28 August 2017
Over the past week Australian shares were up 0.2% with smaller stocks rising further (up 0.4%). Shares in developed countries were up 0.7% broadly in line with the US market, also up 0.7%. Shares in emerging markets were up 2.4%. The Australian dollar remained at the same levels seen last week, 79.32 US cents. The 10 year bond yield in Australia increased to 2.65% while the US 10 year bond yield fell slightly to 2.16%. The oil price fell 1.3% to 47.87 US dollars per barrel.
China usually springs to mind first when people are asked about the engine room of Asian economic growth. However India is also an important economy to monitor now and in the future. Recent research from the United Nations (UN) forecasts India to overtake China in terms of population in just seven years’ time. Global consulting firm PWC forecasts India to become the world’s second largest economy (behind China) by 2050. So how is India’s economy travelling?
The answer is ok, but not without challenges. As shown in the diagram below (on the left) Indian Gross Domestic Product (GDP) growth remains reasonably high at 6% but this has moderated from recent levels of around 8%. Inflation is weaker than what’s targeted by the government (around 4%), an indicator of potentially soft economic conditions. The diagram below (on the right) shows inflation running around 2%, primarily due to the impact of falling food and fuel prices. India’s economic agencies only estimate the unemployment rate on an infrequent basis and it appears to be running at around 5%.
India | GDP Growth and inflation | Year-ended
India’s economic prospects are exciting because they have a huge workforce of English speaking, highly skilled people, especially in technology, with lower wages and living costs than most developed countries. Growth will also come from increasing consumption as the middle class seek higher living standards, a huge contributor to China’s economic growth.
The challenges facing India are to establish greater financial and legal structures, which we take for granted in Australia, as these create a sound environment for saving and investment. There’s also large social risk as inequality continues to expand between city and rural populations.
David Bell | Chief Investment Officer