Deloitte - Global Economic Outlook 2015

Global
Economic
Outlook1st Quarter 2015

Eurozone: An escape from the time
loop in 2015? | 4
By Dr. Alexander Börsch
While consumption in the Eurozone can be
expected to increase slowly, and exports should be
supported by higher world demand than in 2014,
corporate investments are the most important
area to monitor for positive and negative sur-
prises.
United States: The US economy
continues to strengthen, but what
is going on with housing? | 10
By Dr. Patricia Buckley
Signs of growth in business investment and em-
ployment bode well for the US economy in 2015,
but the housing market seems to be changing in
ways that will have a repercussion on the overall
economy.
China: The balancing act | 18
By Dr. Ira Kalish
China’s government continues to struggle with a
tough balancing act, attempting to avert a further
decline in growth while not allowing the imbal-
ances in the financial system to become over-
whelming. At the same time, it is making small
but significant moves in the direction of reform.
United Kingdom: Decent growth,
low inflation, and political
uncertainty | 22
By Ian Stewart
The UK economy delivered a surprise comeback
in 2014. Growth is now running at the fastest
pace in four years, and activity in 2014 is likely to
have outpaced all the other major industrialized
countries.
Japan: Sinking into recession
again | 26
By Dr. Ira Kalish
As Japan appears to be sinking into yet another
recession, two important developments have
taken place: The Bank of Japan has expanded its
program of quantitative easing, and the govern-
ment has decided to delay next year’s tax increase
and seek voter support to continue in power.
Russia: Teetering on the edge of
recession | 30
By Lester Gunnion
Sanctions, a weakening ruble, and falling crude
oil prices all combine to put Russia’s economy
in a precarious position. The country desper-
ately needs sanctions to be lifted and business
to resume as usual, but this will only happen if
policymakers take steps to engage with the West.
Contents
ii | Global Economic Outlook: 1st Quarter 2015

India: Getting ready, holding steady
. . . just waiting to GO! | 38
By Dr. Rumki Majumdar
The financial reforms enacted by Prime Minister
Modi’s administration in the past six months,
along with healthy GDP growth and rising busi-
ness confidence, point to an economy that seems
poised to reach the “critical mass” necessary for
sustainable growth.
Brazil: Watch and wait | 46
By Akrur Barua
Brazilian president Dilma Rouseff’s new economic
team faces a number of challenges in putting Bra-
zil’s fiscal house in order, including a large budget
deficit, eroding transparency, high inflation, and
a volatile real. With growth moribund and rating
agencies breathing down Brazil’s neck, the team
will be in for a rough ride in the coming months.
Economic indices | 52
GDP growth rates, inflation rates, major curren-
cies versus the US dollar, yield curves, composite
median GDP forecasts, composite median
currency forecasts, OECD composite leading
indicators.
Additional resources | 55
About the authors | 56
Contact information | 57
Global Economic Outlook: 1st Quarter 2015 | 1
CONTENTS

AS the new year begins, there are a handful of trends that are driving
the global economy.
• First, the sharp drop in the price of oil is changing the economic
landscape. Driven by weak demand and a big increase in output in the
United States and elsewhere, this has boosted consumer purchasing
power in oil-consuming countries, suppressed inflation in developed
economies, pushed up the value of the US dollar, and weakened several
oil-producing economies.
• Second, the shift in US monetary policy during the past year and the
expected increase in short-term US interest rates later this year are
influencing currency values around the world, especially in emerging
markets. The necessity of maintaining high interest rates in order to
prevent severe currency depreciation has led to much slower growth in
many emerging markets.
• Third, weaker growth and low inflation in the Eurozone, Japan, and
China are offsetting the positive global impact of a rebound in the
US economy. In Europe, Japan, and China, a more aggressive mon-
etary policy is the principal tool used by governments in attempting
to revive growth. Yet in all three locations, a consensus has developed
that greater structural reforms will be needed if sustained growth is to
be attained.
In this report, our economists from around the world examine the
current and expected economic situation. First, Alexander Boersch
examines the repetitive troubles of Europe’s economy. He points to very
weak investment as the principal problem in Europe. Alexander notes that
weak investment not only limits short-term growth, but also reduces the
long-term potential of the economy. And while the ECB has attempted to
stimulate credit market activity, Alexander points out that credit availabil-
ity is not what is holding back business investment. After all, companies
are laden with cash. On the other hand, he points to survey results that
may bode well for a revival of investment in 2015.
Second, Patricia Buckley looks at the US economy. She notes that
there is considerable strength of business investment and private sector
hiring, both indicating a relatively high degree of confidence. Expected
areas of slow growth going forward are exports and government spend-
ing. Moreover, housing remains a puzzle. In her article, Patricia provides
an in-depth analysis of the factors driving the US housing market and the
reasons to expect a pickup in activity.
In our third article, I provide an analysis of the Chinese economy. I
discuss the fact that China continues to struggle with a tough balancing
act, attempting to avert a further decline in growth while not allowing
the imbalances in the financial system to become overwhelming. At the
same time, I note that China is making small but significant moves in the
direction of reform. After noting a range of data indicating slower growth,
I discuss the recent decision by the central bank to cut interest rates. I also
discuss the government’s plans to liberalize financial services by first intro-
ducing deposit insurance.
Introduction
By Dr. Ira Kalish
2 | Global Economic Outlook: 1st Quarter 2015

Our fourth article looks at the British
economy. Ian Stewart writes that, although the
British economy continues to outperform most
other developed markets, there remain some
clouds on the horizon. These include weak
wage growth, troubles in the Eurozone, and
signs of slowdown in the housing market. On
the other hand, the British economy contin-
ues to benefit from lower commodity prices
and low inflation, which provide the Bank of
England with more wiggle room.
Next, I examine the fast-changing situation
in Japan. The economy has reentered recession
following the big tax increase that took place in
April. I highlight the economic impact of the
tax increase and then examine the new policy
choices. These include acceleration of quanti-
tative easing by the Bank of Japan as well as a
decision by the government to postpone the
next round of tax increases.
In our sixth article, Lester Gunnion exam-
ines the Russian economy. He provides details
about the troubles afflicting Russia, including
the declining price of oil, severe downward
pressure on the ruble, high inflation, accelerat-
ing capital flight, and high interest rates. He
discusses the impact of this on growth, fiscal
balances, and the limited policy options that
Russia has at its disposal.
Next, Rumki Majumdar provides her
analysis of India’s economy. She looks at how,
through some early steps, the new govern-
ment has laid the groundwork for substantial
reforms. In addition, she discusses how the
Indian economy has begun to show some early
signs of strength. On the other hand, business
investment has not yet responded to the new
policy environment or to the fact that measures
of confidence have risen. She notes that a com-
bination of tight monetary policy and falling oil
prices have helped bring down inflation, thus
setting the stage for an eventual loosening of
monetary policy.
Finally, Akrur Barua looks at the Brazilian
economy. He discusses the challenges faced
by the new economics team appointed by
President Dilma Rousseff and what kinds of
policy initiatives they may undertake. He notes
that their job is made that much more difficult
by the downward pressure on the currency.
This emanates from expectations of a rise in
US short-term interest rates. The result is that
Brazil’s borrowing costs will probably remain
high, thus hurting business investment as well
as consumer finances.
Dr. Ira Kalish
Chief global economist of
Deloitte Touche Tohmatsu Limited
published quarterly by
Deloitte Research
Editor-in-chief
Dr. Ira Kalish
Managing editor
Ryan Alvanos
Contributors
Dr. Patricia Buckley
Dr. Alexander Börsch
Ian Stewart
Dr. Rumki Majumdar
Akrur Barua
Lester Gunnion
Editorial address
350 South Grand Street
Los Angeles, CA 90013
Tel: +1 213 688 4765
ikalish@deloitte.com
INTRODUCTION

EUROZONE
An escape from the time loop
in 2015?
By Dr. Alexander Börsch
IN the movie Groundhog Day, Bill Murray wakes up every
day only to find out that he is reliving yesterday again.
Morning after morning, his hopes that a new day has
started are disappointed. The Eurozone seems to be caught
in a similar time loop. Since the financial crisis started
more than seven years ago, each new year brought hopes
for a strong recovery, but they never materialized.
Rewind one year: Hopes were particularly high that
2014 would be the year in which the Eurozone finally
turned the tide and returned to solid and accelerating
growth. The signs looked promising. After a long reces-
sion, tepid growth set in, and the early indicators signaled
increasing dynamism. However, things developed differ-
ently. The fragile recovery failed to gain momentum in
the first half of 2014 and came largely to a standstill in
the second.
Since the financial crisis started more than seven years ago, each
new year brought hopes for a strong recovery, but they
never materialized.

EUROZONEEUROZONE

What happened to the 2014 recovery?
At the end of 2014, official EU projections put the 2014 growth rate for
the Eurozone at 0.8 percent. Half a year earlier, the spring projection was
substantially more optimistic; it foresaw 50 percent higher growth (1.2
percent). Investment activity is the main factor for why growth was less-
than-expected. Private consumption and exports developed, by and large,
as forecasted; but investments grew only at a quarter of the expected 2.3
percent (figure 1).1
There are quite a few external factors that contributed to the current
investment weakness. A weaker-than-expected growth rate of the world
economy as well as the crises in Ukraine and the Middle East are among
them. However, the weak investment activity is not a phenomenon that
emerged in 2014. European companies have been hesitant to invest for a
much longer period of time. Investments have recovered much slower in
the Eurozone than in other parts of the world after the financial crisis. In
fact, they have never really recovered, but they are still substantially below
the level in 2007 (figure 2).
The low investments in the Eurozone damage not only short-term
growth prospects by lowering aggregate demand, but also the long-term
growth potential by severely hampering productivity increases. Consider
the recent productivity performance of the three biggest Eurozone econo-
mies. While European countries were trying to catch up with the United
States until the mid-1990s, the trend has reversed since then and acceler-
ated since the outbreak of the financial crisis in 2007 (figure 3).
Graphic: Deloitte University Press | DUPress.com
Source: European Commission 2014, European economic forecast, spring and autumn 2014,
http://ec.europa.eu/economy_ﬁnance/eu/forecasts/index_en.htm.
Figure 1. EU spring (May 2014) and autumn (November 2014) projections of
GDP growth, private consumption, and investment (%)
Spring (May 2014) Autumn (November 2014)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0.8
GDP
1.2
0.7
Private consumption
0.8
Exports
3.9
4.0
0.6
Investment
2.3
EUROZONE

Source: OECD economic outlook 2014.
Figure 2. Investment growth in the Eurozone, US, Japan, and UK [Q1 2008 = 100]
75
85
95
105
115
125
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
United States Japan Euro area United Kingdom Index 2008 = 100
Source: OECD StatExtracts, November 2014.
Figure 3. Productivity growth
(GDP per hour worked, average annual growth in %)
0.2 0.3
-0.3
1.5
-0.5
0
0.5
1
1.5
2
2.5
1.5
France
1.6
Germany
0.2
Italy
2
United States France Germany
Italy
United States
2007–20122001–2007
Investments have recovered much slower in the Eurozone than in other
parts of the world after the financial crisis. In fact, they have never really
recovered, but they are still substantially below the level in 2007.
EUROZONE

When will investment
activity recover?
Investment weakness is not necessar-
ily related to a lack of access to cash. While
in some parts of the Eurozone, firms find it
difficult to obtain credit, investment activity
in those parts where financing conditions are
good also has not taken off. In fact, the financial
firepower on the part of companies actually
increased. Consider the development of cash
reserves of Europe’s listed companies since
2000. Cash reserves have almost tripled in the
last 13 years and amounted to almost 1 trillion
euros at the end of 2013.
One of the key questions for the economic
course in the Eurozone in 2015 and beyond
will be whether firms continue to build up cash
reserves or whether they use their accumulated
cash holdings for investments. Survey-based
evidence on the company level gives some
reason for hope that European firms are begin-
ning to use this capital for growth investments.
Recent research on investment plans of big
EUROZONE

