EuroFinance 2015: The curse of ‘interesting times’

“We meet in interesting times – which of course is the well-known euphemism for difficult and challenging conditions,” said Rupert Pennant-Rea, opening this year’s plenary sessions at EuroFinance 2015. Pennant-Rea, chairman of The Economist magazine, is former deputy governor of the Bank of England and warned his audience that he couldn’t honestly “start the conference on a note of optimism and reassurance”.

He noted that politics is playing a growing role in the financial world and the past week had offered a “prime example of perversity”. Markets globally had moved lower in anticipation of the Federal Reserve increasing US interest rates for the first time since before the 2008 global financial crisis. They subsequently fell further when the Fed thwarted expectations by opting once more to leave rates on hold. The conclusion to be drawn is that we’re living at a time when any reason is sufficient for the markets to fall.

Hopes fall on India

Pennant-Rea suggested that India had recently taken over from China as the emerging market on which hopes were being pinned. Unfortunately he then set out several reasons why it was unlikely that India would replace China as an engine of growth. Among them is the fact that only once (in 1999) has India’s annual growth exceeded China’s over the past 25 years.

At around US$11 trillion, China’s gross domestic product still comfortably exceeds India’s, which is nearer US$2 trillion. Moreover, India’s apparent recent growth spurt owed much to a statistical quirk and a redefinition of where growth comes from.

In addition, manufacturing still only makes a relatively modest contribution to India’s GDP, with services and agriculture collectively still accounting for 80%, against 60% in China. Finally, hopes that India is poised for a boom in infrastructure investment overlooks the very real obstacles to major projects – practically non-existent in China – such as property rights and resistance from pressure groups.

“So while we’re hoping for strong growth from India, it’s not a neat alternative to China,” Pennant-Rea concluded.

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