close the gap between the potential and
actual, India can get out o the trough and back
on to its high-growth path.
Endnotes
1. Hereafer, all growth percentages mentioned in the article are measured as year over year unless otherwisespecified.
2. Reer to Are emerging markets losing their brand appeal? in this edition o Global Economic Outlook.
3. Reserve Bank o India, Inflation Expectations Survey o Households, round 3, September 2013, http://
rbidocs.rbi.org.in/rdocs/Publications/PDFs/05IEHR281013.pd.
4. Te RBIs Inflation Expectations Survey o Households or the JulySeptember 2013 quarter (33rd round)captures the inflation expectations o 4,960 urban households across 16 cities or both the ollowing threemonths as well as the ollowing year.
5. Te consumer confidence survey is conducted by the RBI, and the business sentiment survey is conductedby Federation o Indian Chambers o Commerce and Industry. Both the surveys were last published inJune 2013; also see Reserve Bank o India, Industrial outlook survey: Q2: 20132014 (round 68), October28, 2013, http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/03IOS281013.pd.
6. An index below the threshold o 100 signifies contraction.
7. Economist, Rice arming in Japan: Political staple, November 30, 2013, http://www.economist.com/news/finance-and-economics/21590947-government-abolishes-previously-sacrosanct-agricultural-subsidies-
political.
INDIA
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Russia: No quick fixBy Akrur Barua
RUSSIAS economy continues to ace short-and long-term challenges, so it was notsurprising when growth disappointed in the third