Endnotes
1. European Commission, European economic forecast, spring 2014 and autumn 2014, http://ec.europa.eu/economy_finance/publications/european_economy/forecasts/index_en.htm.
2. Deloitte, Cash to growth–pivot point, 2014, http://www2.deloitte.com/za/en/pages/about-deloitte/articles/emea-research-cash-to-growth.html.
European corporates has uncovered several developments that could work
against the long-term decline in investment activity.2
First, for a majority of surveyed firms, investments are more important
than a further strengthening of their balance sheets. Almost 60 percent
of surveyed firms identified investments as their main priority. A third of
them intend to further strengthen their balance sheets. Second, the motiva-
tion for investments is shifting toward a more offensive approach. Growth
and innovation investments are much more important for corporates than
maintenance investments. Third, in terms of investment priorities, staff
training and development as well as new technologies are very high on the
agenda. Investments in these areas have the potential to reverse the trend
of weak productivity growth.
The study also shows that most surveyed companies have a long-term
investment plan at least until 2017. According to these plans, the invest-
ments will be undertaken stepwise in the course of the second half of 2015
until 2017. So, what can be expected in terms of investment activity for
2015 is not an immediate outburst of investment activity in the Eurozone,
but an important step to reverse the negative investment trend.
Ultimately, that means that in 2015, similar to 2014, the economic
recovery will crucially hinge on investment activity. While consumption
in the Eurozone can be expected to increase slowly, and exports should be
supported by higher world demand than in 2014, corporate investments
are the most important area to monitor for positive and negative surprises.
Source: Deloitte 2014, Cash to growth—pivot point, http://www2.deloitte.com/za/en/pages/
about-deloitte/articles/emea-research-cash-to-growth.html. Analysis is based on companies in
Bloomberg EMEA 1200 index excluding ﬁnancial companies.
Figure 4. Cash reserves of listed European companies [EUR]
337 355
385
501
590 578
660
713 682
809
863 839
916
963
200
300
400
500
600
700
800
900
1000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
EUROZONE

US GDP growth for 2014 overall will finish in the
moderate range (most likely between 2.2 and 2.4
percent), held down by the weather-related blip in the first
quarter when GDP contracted by 2.1 percent. However,
strong growth in the second and third quarters (4.6 percent
and 5.0 percent, respectively) points to an accelerating
economy. This positive outlook is further bolstered by the
increase in business investment and employment. These
developments bode well for a strong 2015. The downside
risks stem from conditions outside the United States—the
growing weakness of some of our major trading partners
and escalating geo-political tensions.
Positive developments: In the second and third quar-
ters, the fixed business investment component of GDP
contributed an amount almost equal to a quarter of the
UNITED STATES
The US economy continues to
strengthen, but what is going
on with housing?
By Dr. Patricia Buckley
Even as output and employment
are showing signs of accelerating
growth, the trends that will define this
post-recession period are becoming
clearer. Shifting trends in housing are
among the changes that could have
long-term repercussions.

total growth, with most of the increase com-
ing from higher investment in equipment and
intellectual property products, such as software
and research and development. This willing-
ness to invest points to increased optimism
about future growth among businesses operat-
ing in the United States. This optimism is also
evident in the growing willingness to hire. The
average monthly employment gain in 2014 was
246,000 per month. Compared to the average
gain of 194,000 in 2013
and 186,000 in 2012, this
is a substantial accel-
eration of job growth.
Additionally, in recent
months, unemploy-
ment has slipped below
6 percent for the first
time since July 2008.
Additional workers on payrolls will provide a
boost to consumer spending.
Where to worry: The two GDP components
where growth will most likely be constrained
going forward are government spending and
exports. Although government spending grew
at a relatively rapid rate in the third quarter of
2014 due to an increase in defense spending,
this component has been a drag on US growth
for the greater part of the last five years. Given
the outcome of the November elections, this is
not likely to reverse.
It is somewhat surprising that US export
growth has held up as well as it has in recent
quarters, since three of our top five trading
partners are experiencing negative to slow
(the European Union and Japan) or uncertain
(China) prospects for growth.1
The United
States has averaged faster export growth over
the last six quarters (if one excludes the anoma-
lous first quarter of 2014) than it has in the
preceding two years. This does not seem to be
sustainable without some improvement in the
economic prospects of our major trading part-
ners. Were exports to begin to contract, rather
than slow down, our hopes for 3.5 percent
growth in 2015 will need to be re-evaluated.
Similarly, if tensions in Russia or the Mid-East
were to further escalate or the situation in
China to sharply deteriorate, not only US but
also global growth prospects would be affected.
The two GDP components where growth will
most likely be constrained going forward are
government spending and exports.
UNITED STATES

And housing: The outlook for one major
component of GDP—residential investment—
remains unclear and, frankly, puzzling. Given
the extent of over-building and the size of the
pricing bubble during the years just prior to the
recession, it was expected that it would take the
housing sector a considerable period to recover,
but by this point, we should have seen more
sustained improvement. However, as shown in
figure 1, residential investment as a percentage
of GDP is well below the levels registered in the
last several business cycles even five years after
the end of the last recession.
The primary driver of faster growth in this
sector is the likely investment in housing by
those who have put off moving into a place of
their own or who had to move back in with
friends or relatives because of the poor job
market, as well as future additions to the adult
population. As shown in figure 2, prior to the
recession, the growth in population of those 16
and over and the rate at which new households
Source: Bureau of Economic Analysis.
Recession areas
Figure 1. Residential investment as a percent of GDP
0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Percent
UNITED STATES

UNITED STATES

form—that is, when a person or people (related
or not) occupy a housing unit—grew at simi-
lar rates. However, during the recession, the
two series began to diverge and, rather than
beginning to narrow during the recovery, the
gap is growing. It is likely that this continued
divergence is a holdover from the recession—a
result of people not going out on their own for
reasons such as going back to school; remaining
unemployed, underemployed, or lacking job
security; or having debt or bad credit—rather
than a shift in preference toward living in
households with more people. If this is correct,
the pace of household formation should eventu-
ally pick up with improving economy.
On the supply side, the housing market is
now close to pre-recession conditions. Home
sales and inventories are back to their pre-bub-
ble levels, and distressed sales, including fore-
closures and short sales (sales where the price is
less than the mortgage balance on the loan), are
down. According to the National Association of
realtors, distressed sales are now down to single
digits from 14 percent just a year ago.2
With all
the pent-up demand and a draw-down of the
excess supply, this sector should begin to see
stronger growth. It is just a question of when.
But once construction begins to pick up,
indications are that the shape of the market may
have changed in at least two ways that may have
an impact outside of the housing market:
Increase in condominium
and apartment construction
relative to single-family
home construction
Prior to the recession, the vast majority
of residential construction was single-family
homes. However, in the post-recession era, a
growing proportion of new housing is multi-
unit, specifically, larger projects with five or
more units (figure 3). In the lead-up to the
bursting of the housing bubble, multi-unit
home construction accounted for approxi-
mately 20 percent of the total. During the
recession and its immediate aftermath, hous-
ing starts of both types dropped to levels not
seen in the 55 years the Census Bureau has
been publishing these numbers, and propor-
tions fluctuated. In 2010, with starts finally
beginning to rise, the proportion of multi-unit
housing was again at 20 percent. However, from
that point, multi-unit housing starts began to
UNITED STATES

Source: Bureau of the Census and Bureau of Labor Statistics.
Figure 2. Growth in population and household formation
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
95
100
105
110
115
120
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Households Population 16+
January 2000 = 100
Recession areas
Source: US Bureau of Census.
1 unit structures Multi-unit Recession areas
Figure 3. Housing starts by type
Thousands of units, annual rate, SA
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0
500
1,000
1,500
2,000
2,500
2000-01-01
2000-07-01
2001-01-01
2001-07-01
2002-01-01
2002-07-01
2003-01-01
2003-07-01
2004-01-01
2004-07-01
2005-01-01
2005-07-01
2006-01-01
2006-07-01
2007-01-01
2007-07-01
2008-01-01
2008-07-01
2009-01-01
2009-07-01
2010-01-01
2010-07-01
2011-01-01
2011-07-01
2012-01-01
2012-07-01
2013-01-01
2013-07-01
2014-01-01
2014-07-01
Prior to the recession, the vast majority of residential construction was
single-family homes. However, in the post-recession era, a
growing proportion of new housing is multi-unit, specifically,
larger projects with five or more units (figure 3).
UNITED STATES

rise faster than single starts and year to date through October, multi-unit
construction has averaged just over 35 percent of the total number of
starts in 2014. This shift to smaller square footage and the accompanying
fall in demand for consumer products such as lawn-care equipment will
have an impact on consumer spending. And to the extent that this type of
construction is more common in urban areas, the trend may have implica-
tions for the entire range of public and private planning activities as well as
major consumer purchases such as automobiles.
Declining home ownership
After being stable at around 64 percent for 10 years, home owner-
ship began to rise in 1994, peaking at 69 percent in 2004, and then
began to decline; it is currently at 65 percent—still above the pre-1994
level—but it is notable that the rate has continued to decline through the
current expansion.
There is no doubt that in the lead-up to the collapse, many people were
buying houses they could not afford, while others were taking advantage of
rapidly rising prices to turn their previously affordable houses into unaf-
fordable ones by refinancing (often more than once) and taking out equity
to finance current spending—that is, using their homes as piggy banks. The
collapse that ensued not only destroyed the personal finances of many who
bought during this period, but also triggered a deep, worldwide recession.
But although bad practices in the granting of mortgages and the pricing
bubble dented the value of home ownership (apart from nearly causing
total financial collapse), home ownership still serves important functions,
Source: US Bureau of Census.
Figure 4. Home ownership rates
Percent
61.0
62.0
63.0
64.0
65.0
66.0
67.0
68.0
69.0
70.0
1984-01-01
1985-01-01
1986-01-01
1987-01-01
1988-01-01
1989-01-01
1990-01-01
1991-01-01
1992-01-01
1993-01-01
1994-01-01
1995-01-01
1996-01-01
1997-01-01
1998-01-01
1999-01-01
2000-01-01
2001-01-01
2002-01-01
2003-01-01
2004-01-01
2005-01-01
2006-01-01
2007-01-01
2008-01-01
2009-01-01
2010-01-01
2011-01-01
2012-01-01
2013-01-01
UNITED STATES

Endnotes
1. On a merchandise trade basis, the five largest export markets for the United States are Canada, the European Union, Mexico, China, and Japan. Among these, on a year-to-date basis, nominal US
exports have increased faster in 2014 than in 2013 to each of these except China. (Source: US Census Bureau, published by International Trade Administration, US Department of Commerce,
http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003364.pdf). Growth forecasts are by the International Monetary Fund “World Economic Outlook”
database, http://www.imf.org/external/pubs/ft/weo/2014/02/weodata/index.aspx.
2. National Association of Realtors, “Existing-home sales rise in October, first year-over-year increase since October 2013,” November 20, 2014,
http://www.realtor.org/news-releases/2014/11/existing-home-sales-rise-in-october-first-year-over-year-increase-since-october-2013.
3. Other advantages to home ownership in addition to asset/wealth accumulation are better outcomes for children and increased community engagement and voting behavior. Negative impacts include
reduced labor mobility. For a literature review see: Dan Andrews and Aida Caldera Sanchez, “The evolution of homeownership rates in selected OECD countries: Demographic and public policy
influences,” OECD Journal: Economic Studies, 2011, http://www.oecd.org/eco/growth/evolution%20of%20homeownership%20rates.pdf.
4. National Association of Realtors, “Highlights from the 2014 profile of home buyers and sellers,” http://www.realtor.org/reports/highlights-from-the-2014-profile-of-home-buyers-and-sellers.
5. Federal Reserve Board, “2013 survey of consumer finances,” http://www.federalreserve.gov/econresdata/scf/scfindex.htm.
Source: Federal Reserve Board Survey of Consumer Finances.
Figure 5. Homeownership by age of the householder
42
68
77 79 81
85
36
62
69
74
86
80
0
10
20
30
40
50
60
70
80
90
100
Less than 35 35–44 45–54 55–64 65–74 75 or more
Percent
2004 2013
most importantly as a vehicle to accumulate asset value that can help
fund retirement.3
In normal times, owner-occupied housing serves as a form of forced
savings, with owner equity in the house growing over time as the mort-
gage is paid off and prices rise, albeit at sub-bubble rates. At retire-
ment, the owners have the option of “cashing in” on this asset to help
fund retirement.
Figure 5 shows that home ownership rate declines are concentrated in
the pre-retirement age groups. The National Association of Realtors has
also reported that the number and proportion of first-time home buy-
ers are low. Only 33 percent of recent home buyers were first-time buy-
ers, which is suppressed from the historical norm of 40 percent among
primary-residence buyers.4
This decline in home ownership is particularly
important since participation in retirement accounts is declining.5
The recovery in the housing market seems overdue. However, when
this sector does pick up, it will be interesting to see if the multi-unit sector
continues to boom relative to single-unit growth and if the currently tar-
nished hallmark of the “American Dream” regains its glitter.
UNITED STATES

