Sunday, February 21, 2016

Japan manufacturing slows sharply; Plunging oil forms alliance of enemies; How 'black money' saved India economy

1 Japan manufacturing slows sharply (Straits Times) Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years, a worrying sign that overseas demand is deteriorating rapidly as China's economy slows, a preliminary survey showed on Monday.

The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January. But it remained above the 50 threshold that separates contraction from expansion for the 10th consecutive month.

The sub-index for new export orders fell to a preliminary 47.9 from 53.1 in January, which would indicate the biggest contraction since February 2013 if confirmed in final data. Exports in January tumbled by the most since the global financial crisis, in a clear indication that financial market turmoil and slowing emerging market economies have eroded demand abroad.

Under pressure from faltering global demand, total new orders from customers at home and overseas also changed direction and contracted, while job creation cooled to a five-month low. Companies cut selling prices for the third month in a row, and more sharply than in January, likely reflecting both falling commodity prices and sluggish demand.

Japan's economy contracted more than expected in the fourth quarter due to weak household spending and exports. While analysts expect a moderate recovery this year, stagnant wages, depressed consumer prices and faltering global growth have raised fresh doubts about Prime Minister Shinzo Abe's cocktail of stimulus policies aimed at re-energising the economy and quashing years of deflation.

2 Plunging oil forms alliance of enemies (Ian Black & Terry Macalister in The Guardian) The Iranian endorsement of a plan by its arch regional rival, Saudi Arabia, to stabilise global oil prices could be seen as a diplomatic coup for Riyadh.

However, Tehran’s support for a production freeze has not been driven by a new desire for political rapprochement as much as acceptance of a greater enemy: collapsed commodity prices. The markets are flooded in crude at a time when demand is faltering due to the slowdown in expected growth from key importers such as China. Desperate times require desperate measures.

Iran and Saudi Arabia are rival oil producers but also bitter adversaries in regional politics. Short of a shooting war, tensions could hardly get any worse at this particular moment. The Saudis severed diplomatic relations with Iran in January following a mob attack on their embassy in Tehran – a protest at the execution of a leading Shia cleric, Nimr al-Nimr, in Saudi Arabia’s eastern province.

Despite this unpromising geopolitical backdrop, last week there were positive moves towards an oil production deal. The price of Brent blend crude soared 7.5% on Wednesday after Bijan Zanganeh, Iran’s oil minister, came out of a two-hour meeting with some of his Opec counterparts to approve a deal hatched by Saudi with non-Opec member Russia the day before.

Iran, which has the fourth-biggest oil reserves in the world, had previously trumpeted its desire to vastly expand its output following the lifting in January of western sanctions imposed over its nuclear programme. It still remains unclear exactly what will happen now: the Saudis and Russians said they would hold their output at January levels, but only if other key players – including Iran – joined in.

However, the wider political and religious rivalry between Saudi Arabia and Iran is unlikely to go away any time soon. Saudi control of Mecca and the hajj pilgrimage gives it legitimacy in the Sunni Muslim world, while Iran is a beacon for Shias everywhere. Arabs and Persians have long memories of prejudice, though in modern times their animosity began with the 1979 revolution and grew after the Iraq war in 2003.

3 How ‘black money’ saved India economy (Justin Rowlatt on BBC) There is no question that India has the most positive economic story on the planet. Buoyed by increased manufacturing output, India's economy grew by 7.4% in the third quarter of 2015, the fastest growth of any major country in the world. But there is a dark side to India's success, says one of the country's most eminent economists.

Kaushik Basu, the chief economist of the World Bank, says the nation's tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years. It is an extraordinary claim for such an influential figure to make but, as he says in his new book, An Economist in the Real World, "economics is not a moral subject".

His argument is that the pervasive use of "black money" - illegal cash, hidden from the tax authorities - created a bulwark against a crisis in the banking sector. Let me explain. Back in the last years of the noughties India's economy was looking just as frothy as the rest of the world. The difference in India is that this "irrational exuberance" did not end in disaster.

There was no subprime loans crisis to precipitate a wider crisis throughout the banking sector. So the big question is why not. There were some shrewd precautionary moves by India's central bank, concedes Mr Basu, but he says one important answer is all that dirty money.

In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent. Not in India. Here a significant part of almost all house purchases are made in cash. And because the highest denomination note in India is 1,000 rupees, ($15; £10) it isn't unusual for a buyer to turn up with - literally - a suitcase full of used notes. The cash payment is what Indians refer to as "black money".

It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too because the lower the declared value of the property, the lower the property tax they will be obliged to pay. What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.

That's why when the crash came, the balance sheets of global big banks collapsed along with property prices. But when prices fell in India - and they did fall in 2008 and 2009 - most bank loans were still comfortably within the value of the property. That's why India managed to avoid the subprime crisis that did so much damage elsewhere.

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