Sentiment on global growth has taken the severest knock since the global financial crisis. Mid-September data showed that Chinese industrial output grew by just 6.9 percent in August, down from the 9 percent level in July, that’s the lowest level since 2008; last week data showed that German industrial output in August slid 4 percent, the biggest fall in 5-1/2 years. And earlier this week, the IMF pulled down global growth numbers for 2014 to 3.3 percent from 3.4 percent forecast in June and 3.7 percent forecast in April.
As these data kept pouring in commodity prices tumbled rapidly. Crude suffered the most. Crude WTI has fallen this week to USD 84 per bbl, down 20 percent since July, indicating it is in bear market terrain. Crude was not alone the Reuters CRB Commodity Index too has been falling continuously since July and is down 10 percent in a quarter indicating broad skepticism over global growth.
Is the growth scare going to get worse and will it unleash another wave of risk aversion across all asset classes – that is the question in the minds of most investors today.
Jim O’Neil, former chairman of Goldman Asset Management Company says IMF’s prediction of global growth slowing to 3.3 percent is not necessarily a bad thing. “It’s what the world has grown by most of the last three decades and so it is getting a lot of negative coverage because it’s a forecast that is coming down, but I do not think it’s that bad and it might well be that the IMF is going to end up being wrong,” he told CNBC-TV18.
O’Neil adds that the IMF is also predicting that the world economy will grow at 3.8 percent next year, which is not getting enough attention.
Taking the optimism ahead, he says the mood regarding some parts of the so-called emerging world, including China, has turned too negative. According to him, China is in a position to deliver 7.5 percent GDP growth again this year, as per the government prediction. He adds that even if it is a bit lower, it won’t make a big difference considering the absolute size of China, which is a 9 trillion economy. “So even if China grows by 7.5 percent, it is effectively equivalent to the United States growing by 4.”
Below is the verbatim transcript of Jim O’Neil’s interview with Latha Venkatesh on CNBC-TV18.
Q: The International Monetary Fund (IMF) has tweaked global growth from 3.4 percent to 3.3 percent and down from 3.7 percent in April. Is there a danger that they have to lower it even further?
A: If it’s 3.3 percent, if that is what it turns out to be then that’s not bad. That’s what the world has grown already this decade. It’s what the world has grown by most of the last three decades and so it is getting a lot of negative coverage because it’s a forecast that is coming down but I do not think it’s that bad and it might well be that the IMF is going to end up being wrong. The IMF is good at a lot of things but forecast in the economic cycle is not particularly one of them.
Q: At least are you convinced that global growth has troughed out and it is on the path to improving?
A: When I look at the US and most of the big emerging economies, I think there are reasons to be optimistic. I would include the United States, China and India and maybe with this election I would include Brazil, Indonesia, Mexico and of course Africa has got a lot of negative comments particularly because of this very worrying Ebola problem. I am not sure whether Africa is going to be as weak as all the people are saying. So, it may well be that it’s often the case that people are getting too pessimistic and the IMF is forecasting 3.8 percent for next year which is not getting enough attention.
Q: Getting into internals of those numbers. What is your own understanding or estimate of European growth? Do you see it turning the corner or do you see it getting worse before it improves?
A: I think all the signals on European economic activity have been very disappointing, of course we have known about that for a while in some of the circle periphery particularly the bigger Mediterranean countries France and Italy, but in the past fortnight the data from Germany has been especially disappointing and if we do not have any bounce back from this last month’s Industrial Production data, I think there will definitely be more downgrades. Therefore, Europe remains not only weak, but is getting weaker.
Q: What about China – that is the other area of concern. The IMF sees it delivering 7.4 percent growth. You think there is a chance of a disappointment that it won’t even deliver 7.4 percent?
A: I think the mood about some parts of the so-called emerging world including China may have gone too negative. I think China is in an invisibly decent position to deliver on 7.5 percent GDP growth again for this year which is what the government told. Even if it’s a little bit lower then it is not a big deal particularly when you look at the absolute size of China. China is a 9 trillion economy and so China growing by 7.5 percent is effectively equivalent to the United States growing by 4.
Q: I am asking you these questions on growth because of the big fall in commodity prices especially in crude. Is the crude market signaling a steeper fall in global growth or are crude prices falling because of factors inherent to that market?
A: It is quite amusing to hear the style in which you asked the question about oil prices. It is linked to what I said earlier. Usually a lot of countries particularly oil importing countries are worried about oil prices rising. So, I would have thought oil price going down is basically a transfer of wealth to consumers in oil importing countries. Its good for India, it should be good for Europe, United States, so it’s essentially good news. Yes, oil prices going down are probably a reflection of some weakness cyclically somewhere but I suspect it is more of an ongoing consequence of dramatically changing supply and demand for oil and it is basically a good thing.
Q: Where do you stand on commodities as an asset class? Are we close to the down cycle ending or will 2015 also be a year of low and maybe falling commodity prices?
A: I am not sure. I suspect it will be a bit more volatile but if I have to stick my neck out then I would be in favour of commodity prices dropping further. If I look at the past 15 years particularly looking at the world of Brazil, Russia, India and China (BRIC) of course was a core of my professional life, it was quite easy for me to be bullish for commodity prices the past decade or the previous decade and this enormous growth of BRIC particularly China and problems of supply constrains, but we have China focused on whole new style of growth based on quality and not quantity and they deliberately accepting of growth closer to 7 and 10 and you got this incredible supply dynamics going on in oil and to some degree maybe in some of the commodities too. I think we have seen the end of the commodities super cycle two-three years ago and there are probably still too many companies and too many investors with positions build upon expecting commodity bull cycle that I think is over.