CHINA’S government continues to struggle with a
tough balancing act, attempting to avert a further
decline in growth while not allowing the imbalances in
the financial system to become overwhelming. At the
same time, it is making small but significant moves in the
direction of reform.
Economic conditions
The economy continues to slow down. The purchas-
ing manager’s index for Chinese manufacturing dropped
from 50.4 in October to 50.0 in November1
—a six-month
low. This means that the manufacturing sector has
stalled. The sub-index for output was in negative territory
while the sub-index for new export orders decelerated.
This is further evidence that the slowdown in the Chinese
economy has not abated. In addition, the government
reports that factory output was up 7.7 percent in October
compared to a year earlier. This was the slowest rate of
expansion since 2009. Investment in fixed assets
during the first 10 months of the year was up 15.9
percent over the previous year, the slowest pace
of increase since 2001. And retail sales increased
11.5 percent in October versus a year earlier. All
of these figures were slower than in the previous
month and slower than investors had expected.
Evidently, efforts by the government to stave off
deceleration have not worked. This raises the ques-
tion as to whether the government will do more to
stimulate demand.
The slowdown in China’s housing market
continues. The result is that house prices continue
to decline. The government reports that prices
fell in 69 of 70 cities analyzed from September to
October. In 67 of 70 cities, prices were down from
a year earlier. Notably, prices fell in Beijing for the
first time in two years. The decline in prices reflects
weakening demand. In the first 10 months of this
CHINA
A balancing act
By Dr. Ira Kalish

year, home sales were down 10 percent from the
previous year. In recent months, the govern-
ment has taken steps to stimulate more activity
in the housing market. This does not yet to have
been fruitful. Developers are reluctant to boost
construction until excess inventories are sold.
Credit market activity in China declined
in October. New lending by banks totaled 548
billion yuan, down 36 percent from September.
Aggregate financing was 663 billion yuan,
down 34 percent from September. Chinese
banks report that bad loans are increasing at a
rapid pace and that deposits are shrinking. This
explains the decline in the extension of credit.
Meanwhile, the broad money supply grew 12.9
percent in October versus a year ago, the sec-
ond slowest rate of increase in more than two
years.2
The weakness in credit growth comes
despite the central bank’s recent injection of
liquidity into banks. This raises the question as
to whether the Bank will choose to cut interest
rates and/or lower the required reserve ratio.
Many analysts are expecting the Bank to take
such action in order to boost credit market
activity. Yet the government is reluctant to do
anything that will exacerbate the existing prob-
lem of excessive debt.
Not only is economic growth sub-optimal,
inflation appears to be decelerating rapidly, thus
increasing the possibility of deflation. China’s
producer prices fell 2.2 percent in October from
a year earlier, faster than the 2.0 percent decline
in September.3
This was the 32nd consecutive
month of declining prices. Consumer prices
were up 1.6 percent in October from a year ear-
lier, unchanged from September.4
The last time
consumer price inflation was this low was in
January 2010. Among the factors driving down
producer prices are lower costs of imported
energy and other commodities as well as
continued excess capacity in many industries.
Indeed, the government said as much. Very
low consumer price inflation and continued
producer price deflation suggest several things.
First, the economy is slowing considerably,
given that businesses are struggling to unload
excess inventories. Second, the continued
efforts by the government to stimulate credit
market activity could be, in the long run, coun-
terproductive as they will likely exacerbate the
problem of excess capacity. Third, China is now
at risk of overall deflation. Indeed, there is now
market commentary to that effect. Expectations
of deflation can be very damaging and can be
self-reinforcing. Fourth, wages continue to rise
due to labor shortages while producer prices
fall. This can only imply that margins are being
squeezed. Plus, there is anecdotal evidence that
state-run companies are retaining workers they
no longer need. This keeps the unemployment
rate low, but does little to improve the efficiency
of the economy. What should China do? Now
would be the optimal time to implement more
radical reforms in order to correct imbalances
CHINA

in the economy, stimulate consumer demand,
and shift investment toward those areas that
would support a more modern economy.
Policy response
The massive growth of credit outside the
banking system, in the so-called shadow bank-
ing system, is a serious cause of concern given
a high volume of debt, much of which may go
bad. Consequently, the government has suc-
cessfully slowed the growth of shadow banking,
contributing to the slowdown in the economy.
On the other hand, the government does not
want overall credit expansion to decelerate too
far. Thus, the central bank recently cut vari-
ous benchmark interest rates by 25 to 40 basis
points.5
This surprised investors and imme-
diately led to a big increase in equity prices in
China and elsewhere. This was the first cut in
interest rates by the central bank since 2012.
It is meant to stimulate more credit market
activity, especially lending to small businesses,
within the traditional banking sector. However,
the central bank did not yet cut the required
reserve ratio (RRR), something it did earlier
this year. A cut in the RRR would boost the
money supply by increasing the share of bank
assets that can be loaned. Also, most traditional
bank lending has gone to state-owned enter-
prises rather than the private sector. The growth
of shadow banking has been, in part, meant to
provide credit to the private sector as it has not
been readily available through traditional chan-
nels. Thus, the cut in benchmark rates might
not necessarily have the desired impact. The
fear is that the main beneficiaries of the cut in
rates will be state-owned enterprises, property
developers, and local governments—rather than
small business owners. As such, we may simply
see these beneficiaries take advantage of lower
rates to refinance existing debts. Meanwhile, it
has been suggested that the central bank is pre-
pared to go further due to fears that China may
now be facing the prospect of deflation.
One of the most important parts of China’s
$6.2 trillion shadow banking system is the large
number of trust companies that manage assets
and lend money to private sector businesses.
The government reports that trust company
assets grew at their slowest pace in the third
quarter since 2010. Specifically, trust assets
increased a modest 3.8 percent from the second
to the third quarter, reaching 12.9 trillion yuan
(or $2.1 trillion).6
The government has endeav-
ored to restrict the growth of the trust indus-
try because of problems associated with trust
lending. The government reported that there
are 397 trust products characterized as “risky.”
There have been problems with trust products
involving delayed payments and near defaults.
Yet in each case, they have been bailed out by
affiliated state-run banks. As such, wealthy indi-
viduals who put their money in the trusts have
little reason to worry that they will lose their
money. This means that risk is not properly
priced, thus leading to excessive growth of the
system (up 500 percent in the last five years)
and to lending behavior that is not consistent
with proper credit evaluation. The result of that
are many projects that fail to generate positive
returns. On the other hand, the slowdown in
trust growth, by limiting overall credit growth,
is probably having a negative impact on the
growth of overall economic activity. This creates
a quandary for the government.
On the other hand, the government is start-
ing to take action designed to alleviate financial
imbalances. The Chinese government intends
to introduce bank deposit insurance in January.
This will be a critical stage on the path to free-
ing up deposit interest rates, probably some-
time in 2016. Currently, such rates are capped.
This fact has contributed to the growth of the
shadow banking system where non-banking
vehicles collect funds from wealthy individu-
als, promising them high returns, and lend
that money to property speculators and local
governments. Once deposit insurance and flex-
ible deposit rates are introduced, there will be
greater competition among banks. There is con-
cern that, once deposit insurance is introduced,
depositors will become scared of the notion that
banks could actually fail. In that case, they may
move their funds to the largest banks. This has
happened in other countries when insurance
CHINA

was first introduced. The point of insurance will
be to make banks riskier by forcing them to pay
market rates to depositors. It will force them
to cut back on fool-hardy lending and engage
in better monitoring of the creditworthiness of
borrowers. Ultimately, it should lead to more
effective investments and, consequently, faster
economic growth. This reform is clearly one
of the most important to be introduced by
this government.
In what could be a very significant reform,
the Chinese government is considering allow-
ing foreign investments into industries tradi-
tionally dominated by state-owned enterprises.
Specifically, it is looking at steel and oil refining,
both of which are currently characterized by
excess capacity. The idea of allowing foreign
investments (including acquisitions) would
be to assist these industries in modernizing
and rationalizing. The government is actually
considering reducing the number of industries
subject to foreign investment restrictions from
79 to 35. It is also considering reducing the
number of industries in which Chinese inves-
tors must have majority control from 44 to 32.
These potential changes, which foreign compa-
nies would certainly welcome, come at a time
when China’s government has been criticized
for worsening the investment climate for for-
eign companies, especially in its enforcement of
anti-monopoly legislation.
Assessing the damage
In these pages, I have often written about
the vast amount of wasted investment in China.
While not quantified, it has long been under-
stood that much of the debt-fueled investment
spending in China was wasteful, especially
given the huge number of so-called “ghost
cities” all over China. Now, the government
itself has quantified the wastefulness, and it has
come up with a startling number. The govern-
ment says that, in the past five years, China has
spent $6.8 trillion on investments that were
“ineffective” in that the money was wasted or
even stolen.7
In fact, the government said that
as much as $1 trillion of the invested money
simply disappeared. The government said that,
in 2013 alone, half of all investment that took
place was wasted. Keep in mind that, in that
year, investment accounted for nearly half of
GDP. According to the government, much of
the wasted investment was in heavy industry
such as the automotive and steel industries
as well as investments in property. The latter
included the countless “ghost cities” that have
received considerable publicity. The problem
is that investment is meant to boost the econ-
omy’s productive capacity, thus contributing
to future growth. Yet as investment has soared
in recent years, growth has decelerated—evi-
dently due to the fact that much of the invest-
ment contributed nothing to the economy’s
productive capacity.
Endnotes
1. “Financial statistics, October 2014,” The People’s Bank of China, November 19, 2014, http://www.pbc.gov.cn/publish/english/955/2014/20141119153316745377599/20141119153316745377599_.html.
2. “National data,” National Bureau of Statistics of China, accessed December 2,2014, http://data.stats.gov.cn/english/easyquery.htm?cn=A01.
3. Ibid.
4. Ibid.
5. “PBC decides to cut RMB benchmark loan and deposit interest rates and expand interest rate floating range,” People’s Bank of China, Accessed November 20, 2014,
http://www.pbc.gov.cn/image_public/UserFiles/english/upload/File/PBCDecidestoCutRMBBenchmarkLoanandDepositrates.pdf.
6. “China’s trust assets expand least since 2010,” Bloomberg News, November 6, 2014,
http://www.bloomberg.com/news/2014-11-06/china-trust-assets-expand-at-slower-pace-amid-investor-concern.html.
7. Christina Larson, “Putting a price tag on China’s wasted infrastructure investments,” December 1, 2014,
http://www.businessweek.com/articles/2014-12-01/putting-a-price-tag-on-chinas-wasted-infrastructure-investment.
CHINA

THE UK economy delivered a surprise comeback in
2014. Growth is now running at the fastest pace in four
years, and activity in 2014 is likely to have outpaced all the
other major industrialized countries. Recent revisions to
GDP estimates also show that economic activity surpassed
its pre-crisis peak in 2013 and now stands well above it.
UK activity also looks slightly more balanced. Private
sector hiring has been strong, more than offsetting the
contraction in public sector jobs. Cuts in public spending
have not derailed the recovery and business investment
has rebounded.
Yet for all this, wages have remained unexpectedly weak,
with earnings increasing more slowly than inflation for the
sixth consecutive year. Indeed, headline wage growth in
the United Kingdom in 2014 was weaker than in Italy or
France, whose economies have scarcely grown over the last
year. Our own expectation is that sharply lower unemploy-
ment and inflation mean that 2015 will be the year in which
real earnings growth finally turns positive, lending a timely
support to the recovery.
UNITED KINGDOM
Decent growth, low inflation,
and political uncertainty
By Ian Stewart
Private sector hiring has been strong, more than offsetting
the contraction in public sector jobs.

