Paul Sheard

Biz@India

May 2018

PAUL SHEARD, Executive Vice President and Chief Economist, S&P Global

Paul Sheard, executive vice president and chief economist, S&P Global, spoke to Biz@India about the better prospects in 2018 and how the situation is with India.

Let’s start with the good news, what is the good news this year in 2018? What can the world look forward to?

I think, the main good news is that the global economy is growing much strongly and it looks like it will probably grow faster in 2018. The growth looks quite good and it looks well distributed. The other good news is related to the stronger growth, some of the concerns that people had, a year or two ago, that would disrupt the economic expansion and recovery have not manifested. In particular, I would point to the Federal Reserve’s policy normalisation. I think that is going very well and it is interesting that as we speak Janet Yellen is coming to the end of a four year term and actually it is interesting that nobody is really focusing on that. I have not noticed here on the assessment of Janet Yellen’s term and it is sort of fading away into the sunset. But I do think that she is not the most flamboyant person. I think she has been very successful in guiding monetary policies through these transitions. The good news is that the monetary policy normalisation process in the US is well advanced and hasn’t upset the apple cart. Now, it doesn’t mean it could not happen but at least we know that we have some facts.

The purpose of the unconventional monetary policies and other policies was to stabilise the economy, get it running again, and get it back where it used to be. If as a result of that, the central banks start to normalise their monetary policies that should not be a cause of concern and it becomes evident that things have worked out quite well.

Now, again qualified central bankers can make mistakes, they can make the wrong judgement but just in terms of the sort of base line expectations. I think none have the proof that this monetary policy normalisation can proceed without upsetting the economic apple cart.

What could upset the apple cart?

With the point in front of us, it looks like it is going to happen. The one thing that I would just really underscore is something that perhaps could upset the apple cart. People are perhaps focusing on, or are a little bit complacent or relaxed about is a potential for trade wars, protection to sort of get out of hand. What are the elements of that concern? One is the NAFTA negotiations, which they plan to complete by the end of March, with seven rounds of negotiations. The noises from the NAFTA negotiations are not that encouraging. The US President Donald Trump is somewhat a little bit unpredictable and also the Trump administration having quite a strong conviction around this trade issues means, that it might be an issue that he focuses on. So you know the NAFTA negotiations are not ending well. If the president were to trigger a withdrawal from NAFTA that would suddenly be a shock.

The other one that I think is very interesting to see is how he plays out is Section 301 trade action against China on Intellectual Property because this is not steel or lumber or these individual products that is not so systemic. The question that, has China been stealing Intellectual Property is much more of a big systemic mystery. If the answer to that is yes then there could be a bit of a wild card in the Global Trading System.

Also we have to negotiate the budget and what is happening in Poland or Hungary.

The theme of Davos is to create and share prosperity in a fractured world but the problem of the European Union is that it has an incomplete economic, monetary and political architecture. They understand this and they are working towards trying to make that architecture more complete and more robust and at the moment they are kind of benefitting from the various crisis management type tools, like the Outright Monetary Transaction (OMT) of the ECB and the ESM functions. Then you have Brexit, you have Poland, Hungary, etc. So the number of stresses in that system is many. The third one I guess is China. The debt overhang which is probably the biggest kind of macro-economic imbalance that you see in the world seems to be internal to China, which is the build-up of credit and debt in the economy. Now if they can continue to grow they can rebalance an economy, reform the economy and just keep growing. What people call the deleveraging process in China, is not going to happen but the ratio of debt to GDP, which ratio are we looking at, is it the corporate debt, the household debt, government debt and the rate of growth of debt various metrics have been used.

If you look at the overall sort of stock of bank, lending has increased and relative to where you would have expected it to be is a very big credit gap. That may not become a problem but the confidence is always the key parameter. As long as there is confidence in the system, the economy and the political leadership then financial crisis do not happen.

Two years ago everyone was complaining that China has let its currency fall too much. The same thing America is doing. If that thing can be held against China why can’t it be held against the US as well?

The Federal Reserve manages monetary policy. The monetary policy influences the exchange rate. Any economist will tell you that is probably out of many factors one of the most important is the monetary policy. There is no foreign exchange intervention by the US Treasure. The last time they did any foreign exchange intervention was after the March 2011 earthquake in Japan where Japan faced the threat of repatriation of capital. Japanese wanted to intervene just to stabilize to deal with the shock and the US did a sort of sympathy. The ECB did a very small sympathy intervention, which affected the US. The US Treasure does not intervene. The central bank sets monetary policy under its kind of inflammation targeting framework. So there is no real room for currency manipulation let alone currency wars but you do have this phenomenon of open market operations. Markets do pay attention to what policy makers say. It is almost like a focal point like equilibrium

The prices of crude oil have gone up, is that enough to rebalance the economy to bring some growth back?

There has been an important structural shift in the global oil markets, no secret about the shale revolution, shale oil and shale gas. Oil prices seems to be in a broad range. Fifty to seventy dollars maybe a little bit more, maybe a little bit less. So if the oil prices are going up that should elicit a supply response from the shale industry. The ability to deploy the capital is much more nimble, much more flexible for the entrepreneurial sector. A broad view would be if oil prices do start to go up because the supply is a bit short relative to the demand. New supply will come on demand will go down. If prices go down too far, supply pulls back.

What are India’s prospects?

The prospects of India look pretty positive. In longer term India is a very positive economic growth development story. Last year of course the growth was primped a little bit by the GST aftermath and the demonetisation shock. India to a large extent been operating in the shadows of China for maybe the last 10 or 15 years, but if you didn’t have China there would be a lot more focus on India, where growth is between 6.5 pc and 7.5 pc.

India has a lot of positive fundamental with a large and rising middle class, a very big and potential domestic market again like China, Europe, US. These are all continental scale economies. Getting on that escalator of economic development and making sure it keeps on going. India has an enormous potential. That is why there is so much focus on reform and building having a high level of investment, savings fuelling investment.

Keeping that growth momentum and unleashing the energy in the economy, is very important and then the final factor is of having a good policy framework. Macro policy management and micro policy structural reforms and the role of the diaspora, I think is a great asset for India.

Do you expect other countries to move ahead with their bilateral/ multilateral trade agreements without US in case Trump decides to go easy?

We are already seeing that with a Trans Pacific Partnership (TPP) 11. The problem with that is without the US it changes the whole game. I think the broader question is pretrade, globalisation has the tide turned on that and are we going into a secular period of retreat.

Countries will either, through bilateral or multilateral mechanism, try to figure out ways to harness the benefits of trade. I think it is encouraging when the US pulled out the TPP which was a very tangible real decision for the President. I mean TPP was on the verge of happening with the US but without China and pulling out has put that back but the fact is that the TPP 11 has soldiered on. It is good and has preserved optionality. But it is interesting that China was not in the TPP so one of the criticisms of the TPP 11 was that without China TPP does not make any sense. Maybe China will join later on. Now the US pulling out evens things up.