Perhaps the greatest threat to the United
Kingdom comes from weakness in the euro
area. Could this, as it did in 2011–2012, drag
the United Kingdom back into stagnation
or worse?
Certainly, there are signs that the pace of
UK growth is slowing. Housing activity has
cooled, and inquiries by would-be home buyers
to estate agents are down sharply. Corporate
sentiment has also weak-
ened in recent months.
Yet for all the risks
in Europe, we wouldn’t
overdo the gloom.
Growth between neigh-
bouring countries is
often desynchronized.
2014 was a case in
point, with the United
Kingdom expanding
strongly and the euro area close to reces-
sion. The United Kingdom spent a lot of the
1980s and 1990s outperforming the German
economy, and by a wide margin. Agreed, the
2011–2012 euro crisis hit the United Kingdom,
but that was at a time of weak demand at home.
UK consumer spending, corporate hiring,
and capital spending are stronger today. But
Europe’s slow recovery does deal a blow to
hopes of an export-led recovery. Net exports
are unlikely contribute much to UK growth in
2015 or 2016, a disappointment for those hop-
ing for an export-led recovery.
Lower commodity prices have hit countries
like Russia and Brazil, but they are a boon for
Western growth. In the United Kingdom, a
strong pound has added to the downward pres-
sure on inflation. After several years of soaring
increases, food, petrol, and energy prices have
tumbled, helping push inflation to a five-year
low. It seems quite likely that UK inflation will
stay below its official 2.0 percent target for the
next two years.
Together with a cooling UK housing market
and weakness in Europe, low inflation eases
the pressure on the Bank of England to raise
interest rates. Over the summer of 2014, it
seemed quite possible that UK rates would rise
by early 2015. Financial markets now assume
Yet for all the risks in Europe, we
wouldn’t overdo the gloom. Growth
between neighbouring countries is
often desynchronized.
UNITED KINGDOM

that interest rates will not increase until the second half of 2015 and that
the upward path will be gentler than previously expected. The thinking
is that the United Kingdom will remain in easy money territory for years
to come, with the short sterling futures market pricing in three-month
interest rates of just 2.5 percent in five years.
Perhaps the area of greatest disappointment for the United Kingdom
is the failure of stronger growth to have a more pronounced effect on the
level of public borrowing. The United Kingdom is only half way through
a deficit reduction program that stretches toward the end of the next
Parliament. The IMF estimates that the UK deficit in 2015 was larger
than those of Greece, France, Italy, or Ireland. The government’s plans
imply a tightening of fiscal policy and cuts in real government consump-
tion spending for each of the next five years. The private sector will have
to compensate for this and drive growth through the next Parliament.
The recession may be over, but much of the pain of deficit-reduction still
lies ahead.
2015 will be an election year, with the general election taking place
on May 7. Concerns about political risk are climbing the corporate
agenda. Deloitte Touche Tohmatsu Limited’s CFO Survey shows that
chief financial officers are particularly concerned about domestic politi-
cal risks around the general election and a possible referendum on UK
membership of the European Union. (The Conservative Party is com-
mitted to holding a referendum on EU membership if it is returned
to office in May.) The shrinkage of the membership base of the main
political parties and the growth of smaller parties, specifically, the UK
Independence Party and the Scottish Nationalists Party, mean that the
outcome of the May 7 election is particularly uncertain. Compared to
most post-war elections, the chances of a hung Parliament, and the pos-
sibility that the United Kingdom may see another coalition government,
are relatively high.
Source: IMF World Economic Outlook, November 2014.
Figure 1. UK leading the industrialised world in growth in 2014
-0.5 0 0.5 1 1.5 2 2.5 3 3.5
Italy
France
Japan
Germany
United States
Canada
United Kingdom
UNITED KINGDOM

Source: Thomson Reuters Datastream.
Figure 2. UK GDP growth vs. CPI inflation
Q1 moving average of 1Y percent change of AWE: Whole economy total pay: United Kingdom
Percent YoY GDP growth
GDP growth
Wages
Inflation
8
6
4
2
0
-2
-4
-6
04 05 06 07 08 09 10 11 12 13 14
Source: Deloitte CFO Survey Q3 2014.
Figure 3. Risk to business posed by the following factors
1 A future UK referendum on membership of the European Union
1 The May 2015 UK general election and the risk of policy change and uncertainty
3 Deflation and economic weakness in the euro area, and the possibility of a renewed euro crisis
4 The prospect of higher interest rates and general tightening of monetary conditions in the UK and US
5 Weakness and or volatility in emerging markets
6 A bubble in housing and/or other real financial assets and the risk of higher inflation
7 Scotland’s referendum on independence on September 18*
*The referendum for Scottish independence ranked fourth until September 19.
Risk ranking from highest to lowest
Perhaps the area of greatest disappointment for the United Kingdom
is the failure of stronger growth to have a more pronounced effect
on the level of public borrowing.
UNITED KINGDOM

SINCE our last quarterly article three months ago, two
important things have taken place in Japan. First, the
Bank of Japan (BOJ) expanded its program of quantita-
tive easing, making Japanese monetary policy the most
aggressive of any major country in the world. Second, the
government decided to delay next year’s tax increase and
seek voter support to continue in power. Both actions are
intended to rectify a troubling situation: Japan appears
to be sinking into yet another recession, and inflation is,
once again, decelerating. This was not meant to be. When
the policy known as Abenomics was initiated nearly
two years ago, the combination of aggressive monetary
policy, fiscal stimulus, and deregulation was intended
to reverse two decades of stagnating growth combined
with declining prices. Yet several things went wrong.
First, fiscal policy, rather than offering stimulus, did the
opposite when the national sales tax was increased in
April. Second, the government failed to implement any
significant deregulation of the economy. Finally,
Japanese companies have failed to boost wages even
when inflation started to accelerate. The result has
been a sharp drop in real wages.
Current economic situation
Much to the surprise of everyone, Japan is back
in recession. What went wrong? Recall that Japanese
GDP fell at an annual rate of 7.3 percent in the
second quarter due to the imposition of the April
tax increase.1
That drop in GDP followed a sharp
6.0 percent increase in the first quarter. As such,
it appeared that consumer and business spending
simply shifted from the second to the first quarter
in order to avoid the tax increase. On the other
hand, the depth of the second-quarter decline was
a bit alarming. Still, most analysts expected GDP
JAPAN
Sinking into recession again
By Dr. Ira Kalish

to bounce back in the third quarter. It didn’t.
Instead, the government reports that real GDP
fell at an annual rate of 1.6 percent in the third
quarter. Two consecutive quarters of declining
GDP is often considered a recession.
The decline was due, in part, to a drop
in the accumulation of inventories by busi-
ness. Evidently businesses are not sufficiently
confident in future growth of demand to stock
up on inventories. On the other hand, con-
sumer spending was up
at a rate of 1.4 percent,
exports increased at a
rate of 5.3 percent, and
imports increased at a
rate of 3.1 percent. In
addition, although the
government’s initial esti-
mate suggested a drop
in business investment, a later revision indi-
cated that capital spending was up 5.5 percent
from a year earlier, led by a strong 11 percent
increase in investment by manufacturers.
Non-manufacturing investment was up only
2.7 percent. Also, the government reported that
corporate profits were up strongly in the third
quarter. Analysts had expected better consumer
spending performance, especially given that
spending had dropped at a rate of 5.2 percent
in the second quarter. Consequently, it appears
that the tax increase in April did far more
damage to the economy than many analysts had
expected—which itself is surprising. After all,
the last tax increase in the 1990s was followed
by a recession.
As for more recent economic data, the
purchasing managers’ index for Japanese
manufacturing declined slightly from 52.4 in
October to 52.0 in November.2
The subindex
for output increased slightly, while the subin-
dices for new orders and export orders both
worsened. This weakness is not surprising,
given the recent news that Japan has once again
dipped into recession. It suggests poor business
confidence and hesitation to make future com-
mitments. Perhaps this will change soon now
that the prime minister has postponed the next
tax increase. On the other hand, the Japanese
government announced that exports were up
in October at the fastest pace in eight months.
Exports rose 9.6 percent in October versus a
year earlier, reaching their highest level since
2008 and surprising investors who expected
Fiscal policy, rather than offering stimulus,
did the opposite when the national sales tax
was increased in April.
JAPAN

much less. The strength of exports was due, in
part, to the drop in the value of the Japanese
yen; strong exports bode well for a return to
positive economic growth in the fourth quarter.
Exports to China were up 7.2 percent, while
exports to all of Asia were up 10.5 percent from
a year earlier. Exports to the United States were
up a strong 8.9 percent.
Another important indicator is the infla-
tion rate. In October, consumer prices were 2.9
percent higher than a year earlier, but most of
this rise was due to the increase in the national
sales tax that took place in April.3
Excluding
the impact of that tax increase, prices were up
only 0.9 percent, far below the target rate of 2.0
percent. This was the third consecutive month
in which core inflation declined. Although the
BOJ has lately implemented a more aggressive
program of quantitative easing, it is expected
that this will take time to work its way through
the economy. Meanwhile, falling oil prices are
contributing to the lower inflation, thus making
the BOJ’s job that much harder.
The government reported that retail sales
increased 1.4 percent in October versus a year
earlier. It also reported that industrial produc-
tion was up 0.2 percent in October from the
prior month, and that the unemployment rate
fell from 3.6 percent in September to 3.5 per-
cent in October. The ratio of jobs to applicants
increased to its highest level in 22 years. Thus,
despite the weak inflation numbers, it appears
that there are some positive developments in
the Japanese economy.
Policy decisions
For months, BOJ Governor Haruhiko
Kuroda has insisted that the blistering pace of
asset purchases the BOJ is undertaking is suffi-
cient to cure what ails Japan. He resisted calls to
expand the program, saying that the goal of 2.0
percent inflation is feasible. Yet in late October,
Kuroda joined four of the bank’s other eight
board members and, to the considerable sur-
prise of financial markets, expanded the asset
purchase program. This was a controversial
decision, and the 5 to 4 vote by the board was
unusually close. The bank is increasing its asset
purchases each year from the current 60–70
trillion yen to 80 trillion yen (or about $724
billion). The bank also reduced its forecasts
for inflation and growth—essentially admit-
ting that it has so far failed to reverse Japan’s
ingrained deflationary psychology. This is also
an admission that the tax increase in April,
combined with weak overseas markets, seri-
ously damaged growth prospects. This decision
was a shock to markets and was likely intended
to convince investors that the bank is serious
about meeting its inflation target. As such, it is
meant to shift the deflationary psychology that
has long gripped Japan. Indeed, Kuroda said
that the bank will act again if necessary.
On the same day that the BOJ announced
its more aggressive monetary policy, Japan’s
Government Pension Investment Fund (GPIF)
said that it will place 50 percent of its assets in
local and foreign equities, up from 24 percent,
as opposed to its previous focus on fixed-rate
assets.4
Bonds, which are currently 60 percent
of assets, will shrink to 30 percent. This reflects
both a view that deflation will eventually go
away as well as a desire to generate a higher
return on the world’s largest pension fund.
Currently the GPIF manages assets worth 127.3
trillion yen (roughly $1.1 trillion).
Not long after the BOJ shifted monetary
policy, Japanese Prime Minister Shinzo Abe
announced the dissolution of the Parliament
and said he will call a snap election. He also
said that he will postpone the next increase in
the national sales tax, previously scheduled to
take place in October 2015, for an additional
18 months. Abe said, “To ensure the success
of Abenomics, I’ve concluded that it [the tax
increase] shouldn’t be carried out next October
and instead should be postponed by 18 months.
The postponement is a grave decision, and
I believe going to the people with this deci-
sion is not only natural but the right way for a
democracy.” Regarding the success or failure of
Abenomics, Abe said, “I am aware that critics
JAPAN

say ‘Abenomics’ is a failure and not working,
but I have not heard one concrete idea what
to do instead. . . . Are our economic policies
mistaken, or correct? Is there another option?
This is the only way to end deflation and revive
the economy.” He also defended his policies and
their impact by saying, “Job conditions have
improved, wages are starting to rise, and the
virtuous cycle in the economy is finally begin-
ning to move. We can’t afford to let go of this
chance to end 15 years of deflation. There can
be no going back to those years of darkness and
disarray.” He also said that he will promote new
stimulus for consumer spending.5
Abe’s decision follows disappointing eco-
nomic performance, culminating in two
consecutive quarters of declining GDP. Critics
might say that postponing the next tax increase
will hurt confidence in the country’s ability to
manage its finances. Indeed, the prime minis-
ter’s decision was followed by a reduction in the
country’s bond rating. The multistage increase
in the national sales tax is meant to address
the long-term fiscal deficit that Japan faces as a
result of an aging population. Japan already has
a very high level of sovereign debt relative to
GDP. Japan now has a bond rating lower than
that of neighboring China or South Korea.
A bond rating is meant to be information
that investors can use to assess risk and assign
pricing. Yet in the case of large sovereign debt-
ors such as Japan, bond ratings do not provide
any information that the public doesn’t already
possess. As such, these ratings are usually
ignored. Indeed, even with a low rating, Japan
has some of the lowest bond yields in the world.
This reflects several factors: very low inflation,
a high rate of savings, the fact that most of the
debt is held domestically, and confidence that
the country’s ability to print money removes
risk of default. Indeed, the central bank is in the
process of a massive purchase of government
bonds as part of its program of quantitative
easing. As such, the central bank is actually
reducing the risk of default. Moreover, delaying
the tax increase could actually boost economic
growth and inflation, thereby reducing the
debt-to-GDP ratio. This is what the prime min-
ister is now gambling on. However, Abe said
that, after 18 months, the tax will go up, and
there will be no second delay. Thus he is giving
himself a rather narrow window in which to get
the economy moving.
Immediately following the ratings down-
grade, Japanese bond yields declined to a
five-year low, and equity prices increased to a
six-year high. Evidently investors didn’t get the
memo from Moody’s. If Abe is to boost long-
term growth, he will need to become more
aggressive on the third arrow of Abenomics,
deregulation, and remove those regulations
that stymie productivity and innovation.
Completion of the Trans-Pacific Partnership,
a free-trade agreement among Pacific Rim
nations, would compel Japan to deregulate
several industries.
Endnotes
1. Statistics Bureau, “Economic and financial data for Japan,” Ministry of Internal Affairs and Communications, Japan, http://www.stat.go.jp/english/19.htm, accessed December 11, 2014.
2. Markit Economics, “Markit/JMMA Japan Manufacturing PMI,” December 1, 2014, http://www.markiteconomics.com/Survey/PressRelease.mvc/8d624f6683ba4e119b6a525e6e8b56fb.
3. Statistics Bureau, “Japan October 2014, Ku-area of Tokyo November 2014 (preliminary),” Ministry of Internal Affairs and Communications, Japan, November 28, 2014,
http://www.stat.go.jp/english/data/cpi/1581.htm.
4. Government Pension Investment Fund, “Adoption of new policy asset mix,” http://www.gpif.go.jp/en/fund/pdf/adoption_of_new_policy_asset_mix.pdf, accessed December 12, 2014.
5. Toko Sekiguchi and George Nishiyama, “Japan Prime Minister Shinzo Abe calls snap election,” Wall Street Journal, November 18, 2014,
http://www.wsj.com/articles/japan-prime-minister-shinzo-abe-announces-election-1416307086.
JAPAN

RUSSIA’S problems continue to multiply as sanctions
imposed by the United States and Europe persist. The
Russian economy is in a state of stagnation, with a reces-
sion in 2015 all too likely.1
Net capital outflow more than
doubled in 2014 to an estimated $128 billion, which is the
highest level since the financial crisis in 2008.2
The ruble
has weakened dramatically, stoking inflation and leading to
high interest rates that are corrosive to business investment
and consumer confidence. Adding to this gloomy list of
problems is the sharply declining price of crude oil, which
is critical to Russia given its dependence on hydrocarbon
exports as a source of revenue. Of course, Russia sits on
a stockpile of international reserves, but this too is being
depleted due to decreasing energy revenues, rising assis-
tance to Russian companies, and the Bank of Russia’s efforts
to cushion the ruble’s fall.
The ruble declines and
interest rates increase
The ruble has depreciated more than 40 percent against
the dollar since the beginning of 2014 (as of December
19, 2014). This slide has cost the Bank of Russia (BoR) in
excess of 90 billion dollars of gold and foreign currency
RUSSIA
Teetering on the edge of recession
By Lester Gunnion
The ruble has weakened dramatically, stoking inflation
and leading to high interest rates that are corrosive to business
investment and consumer confidence.

reserves in its efforts to defend the currency.3
In November, two months ahead of schedule,
the BoR announced a shift to an inflation-tar-
geting regime, away from frequent intervention
in the foreign exchange market.4
The primary
reason for this shift in monetary policy is that
Russia cannot sustain spending billions of dol-
lars’ worth of reserves to defend the ruble from
further depreciation.5
In a desperate attempt to
arrest the ruble’s fall, the BoR raised the key rate
by 750 basis points, in December, to 17.0 per-
cent, and also eased regulations on the banking
system. But the ruble remains weak and a weak
ruble leads to rising prices. Inflation is well
above the BoR’s medium-term target of 4 per-
cent. Consumer prices climbed 9.1 percent in
November from a year ago, the fastest rate since
June 2011. Russia’s tit-for-tat countersanctions
on food imports from Europe have done little
to help the situation. Ironically, the BoR stresses
price stability as one of the key conditions for
long-term reform, seeking to arrest inflation so
that rates can eventually be lowered to encour-
age borrowing and investment. However, infla-
tion is unlikely to decline in the near term as
capital continues to flow out of Russia and the
ruble stays weak. The BoR expects net capital
outflow to be $99 billion in 2015,6
and inflation
could touch double digits in the first quarter of
2015.7
Investment, too, is unlikely to improve as
Russia’s companies face increasing debt burdens
on foreign loans.
Russian companies struggle
to refinance themselves
External corporate borrowing in Russia
peaked at almost $660 billion as of July 2014, up
from $100 billion a decade ago.8
With doors to
Western markets now firmly shut, large compa-
nies under sanctions are turning to the govern-
ment for funds to meet their debt obligations.
Meeting the demands of companies seeking to
roll over debt led Russia to draw on its sover-
eign wealth funds. The National Wealth Fund,
worth $83 billion, was originally set up for the
purpose of long-term pension payments. In
2013, though opposed by the finance ministry,
President Putin announced that 60 percent of
the National Wealth Fund (up from 40 percent)
would be used to fund large-scale investment
RUSSIA

Source: Bloomberg, December 2014.
Figure 1. Ruble against the US dollar and the euro
0.011
0.013
0.015
0.017
0.019
0.021
0.014
0.016
0.018
0.02
0.022
0.024
0.026
0.028
0.03
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
RUB/USD RUB/EUR(RHS)
Figure 2. Inflation and key components (%)
0
2
4
6
8
10
12
14
Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14
Headline inflation Core inflation Food inflation
With doors to Western markets now firmly shut, large
companies under sanctions are turning to the government for
funds to meet their debt obligations.
RUSSIA

projects. Currently, the fund is being accessed
to bail out Russia’s beleaguered banks. In fact,
demands for government assistance exceed
the total value of the National Wealth Fund.
Russian companies need to refinance an
estimated $130 billion by the end of 2015.9
Companies placed under sanctions account for
60 percent of this debt.10
Interestingly, even though the United States’
and Europe’s sanctions were placed on large
banks and oil companies, smaller Russian
companies that are not under sanctions have
also been paying the price. Western banks and
financial institutions are refusing to finance
even those Russian companies that do not fall
under the purview of the sanctions so as to stay
clear of potential risks. While large compa-
nies with ties to the Kremlin will find ways to
weather the storm, Russia’s small and medium-
sized enterprises could be heading for default.
According to UralSib Capital, there may be as
many as 10 corporate defaults by the end of
March 2015.11
While Russia’s reserves might be
large enough to address shortfalls in the near
term, the rate at which the country’s reserves
are being depleted is a cause for concern.
RUSSIA

Russia’s usable funds are shrinking
Russia went through almost $100 billion of reserves in the first 11
months of 2014.12
Even though its total foreign exchange and gold reserves
stand above $400 billion, the proportion of Russia’s funds that are available
for short-term financing needs is a matter of debate. In November 2014,
Bloomberg estimated that Russia’s usable currency reserves stand at $244.5
billion.13
According to Standard and Poor’s, Russia’s usable reserves will
shrink from eight months of imports in 2014 to four months of imports
in 2017.14
Not surprisingly, S&P cut Russia’s sovereign debt rating in April
2014 to BBB–, the lowest investment grade rating, and affirmed that rat-
ing in October.15
Moody’s followed suit in October, downgrading Russia’s
rating to Baa2; it cited subdued medium-term growth prospects, ongoing
erosion of the country’s foreign-exchange buffers, restricted international
market access, and low oil prices as reasons for the downgrade.16
The combination of these reasons should sound alarm bells for the
Russian economy. However, the immediate concern is the sharp decline
in the price of crude oil, which is arguably the biggest blow to Russia’s
economic prospects.
Falling oil prices complicate matters for Russia
The tumbling price of crude oil made Russia’s slide a whole lot more
slippery. The price of crude oil plummeted more than 40 percent between
June and December. Brent, the benchmark that traders examine, is cur-
rently priced at about $60 a barrel (December 19, 2014), having declined
from above $110 a barrel in June 2014. This is of particular significance
to the Russian economy. In 2013, the sale of crude oil, petroleum prod-
ucts, and natural gas accounted for 68 percent of Russia’s total export
revenue.17
It is also important to note that Russia earned nearly four times
as much revenue from the export of crude oil and petroleum products as
it did from natural gas.18
Oil revenues account for close to 50 percent of
Figure 3. Russian foreign exchange and gold reserves ($ billion)
400
425
450
475
500
525
550
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14
RUSSIA

Figure 4. Oil price movement since January 2014 (dated Brent, $ per barrel)
55
65
75
85
95
105
115
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
Source: Deutsche Bank and IMF.
Figure 5. Oil price needed to balance budgets ($ per barrel)
Brent $60 (December 16 )
0 20 40 60 80 100 120 140 160 180 200
Libya
Iran
Algeria
Nigeria
Venezuela
Russia
Saudi Arabia
Iraq
UAE
Kuwait
Qatar
The combination of shrinking usable reserves and rating downgrades
should sound alarm bells for the Russian economy. However, the
immediate concern is the sharp decline in the price of crude oil,
which is arguably the biggest blow to Russia’s economic prospects.
RUSSIA

Russia’s budget.19
In fact, the budget for 2015
balances only if oil averages about $100 a bar-
rel. At present though, the price of oil is far
below that mark and could continue to drop.20
The Organization of Petroleum Exporting
Countries’ recent decision not to cut crude
oil production to prop up prices is further
bad news for Russia. In addition, Russian oil
production is already projected to decline
(prior to sanctions),21
and Russian oil compa-
nies have been exploring new geographies and
new technologies for sourcing oil. These efforts,
however, depend on Western technology—
something that is no longer accessible. Further
highlighting Russia’s strained relationship with
the West is the recent decision to abandon the
South Stream gas pipeline to Europe in favor of
an alternative pipeline to Turkey.22
All of these developments place the Russian
energy industry in a precarious situation and
push the economy closer to the brink. A recent
$400 billion deal to supply gas to China over
a 30-year period shows a clear eastward shift
by Russia. But turning to China is unlikely to
resolve Russia’s current economic conundrum,
especially while the Chinese economy contin-
ues to show signs of slowing down.
Russia cannot thrive in isolation
Russia is becoming increasingly isolated
from the world stage. Having already been sus-
pended from the G8, Russia finds itself on the
fringes of the G20. Now, more than at any time
during the past year, Russia needs to reengage
with the West. The country desperately needs
sanctions to be lifted and business to resume
as usual. This will happen only if there is a
de-escalation of tension in eastern Ukraine.
Instead, however, tensions rose in November,
resulting in additional sanctions being imposed
by the United States in December.23
In this
grave situation, Russia’s long-term underinvest-
ment in the non-energy sector is becoming all
the more apparent. Consumer spending, which
was a key driver of growth in recent years, is
bound to decline as stagflation makes Russian
households progressively worse off. Russia can
turn its attention to these pressing issues only
when policymakers take steps to reintegrate
with the global economy. If the necessary steps
are not taken, Russia’s isolation will lead the
economy to new lows.
RUSSIA

Endnotes
1. BBC, “Russia warns of recession in 2015,” December 2,
2014, http://www.bbc.com/news/business-30288739.
2. Jason Bush, “Russian c.bank cuts growth forecasts,
sees sanctions until 2017,” Reuters, November 10,
2014, http://www.reuters.com/article/2014/11/10/
russia-cenbank-strategy-idUSL6N0T01E620141110.
3. Ksenia Galouchko, “Ruble rally turns to rout as fortunes
tied to sinking oil,” Bloomberg Businessweek, December 1,
2014, http://www.businessweek.com/news/2014-11-30/
ruble-rally-turns-to-rout-as-fortunes-tied-to-sinking-oil.
4. Ibid.
5. Anna Andrianova and Vladimir Kuznetsov, “Russia
reserves decline $10.5 billion, most since May,” November
6, 2014, http://www.bloomberg.com/news/2014-11-06/
russia-reserves-fall-7-9-billion-biggest-drop-since-may.
html.
6. Bush, “Russian c.bank cuts growth forecasts, sees sanc-
tions until 2017.”
7. Andrey Ostroukh, “Russia consumer inflation likely to
reach double digits in early 2015,” Wall Street Journal,
December 1, 2014, http://online.wsj.com/articles/
russia-consumer-inflation-likely-to-reach-double-digits-
in-early-2015-1417426155.
8. Neil Buckley, “Russian companies’ struggle to finance
themselves will persist,” Financial Times, November
12, 2014, http://www.ft.com/intl/cms/s/0/a94b-
95fc-6a82-11e4-8fca-00144feabdc0.html#axzz3Kl7oAGIj.
9. Ibid.
10. Ibid.
11. Ksenia Galouchko, “Russia’s small-enough-to-fail starting
to default,” Bloomberg, November 26, 2014, http://www.
bloomberg.com/news/2014-11-25/sanctions-squeezing-
small-enough-to-fail-issuers-russia-credit.html.
12. Andrianova and Kuznetsov, “Russia Reserves Decline
$10.5 Billion, Most Since May.”
13. Ibid.
14. Ibid.
15. Reuters, “S&P affirms Russia’s sovereign rat-
ing a notch above junk,” October 24, 2014,
http://www.reuters.com/article/2014/10/24/
ukraine-crisis-russia-ratings-idUSL6N0SJ4YK20141024.
16. Moody’s Investors Service, “Moody’s downgrades Russia’s
ratings to Baa2; outlook negative,” October 17, 2014,
https://www.moodys.com/research/Moodys-Downgrades-
Russias-Ratings-to-Baa2-Outlook-Negative--PR_310632.
17. US Energy Information Administration, “Oil and natural
gas sales accounted for 68% of Russia’s total export
revenues in 2013,” July 23, 2014, http://www.eia.gov/
todayinenergy/detail.cfm?id=17231.
18. Ibid.
19. Ibid.
20. Olga Tanas, “Russia sees recession next year if oil price
falls to $60,” November 18, 2014, http://www.bloomberg.
com/news/2014-11-18/russia-sees-recession-next-year-if-
oil-falls-to-60.html.
21. Daniel J. Graeber, “Russian oil production expected
to drop,” UPI, July 7, 2014, http://www.upi.com/Busi-
ness_News/Energy-Resources/2014/07/07/Russian-oil-
production-expected-to-drop/4391404741593/.
22. BBC, “Russia drops South Stream gas pipeline plan”,
December 1, 2014, http://www.bbc.com/news/
world-europe-30283571.
23. Natalia Zinets and Vladimir Soldatkin,
“Ukraine accuses Russia of sending in tanks,
escalating crisis,” Reuters, November 7, 2014,
http://www.reuters.com/article/2014/11/07/
us-ukraine-crisis-military-idUSKBN0IR11020141107.
RUSSIA

IT’S been six months since Prime Minister Modi and his
government took charge of the Indian economy after
the Bharatiya Janata Party (BJP) and its alliances swept to
power in a landslide election. Since then, the government
has enacted a string of incremental reforms and announced
numerous policies aimed at reviving the economy. The
economy too has shown signs of a turnaround. GDP grew
at a healthy rate of 5.5 percent in the first half of FY 2014–
15, while economic imbalances shrank. A decline in infla-
tion and current account imbalance due to adept monetary
policies, together with some serious efforts to consolidate
fiscal balance, have boosted confidence. Business sentiment
is surging up as new government initiatives, new foreign
policies, and an improved growth outlook relative to other
leading emerging economies continue to impress global
investors. India’s position is better than that of commodity-
centric nations like Brazil, Russia, and South Africa. And
although China has often fared economically better than
India, China has lately been struggling because
of a slowing economy and financial instability.
However, questions about addressing more
fundamental structural bottlenecks, as well
as doubts about the successful implementa-
tion of reforms, continue to linger in investors’
minds. Complex regulatory procedures and a
lack of transparency and coordination across
all levels of government continue to exist. The
manufacturing sector, which can significantly
contribute to employment, income, and exports,
needs to be overhauled to address structural
deficiencies, complex labor laws, and inefficient
policy regulations.
To put the economy on a sustainable
and inclusive growth path, it is important to
make the bureaucracy lay a clear roadmap to
ensure that reforms on paper are effectively
INDIA
Getting ready, holding steady . . .
just waiting to GO!
By Dr. Rumki Majumdar

To put the economy on a sustainable and inclusive
growth path, it is important to make the bureaucracy lay
a clear roadmap to ensure that reforms on paper are
effectively implemented.
implemented. In the past six months,
numerous initiatives have aimed at
improving governance and increasing
administrative efficiency. The government
has repeatedly emphasized the develop-
ment of infrastructure and the need to
boost the manufacturing sector. However,
the government has had only limited
success in implementing these initia-
tives. A number of areas fall under the
responsibility of India’s state governments,
which differ in their attitudes, political
will, and administrative efficiency. Thus,
it will remain a challenge to enact such
initiatives effectively, despite the center’s
best intentions.
That said, it is also true that it takes
time to turn around an economy that has
been suffering from myriad economic
maladies over the past few years. Once the
economy reaches a minimum threshold
level, it can take off at a sustainable pace.
Thus, it is very important that the path to
sustainable growth is laid out with proper atten-
tion so that once the economy picks up, it can
experience a hurdle-free run thereafter.
Laying the groundwork with
initiatives and reforms
The prime minister has announced a num-
ber of reforms and initiatives in the past few
months. Some major reforms, such as labor
reforms, fuel price reforms, and reforms in the
coal sector, as well as initiatives such as the
“Make in India” campaign that have launched
in the last couple of months, can be game-
changers in the long run.
Reforms
Labor reforms: In August, the government
introduced a few strategic changes to the Labor
Laws Act of 1988, the Factories Act of 1948, and
the Apprenticeship Act of 1961. The intent of
these reforms was to reduce paperwork, lower
INDIA

some transaction costs for firms, and limit
intrusions by the state. In October, the prime
minister launched a single-window labor com-
pliance process for industries on labor-related
issues and friendlier provident fund (PF) facili-
ties. He also unveiled a new inspection scheme
that is expected to curb the element of discre-
tion among labor inspectors—often termed
“Inspector Raj.” In addition, health insurance
and new skill development and apprenticeship
schemes were revamped.
These measures are expected to streamline
rules and regulations to create a better busi-
ness environment. However, when compared
to the reforms that India really needs, these
measures are relatively modest. Stringent
labor laws such as the Industrial Dispute Act,
which prevents firms with 100 employees or
more from firing workers without govern-
ment permission, often discourage businesses
from promoting large-scale production. As a
result, the cost of production and productivity
growth suffer, while businesses prefer to grow
in capital-intensive sectors. Again, successful
and effective implementation of these laws will
require a clear roadmap.
Albeit modest, these measures signal that
the government recognizes the importance
of changing existing labor laws and simplify-
ing procedures. In order to boost productivity
and competitiveness, India must get rid of old
regulations and procedures that inhibit business
growth, but at a balanced pace. Therefore, these
measures should be seen as a stepping stone for
bigger changes in the future.
Fuel price reforms: The new government
seized the opportunity presented by falling
international oil prices by deregulating die-
sel’s retail price, which will reflect movement
in global oil prices going forward. A cut in
diesel prices was always in the cards; however,
the move to deregulate the prices, which has
been a politically sensitive issue and directly
impacts the cost of daily living, is a positive
development. Of course, the hard decision
to deregulate gas prices was initiated by the
previous government, but diesel prices were
not deregulated. Instead, diesel subsidies were
reduced over 16 months. The recent fuel reform
also included raising gas prices, although they
were raised less than the amount recommended
by the Rangarajan Committee, and the increase
was less than market expectations.
The deregulation of diesel prices now creates
opportunities for private companies to reenter
the fuel retail market. Similarly, the increase in
gas prices from current levels will likely attract
investment into sectors such as deep-sea explo-
ration. However, these moves are not enough to
spark much enthusiasm among private inves-
tors. The decision to deregulate diesel prices
was made easy because of falling international
oil prices. What happens when the falling oil
price trend reverses? Can the government
afford to raise prices at a pace faster than was
done previously, if the situation warrants it? The
uncertainty generated by this policy reversal
will weigh on investment decisions by private
investors, who have already had to mothball
their operations once due to a similar policy
reversal. If government controls come back,
these private companies will fail to compete
with the subsidized price of state retailers.
Roadmap for coal sector reforms: The
finance minister signaled that the government
may allow commercial use of mines in future.
The government also indicated that it may soon
The deregulation of diesel prices now creates opportunities
for private companies to reenter the fuel retail market.
INDIA

issue an ordinance to facilitate an auction of
the coal blocks that was recently cancelled by
India’s Supreme Court. Mines will likely be put
on e-auction for the first time, and the process
of reallocation will likely be completed within
3 to 4 months. Renewing work in these mines
could re-employ thousands of laborers and free
up bank capital. However, the government did
not announce any big-ticket reforms to end the
monopoly of Coal India, which has been unable
to ramp up production quickly.
All these reforms indicate that the govern-
ment feels some urgency to usher in some
much-needed reforms to kick-start the economy.
The parliament convened on November 24 for
its month-long winter session, with one of the
government’s main objectives being to imple-
ment a number of pending economic reforms.
The government continued to reform through
ordinance and amended the new land acquisi-
tion act. It also tabled a bill to establish a long-
awaited national goods and services tax (GST).
Initiatives
Make in India: The prime minister launched
the “Make in India” program to attract invest-
ment and encourage innovation by creating a
world-class manufacturing infrastructure in
India. The program’s intent is to make doing
business in India easier, more transparent, and
credit-friendly. The government has identified
25 sectors and industries in which India has
the potential of becoming a world leader. New
de-licensing and deregulation measures have
been introduced.
Modi has been proactively canvassing
support for this program. In his recent trips
to the United States and Australia, he invited
big corporations, government authorities, and
the Indian community settled abroad to invest
in India. The campaign has already attracted
the attention of many foreign companies and
nations. If India succeeds in attracting invest-
ment and multinational manufacturing facto-
ries, it could create immense job opportunities
as well as provide a livelihood for people in
rural areas. According to the “Make in India”
website, this initiative offers a wide gamut
of investment opportunities, from automo-
biles to biotechnology to renewable energy,
which could benefit small- and medium-scale
enterprises immensely.
From highways to i-ways: The govern-
ment is actively initiating policies for building
quality infrastructure, with the aim of build-
ing smart cities, industrial corridors, bullet
trains, highways, and a strong digital network
in rural areas. In all his recent meetings with
the international leaders, Modi had a strong
domestic agenda of encouraging investment
into the country, with an emphasis on foreign
participation in India’s infrastructure develop-
ment. Recently, India and the United States
signed a memorandum of understanding for
infrastructure development, which will likely
facilitate US industry participation in infra-
structure projects in India. Prior to that, Modi
invited China, Japan, and Australia to invest
in mega infrastructure projects. In his visits
abroad, Modi met a great many top corpo-
rates, executives, and non-resident Indians to
reinvigorate their interest in investing in the
government’s new initiatives related to smart
cities, infrastructure, digitalization, education,
and health.
In addition, Modi has also proposed
a “Digital India” initiative. The center has
approved a blueprint for the project, which is
expected to attract investments of Rs 1,00,000
crore over the next three to four years.
Technology giants across India and abroad
are eyeing the project. Sectors that may see
an influx of technology include agriculture,
manufacturing, health care, infrastructure, rail-
ways, retail, business and financial investments,
and education. The government has already
begun to digitize its own departments with
the large-scale digitization of all government
records. It has roped in multinational technol-
ogy companies to target digitization across
government functions.
INDIA

However, the success of these initiatives
hinges on several factors. While implementing
these initiatives with minimum government
involvement and maximum efficiency remains
a challenge, the availability of uninterrupted
resources at competitive rates is another fac-
tor that deserves serious attention. Initiatives
are often delayed or discontinued due to lack
of resource availability at the right time, be it
access to electricity or credit funding. Poor
management and corruption further dam-
age the chances of successfully implementing
these initiatives.
The economy is stabilizing
and on the path to recovery
According to the latest GDP release, the
economy grew 5.3 percent year over year1
in
Q2 FY 2014–15 (see figure 1), thanks to growth
in services and stronger-than-expected results
in farming after a bad monsoon. However,
poor performance in the manufacturing sector
slowed growth. Growth in real private con-
sumption expenditure remained steady at 5.8
percent in Q2. Although growth in government
consumption expenditure fell 13.1 percent
relative to the previous quarter, its year-over-
year growth of 10.1 percent helped boost GDP
growth. The real worry has been the poor per-
formance of exports and private investments,
which contracted by 1.6 percent and 0.3 per-
cent, respectively.
Evidently, the pick-up in project clearances
and reform initiatives by the government, and
the improved business sentiment of the last
six months, have failed to show up in the GDP
numbers. Negative growth in capital formation
in Q2 is an indicator that poor global demand,
limited improvement in capacity utilization
levels, and uncertainty over the implementation
of reforms are weighing on investment deci-
sions. Businesses are looking forward to a more
predictable taxation system, faster regulatory
clearances, and industry-friendly land acquisi-
tion and labor laws before they commit to long-
term investments.
Falling prices have brought some relief to
both policymakers and to the populace at large.
Declining consistently since May 2014, the
wholesale price index remained unchanged in
November compared to the same period a year
ago. This is the slowest increase in the past 5
years (figure 2). Consistently falling food prices
along with declining international fuel prices
have helped contain inflation. Several factors
have contributed to the fall in food prices:
the recovery after the monsoon, government
actions such as lower minimum support prices
and more proactive stock sales, and benign
global food prices. However, structural factors
such as having the right infrastructure, proper
storage, and better transportation capabilities
still need to be attended to. Unless these factors,
which have resulted in higher food prices in
the last decade, are addressed, the recent fall in
food prices may be short-lived. As is evident,
the expectation of inflation continues to remain
high, which implies that there remains signifi-
cant upside risks to inflation.
For some time, the RBI has been under
immense pressure from both industry and
policymakers to cut rates as inflation rates ease
and economic performance remains modest.
However, as the RBI governor has pointed out,
despite the slowdown, there are significant
upside risks to inflation. The recent easing is
due to transitory factors and administered price
corrections; weaker-than-anticipated agricul-
tural production in the coming months and
a possible rise in energy prices may alter the
benign outlook. The RBI governor has decided
to keep key policy rates in the RBI’s recent
monetary policy unchanged. However, he has
also hinted that if inflation continues to remain
steady, and fiscal developments are encourag-
ing, there might be a change in the RBI’s mon-
etary policy stance early next year, even outside
the policy review cycle.
Business sentiment is improving fast, as sug-
gested by the 2014 Manufacturing Leadership
Survey, which was conducted jointly by an
industry lobby that included the Confederation
INDIA

Source: CSO India, Ministry of Statistics and Programme Implementation, December 2014.
Figure 2. The inflation monster seems to have been tamed
(year over year, percentage)
CPI-IW WPI
0
2
4
6
8
10
12
Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14
Note: Q1 refers to fiscal year beginning in April and ending in March of the following year.
Sources: Reserve Bank of India, September 2014; Press Information Bureau, August 2014;
Bloomberg, November 2014.
Figure 1. A healthy growth so far (year over year, percentage)
4.0
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
-3
0
3
6
9
12
15
Q1 2013–14 Q2 2013–14 Q3 2013–14 Q4 2013–14 Q1 2014–15 Q2 2014–15
Private final consumption expenditure Government final consumption expenditure
Gross fixed capital formation Real GDP (at factor cost, RHS)
According to the latest GDP release, the economy grew 5.3 percent year over
year in Q2 FY 2014–15 (see figure 1), thanks to growth in services and stronger-
than-expected results in farming after a bad monsoon.
INDIA

of Indian Industry (CII) and the Boston Consulting Group (BCG).2
The
survey, of over 100 heads of Indian corporations, was performed to gauge
the pulse of industry leaders on India’s current economic situation and the
future prospects for the Indian manufacturing sector. The survey shows
a distinct rise in confidence, with 85 percent of those surveyed expecting
manufacturing growth to rise between 5 percent and 10 percent in the next
five years (compared with 3.4 percent in the past five years). According to
the RBI’s survey,3
too, the business expectation index (BEI) has been rising
sharply in the past few quarters. The industrial outlook survey suggests
that perceptions of the overall business, production, and financial situation
in India are as good as they were in 2010 (figure 3).
However, a few economic indicators suggest that the economy is not out
of the woods yet. Factors such as the pace and quality of fiscal consolida-
tion, high inflation, poor manufacturing sector performance, poor export
performance, and the banking sector’s deteriorating asset quality pose
downside risks to the economy. So far, fiscal consolidation has taken place
mainly by curbing government expenses rather than by increasing reve-
nues. Tax collection remains poor, while the pace of disinvestment remains
slow. It will be important for the government to find alternative sources of
revenue if fiscal balance is to be achieved without impacting growth. While
the current account deficit has narrowed since 2013 due to a tight mone-
tary policy, restrictions on gold imports, and a fall in crude imports, export
growth has remained weak in last few months.
India’s currency has weakened against the US dollar in the last month,
primarily due to the spillover effect of the strengthening US dollar itself as
well as transient factors such as the sudden rise in demand for the US dol-
lar to pay for imports. That said, the Indian currency has firmed against the
euro, pound, and yen, while the real effective exchange rate suggests that
the domestic currency is appreciating while its peers are deteriorating.
The index of industrial production (IIP) continues to remain weak, as
the manufacturing sector remains highly vulnerable. The growth in capital
*Note: The difference of percentage of the respondents reporting optimism and that reporting
pessimism. The range is -100 to 100. Any value greater than zero indicates expansion/optimism and
any value less than zero indicates contraction/pessimism i.e., NR = (I – D); where, I is the percentage
response of ‘Increase/optimism’, and D is the percentage response of ‘Decrease/pessimism’ and E is
the percentage response as ‘no change/Equal’; I+D+E=100.
Source: Reserve Bank of India, January 2014.
Figure 3. Business sentiment is improving signiﬁcantly
BEI (RHS) Overall business situation* Financial situation* Production*
100
105
110
115
120
125
130
0
5
10
15
20
25
30
35
40
45
50
Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014
Index Index
Expected for Q4
INDIA

goods has been on an unsustainable trajectory,
while contraction in the consumer durable
goods sector indicates a poor outlook for con-
sumer demand. The auto sector has performed
below expectations thus far in 2014 as domestic
demand failed to increase sales, especially in
the passenger vehicle market. Poor exports, too,
contributed to a weak IIP.
Many public sector banks are facing huge
outstanding bad loans, mostly made to sev-
eral large, influential borrowers. The recovery
process has been poor because of legal loop-
holes and big corporations’ lobbying power
over the financial system. This has resulted in
an increase in stressed assets (bad loans and
restructured assets), which now account for
10 percent of total assets. The corporate debt
restructuring mechanism, under which inter-
est rates are lowered and tenors extended, is
being abused in some cases, with promoters
not bringing in equity. The RBI governor has
been pushing for financial sector reforms and is
vigilant over credit conditions.
Promising growth in
the long term
The dynamics in India are changing fast, and
even though the impact on the economy has
been limited to date, the government’s efforts to
revive the economy are improving the long-
term outlook. This is evident from the recent
upward revision of India’s growth forecast
for FY 2015–16 by the IMF4
and the OECD,5
as well as an outlook upgrade by some of the
rating agencies. The prime minister’s strong
leadership, the recent reforms and initiatives,
and the RBI’s prudent monetary policies are
building up confidence among investors. While
credit conditions are expected to remain tight
for some time, improved business sentiment
may drive up investment, which will likely be
the growth engine in coming quarters. As said
earlier, it takes time for an economy to reach a
threshold where it can take off, and there are
clear signs that energy is gradually building up.
Endnotes
1. All growth rates are measured year over year unless otherwise specified.
2. Shantanu Nandan Sharma, “Goodbye to Jugaad: How Modi government plans to roll out ‘Make in India’ to revive manufacturing,” Economic Times, November 16, 2014,
http://articles.economictimes.indiatimes.com/2014-11-16/news/56137367_1_india-inc-indian-manufacturing-sector-ceos.
3. Reserve Bank of India (2014), Industrial Outlook Survey Q2: 2014–15 (Round 67), September 30, 2014, http://www.rbi.org.in/scripts/PublicationsView.aspx?id=16051.
4. IMF, World Economic Outlook, October 2014, http://www.imf.org/external/pubs/ft/weo/2014/02/pdf/text.pdf.
5. OECD, “India: Economic forecast summary (November 2014),” http://www.oecd.org/eco/outlook/india-economic-forecast-summary.htm, accessed December 9, 2014.
Table 1. India: Economic forecast summary
(November 2014)
2014–15* (%) 2015–16 (%)
RBI 5.5 (+0.2) 6.5 (+0.3)
IMF 5.6 (0) 6.4 (+0.2)
OECD 5.4 (-0.3) 6.4 (+0.5)
EIU 6.0 (-0.4) 6.5 (-0.1)
* The figures in the bracket refer to the revisions since the last
forecasts.
Sources: Reserve Bank of India; International Monetary Fund;
Bloomberg; Economic Intelligence Unit, November revisions.
INDIA

ON November 27, 2014 Brazilian President Dilma
Rousseff unveiled a new economic team for her sec-
ond term in office, which starts in January 2015. Joaquim
Levy, a banker and former treasury secretary, will be
Brazil’s next finance minister, while former deputy finance
minister Nelson Barbosa will take over as the country’s new
planning minister. Rousseff retained Alexandre Tombini
as the central bank governor. Markets have cheered Levy’s
appointment, given his credentials and views on fiscal
prudence. He had served under Rousseff’s predecessor,
Lula, in 2003–06 as treasury secretary, helping the Brazilian
economy overcome its plunging currency and set the stage
for strong medium-term growth. Yet, again, the going is
not likely to be easy for Levy. With growth moribund and
rating agencies breathing down his neck, he will be in for a
rough ride. He will also face strong opposition as he tries to
steer a course of fiscal consolidation.
A tall order for Levy and friends
Levy’s immediate task will be to get Brazil’s fiscal house
in order, the better to keep its investment grade rating. In
March 2014, S&P downgraded Brazil’s sovereign rating to
only one level above junk. Then, in September, Moody’s
lowered its outlook to negative.
In the near term, Levy will have to address two key
concerns: a high budget deficit and eroding transparency.
The deficit has been rising in recent years due to high
BRAZIL
Watch and wait
By Akrur Barua
In the near term, Levy will have to address two key concerns:
a high budget deficit and eroding transparency.

welfare spending and slowing revenues as a
result of weak GDP growth. Even the primary
balance, which excludes interest payments, is
under threat. Recently, the government sought
legislative approval to lower its primary surplus
target for 2014 to just 0.19 percent of GDP from
an earlier target of 1.9 percent. However, even
this revised target might be optimistic with the
primary balance in deficit for the year until
October. Consequently, for the first time in two
decades, the government could end up with an
annual primary deficit in 2014. The fiscal defi-
cit, which includes interest payments, has fared
even worse. It widened to 5.01 percent of GDP
in the 12 months to October from a little more
than 3.0 percent in 2013.
Levy and Barbosa are aware of the fiscal
problem. They announced their intention of
pushing up the primary surplus to 1.2 per-
cent of GDP this year, and then increasing it
further to at least 2.0 percent in 2016 and 2017.
However, they have not announced a road-
map so far. On the expenditure side, it will be
difficult for them to stem welfare spending,
given that Rousseff had won the election on a
pledge to continue such spending. Any changes
to the spending regime will also come in for
opposition from some members of the ruling
party. On the revenue side, hiking taxes is not
an option, given that Brazilians are already up
against a complicated tax regime. According
to the World Bank’s “Doing Business” rank-
ings, Brazil ranks a dismal 159th among 189
countries in the ease of paying taxes.1
While
reforming its tax system is essential to enhanc-
ing Brazil’s economic competitiveness, it will
not be a short-term priority for the new team.
As a first step, Levy is likely to remove tax
breaks to spruce up finances before going in for
tougher reforms.
The new team will also have to tackle
decreasing transparency in public finances,
including transfers to major public sector banks
for on-lending. This has been a key concern for
investors and rating agencies as they struggle
to calculate the extent of the government’s debt
burden. Given such transfers and the use of
reserve funds to plug budget deficits, econo-
mists nowadays increasingly focus on Brazil’s
gross debt rather than net debt. Worryingly, the
former as a share of GDP has increased during
BRAZIL

Levy and Barbosa are aware of the fiscal problem. They announced their intention
of pushing up the primary surplus to 1.2 percent of GDP in 2015, and
then further to at least 2.0 percent in 2016 and 2017.
Source: Oxford Economics, December 2014.
Figure 1. Current account and government balance (percentage of GDP)
-6
-5
-4
-3
-2
-1
0
1
2
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Current account Government balance
Source: Oxford Economics, December 2014. *2014 forecasts, Oxford Economics.
Figure 2. Gross government debt: Value and share of GDP
50
55
60
65
70
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
Total debt (BRL billion) Share of GDP (%, right axis)
BRAZIL

Rousseff’s first term in office. In September, gross public debt was 61.7
percent of GDP, up from 56.7 percent in 2013.
Another major task—for both the central bank and the government—
will be to get inflation back on track. Inflation has been above the midpoint
of the central bank’s 2.5–6.5 percent range for the past four years, thereby
denting the institution’s credibility. Arguably, the central bank has fallen
behind the rate curve. Despite 450 basis points’ (bps) worth of rate hikes
since 2013, inflation is still high. The latest hike came in December 2014
when the bank raised the rate by 50 bps to 11.75 percent, the highest in
three years. Fortunately for the central bank, a focus on fiscal prudence by
Levy will aid in the fight against inflation, although any removal of sub-
sidies (especially electricity) could push up prices in the short term. One
important step that the central bank could consider as it tries to restore
credibility is to lower its target range, which at 4 percent is a wide one. Any
such move, however, will come in for scrutiny by the government, which
in recent years has preferred a loose monetary stance to stimulate credit-
driven growth.
The economy came out of recession
in Q3, but barely so
The economy grew 0.1 percent quarter-on-quarter in Q3 2014, just
enough to come out of a recession. Growth was -0.2 percent in Q1 and
-0.6 percent in Q2. In Q3, public expenditure grew 1.3 percent due to the
presidential elections, thereby emerging as a key growth driver. Consumer
spending, which accounts for about two-thirds of the economy, fell 0.3
percent—its worst performance since the end of 2008, when the global
financial crisis hit Brazilian shores. Households have been under pressure,
facing high debt, rising interest rates, and weak economic prospects. The
contribution from net exports was also negative in Q3, with imports out-
pacing exports. Although export growth was positive in Q3 (1.0 percent),
Source: Central Bank of Brazil, December 2014.
Figure 3. Headline and core inflation (year over year, percentage)
5.0
5.5
6.0
6.5
7.0
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
Headline inflation Core inflation
BRAZIL

it was lower than the previous quarter’s 3.0 percent rise. Brazil’s exports
will continue to face pressures due to slowing growth in China (its main
commodity importer) and Argentina. Although a weakening real will
enhance exports competitiveness, it will not be enough to bring in a steady,
sustainable rise in exports.
A rise in investment in Q3 might just be temporary
Apart from public expenditures, investments made a positive con-
tribution to GDP growth in Q3. The segment grew 1.3 percent, the first
expansion in investments since Q2 2013. However, near-term prospects
for investment appear dim due to slow economic growth and a challenging
external environment. Moreover, companies are likely to cut down their
investment plans as corporate profits suffer (as it did in Q3). For example,
the mining giant Vale posted a net loss of about $1.44 billion in Q3 due to
foreign exchange losses on its dollar-denominated debt and a 27 percent
year-over-year fall in sales.2
Mining and commodity-related companies
have been hit hard by the end of the commodities super cycle. For example,
in Q3, Vale’s average sales price for iron ore fell 36 percent year over year
to the lowest level since Q1 2010.3
Not surprisingly, the mood among the
wider businesses community is one of caution. Even though business
confidence, as measured by the Getulio Vargas Foundation (FGV), rose
to a five-month high in November, the figure—at 85.6—is still below the
threshold 100 mark.4
Tough financing conditions for companies
Along with fiscal consolidation, an important medium-term task for
the new economic team will be to shore up investment, which, at about
17 percent of GDP, is far lower than the emerging market average of
23–24 percent. However, getting the funds for investment is a problem.
Domestic savings as a share of GDP in Brazil is low, at 15.4 percent. With
Source: Brazilian Institute of Geography and Statistics, December 2014.
Figure 4. Quarter-on-quarter growth in real GDP and key components
(percentage)
-8
-6
-4
-2
0
2
4
6
8
10
Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014
GDP Household consumption Government consumption
Gross ﬁxed capital formation Exports of goods and services
BRAZIL

Endnotes
1. World Bank, “Doing business: Brazil,” December 2014.
2. Paul Kiernan, “Vale swings to surprise loss,” Wall Street Journal, October 30, 2014.
3. Ibid.
4. Instituto Brasileirdo De Economia, “Press releases: ICI of November 2014,” November 26, 2014.
government borrowing high and households likely to focus on reducing
their debt burden, Brazilian companies will continue to look at foreign
funds. However, a volatile real will not help in the near term. For example,
the real declined by about 12 percent against the US dollar in 2014, thereby
pushing up the cost of raising dollar-denominated debt. And the pressure
on the real will not go away any time soon, especially with the US Federal
Reserve winding down its asset purchases program and looking to raise
interest rates in 2015 from its historic low of 0–0.25 percent. Moreover, the
cost of foreign funds could rise further if there is any negative movement
on Brazil’s sovereign rating.
Long road to the carnival
In such a scenario, it is likely that Brazil’s economy will remain under
pressure for the next few years. The planning ministry recently down-
graded its growth forecast for 2014 to 0.5 percent from its earlier estimate
of 0.9 percent. Even this figure appears optimistic, as both domestic and
external demand is weak. Any fiscal consolidation in the short term will
dent growth further. Also, higher interest rates will dent credit growth
and raise household debt servicing costs. This is likely to weigh on private
spending, with consumer confidence in November declining to its low-
est level since October 2008. Consequently, annual GDP growth in 2014
will be flat, with the economy not likely to grow beyond 1.5 percent this
year. This is a far cry from the heyday of 2003–10, when growth averaged 4
percent a year. It looks like Brazilians will have to wait longer for a return
of the economic carnival.
Figure 5. Brazilian real’s movement against the US dollar and the euro
USD/BRL EUR/BRL (right axis)
2.9
3.0
3.1
3.2
3.3
3.4
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
31-Dec-1331-Jan-1428-Feb-1431-M
ar-1430-Apr-1431-M
ay-1430-Jun-14
31-Jul-1431-Aug-1430-Sep-1431-Oct-1430-Nov-1431-Dec-14
BRAZIL

Economic indices
Source: Bloomberg.
US UK Eurozone Japan
GDP growth rates (percentage, year over year)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Q1
09
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
-15
-10
-5
0
5
10
15
Q1
09
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
GDP growth rates (percentage, year over year)
Brazil China India Russia
Source: Bloomberg.
-2
0
2
4
6
Apr 11 Nov 11 Jun 12 Jan 13 Aug 13 Mar 14 Oct 14
Source: Bloomberg.
Inﬂation rates (percentage, year over year)
US UK Eurozone Japan
-4
0
4
8
12
16
Apr 11 Nov 11 Jun 12 Jan 13 Aug 13 Mar 14 Oct 14
Source: Bloomberg.
Inﬂation rates (percentage, year over year)
Brazil China India Russia
75
80
85
90
95
100
105
1.2
1.3
1.4
1.5
1.6
1.7
1.8
May 11 Nov 11 May 12 Nov 12 May 13 Nov 13 May 14 Nov 14
Source: Bloomberg.
Major currencies vs. the US dollar
GBP/USD Euro/USD USD/Yen (RHS)

Yield curves (as of Oct 07, 2014)*
US Treasury
bonds & notes
UK
gilts
Eurozone govt.
benchmark
Japan
sovereign
Brazil govt.
benchmark
China
sovereign
India govt.
actives
Russia‡
3 months 0.04 0.50 -0.01 -0.05 11.66 3.23 8.28 10.34
1 year 0.12 0.41 -0.01 0.03 12.53 3.15 8.21 10.69
5 years 1.59 1.31 0.14 0.09 11.73 3.43 8.00 10.95
10 years 2.29 1.97 0.74 0.42 11.96 3.56 7.97 10.68
Composite median GDP forecasts (as of Oct 07, 2014)*
US UK Eurozone Japan Brazil China Russia
2014 2.2 3 0.8 0.9 0.25 7.4 0.5
2015 3 2.6 1.2 1 1 7 0.05
2016 2.9 2.3 1.5 1.1 2 6.76 1
Composite median currency forecasts (as of Oct 07, 2014)*
Q1 15 Q2 15 Q3 15 Q4 15 2014 2015 2016
GBP-USD 1.57 1.56 1.56 1.55 1.58 1.55 1.55
Euro-USD 1.23 1.2 1.2 1.18 1.24 1.18 1.17
USD-Yen 117.5 120 121 123 115 123 123.5
USD-Brazilian real 2.55 2.62 2.63 2.65 2.5 2.65 2.7
USD-Chinese yuan 6.1 6.09 6.06 6.02 6.1 6.02 5.9
USD-Indian rupee 62.1 62.4 62.5 62.5 61.81 62.5 62
USD-Russian ruble 47 47.17 46.35 45 43.55 45 45.25
ECONOMIC INDICES

OECD composite leading indicators (amplitude adjusted)†
US UK Eurozone Japan Brazil China India
Russia
Federation
Nov 12 99.8 99.8 98.7 99.4 100.6 100.3 99.4 99.5
Dec 12 99.9 99.8 98.8 99.5 100.6 100.3 99.2 99.4
Jan 13 100.0 99.8 99.0 99.7 100.5 100.3 99.1 99.3
Feb 13 100.1 99.8 99.1 99.9 100.3 100.3 99.0 99.2
Mar 13 100.2 99.9 99.2 100.1 100.1 100.1 98.9 99.0
Apr 13 100.2 99.9 99.3 100.3 99.8 100.0 98.7 98.9
May 13 100.3 100.0 99.4 100.5 99.6 99.9 98.6 98.9
Jun 13 100.4 100.1 99.6 100.7 99.4 99.9 98.5 98.9
Jul 13 100.4 100.4 99.8 100.8 99.2 99.9 98.4 98.9
Aug 13 100.4 100.6 100.0 101.0 99.2 100.0 98.3 99.0
Sep 13 100.4 100.8 100.2 101.1 99.1 100.0 98.3 99.2
Oct 13 100.4 100.9 100.4 101.3 99.2 99.9 98.2 99.3
Nov 13 100.4 101.0 100.5 101.4 99.2 99.8 98.2 99.4
Dec 13 100.4 101.0 100.7 101.4 99.2 99.6 98.2 99.5
Jan 14 100.3 101.0 100.8 101.4 99.1 99.5 98.2 99.6
Feb 14 100.3 101.0 100.9 101.2 99.1 99.2 98.3 99.7
Mar 14 100.3 101.0 100.9 101.0 99.0 99.1 98.4 99.9
Apr 14 100.4 101.0 100.9 100.7 99.0 98.9 98.5 100.1
May 14 100.4 101.0 100.9 100.4 99.0 98.9 98.6 100.3
Jun 14 100.4 101.0 100.9 100.1 99.0 98.8 98.7 100.4
Jul 14 100.4 100.9 100.8 99.9 99.1 98.8 98.8 100.5
Aug 14 100.4 100.7 100.7 99.7 99.2 98.9 99.0 100.6
Sep 14 100.4 100.5 100.7 99.6 99.2 99.1 99.1 100.5
May 14 100.5 101.0 101.0 100.4 98.9 99.0 98.7 100.1
Jun 14 100.6 101.0 100.9 100.1 99.1 99.0 98.9 100.2
Jul 14 100.6 100.8 100.8 99.9 99.4 99.1 99.0 100.3
*Source: Bloomberg ‡MICEX rates †Source: OCED
Note: A rising CLI reading points to an economic expansion if the index is above 100 and a recovery if it is below 100. A CLI which is declining points to
an economic downturn if it is above 100 and a slowdown if it is below 100.
ECONOMIC INDICES

Deloitte Research thought leadership
Asia Pacific Economic Outlook, January 2015: China, India, Indonesia,
and Myanmar
United States Economic Forecast, Volume 2 Issue 4
Issue by the Numbers, September 2014: The geography of jobs, part 2:
Charting wage growth
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Additional resources

Dr. Ira Kalish is chief global
economist of Deloitte Touche
Tohmatsu Limited.
Dr. Patricia Buckley is
director of Economic Policy
and Analysis at Deloitte
Research, Deloitte Services LP.
Dr. Alexander Börsch is
director of research, Deloitte
Germany, Deloitte &
Touche GmbH.
Ian Stewart is chief economist,
Deloitte UK.
Dr. Rumki Majumdar is a
macroeconomist and a
manager at Deloitte Research,
Deloitte Services LP.
Akrur Barua is an economist
and a manager at Deloitte
Research, Deloitte Services LP.
About the authors
Lester Gunnion is an
economist and a senior
analyst at Deloitte Research,
Deloitte Services LP.

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