22576857 eco presentation

8/8/2019 22576857 Eco Presentation

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DEFLATION IS POSSIBLE BUT DEFLATION IS POSSIBLE BUT INFLATION IS ALMOST INFLATION IS ALMOST

IMPOSSIBLE IN DEVELOPED IMPOSSIBLE IN DEVELOPED

COUNTRIES COUNTRIES SUBMITTED BYSUBMITTED BY ::

RUHINA DHAWAN(33)RUHINA DHAWAN(33)

SAKSHI KHANNA(34)SAKSHI KHANNA(34)SANDEEP MALHOTRA(35)SANDEEP MALHOTRA(35)SHILPA SRIVASTAVA(36)SHILPA SRIVASTAVA(36)

SHRUTI GUPTA(37)SHRUTI GUPTA(37)


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INFLATION INFLATION

Inflation is when you pay fifteen dollars for Inflation is when you pay fifteen dollars for the tenthe ten--dollar haircut you used to get for dollar haircut you used to get for

five dollars when you had hair.five dollars when you had hair.

Sam Ewing quoteSam Ewing quote


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DEFLATION DEFLATION

In economic term, deflation occurs whenIn economic term, deflation occurs when

the inflation rate falls below zero percent,the inflation rate falls below zero percent,resulting in an increase in the real value of resulting in an increase in the real value of money.money.


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TOPICS TO BE COVERED TOPICS TO BE COVERED

Deflation in UKDeflation in UKDeflation in JapanDeflation in Japan

Deflation in USADeflation in USATrends in IndiaTrends in IndiaTrends in ChinaTrends in ChinaConclusionConclusion


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DEFLATION DEFLATION

IN IN UNITED KINGDOM UNITED KINGDOM


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OVERVIEW OF UK ECONOMY OVERVIEW OF UK ECONOMY

The UK is the fifth largest economy in the The UK is the fifth largest economy in theworld, with a gross domestic product(GDP)world, with a gross domestic product(GDP)of US$2,727 billion (Source: World Bank,of US$2,727 billion (Source: World Bank,2008).2008).

It has a population of 61 million (Source:It has a population of 61 million (Source:ONS, 2008),ONS, 2008),

It was the second largest recipient of It was the second largest recipient of foreign direct investment (FDI) globally inforeign direct investment (FDI) globally in2007 (Source: UNCTAD, 2008),2007 (Source: UNCTAD, 2008),


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It is a leading global trading nation, being the secondIt is a leading global trading nation, being the secondlargest exporter and third largest importer of largest exporter and third largest importer of commercial services, and the seventh largest exportercommercial services, and the seventh largest exporterand fourth largest importer of merchandise (Source:and fourth largest importer of merchandise (Source:World Trade Organization, 2008),World Trade Organization, 2008),

UK is a member of the European Union, the worldsUK is a member of the European Union, the worlds

largest trading entity, with nearly 500 millionlargest trading entity, with nearly 500 millionconsumers and a GDP of approximatelyconsumers and a GDP of approximatelyUS$19,000 billion (Source: Eurostat, 2008),US$19,000 billion (Source: Eurostat, 2008),

It has low unemployment (with an unemploymentIt has low unemployment (with an unemployment

rate well below the European Union averagerate well below the European Union average


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MARKET SITUATIONMARKET SITUATION


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CAUSESCAUSES

Sub prime loan crisis lead to fallingSub prime loan crisis lead to falling

household prices.household prices.

Falling interest ratesFalling interest rates


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EFFECTS OF DEFLATIONEFFECTS OF DEFLATION

Postponement of demand.Postponement of demand.

When prices and wages fall together..When prices and wages fall together..It further becomes difficult for anIt further becomes difficult for aneconomy to sustain..economy to sustain..

Lower profit marginsLower profit margins

Confidence and savingConfidence and saving


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FORECASTFORECAST

UK is expected to be in deflation for two andUK is expected to be in deflation for two anda half year or soa half year or so ---------------- THE TELEGRAPH THE TELEGRAPHbecause the RPI has dipped to negative forbecause the RPI has dipped to negative forthe first time in almost half a century.the first time in almost half a century.

GDP to contract by more than 4% this yearGDP to contract by more than 4% this year

and further by 1% in 2010.and further by 1% in 2010.

Unemployment rate to surge above 12%Unemployment rate to surge above 12%


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How to OvercomeHow to Overcome J ust like USA and J APAN. UK also J ust like USA and J APAN. UK alsoinjected money in the economy byinjected money in the economy by printingprintingfresh currency.fresh currency.

It bought the outstanding and privateIt bought the outstanding and privatesector debt ( lending money to banks)sector debt ( lending money to banks)

Printing of fresh currency is not a long termPrinting of fresh currency is not a long termsafe measure. Because it may lead tosafe measure. Because it may lead togalloping inflation.galloping inflation.


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They are aware of deflation risk. They areThey are aware of deflation risk. They are

cutting rates very fast & if necessary theycutting rates very fast & if necessary theytoo will turn to helicopters but in the endtoo will turn to helicopters but in the endthey will keep the wolf away from the doorthey will keep the wolf away from the door


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DEFLATIONDEFLATION

ININUSA USA


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USAUSAThe United States of America (US or USA) has the worlds largest economy. According to the CIA WorldThe United States of America (US or USA) has the worlds largest economy. According to the CIA WorldFactbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largestFactbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largesteconomy, Japan, which has a GDP of $4.4 trillion.economy, Japan, which has a GDP of $4.4 trillion.

The recent failure in the US housing and credit markets have resulted in aThe recent failure in the US housing and credit markets have resulted in aslowdown in the US economy. 2007 GDP growth was estimated at 2.2% but inslowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in2008 it is projected to be just 0.9%, down from the 102008 it is projected to be just 0.9%, down from the 10- -year average of 2.8%.year average of 2.8%.


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Deflation In USA !!!!Deflation In USA !!!!There have been three significant periods of deflation in the UnitedThere have been three significant periods of deflation in the UnitedStates.States.

The first was the recession of 1836, when the currency in the UnitedThe first was the recession of 1836, when the currency in the UnitedStates contracted by about 30%, a contraction which is onlyStates contracted by about 30%, a contraction which is onlymatched by the Great Depression. This "deflation" satisfies bothmatched by the Great Depression. This "deflation" satisfies bothdefinitions, that of a decrease in prices and a decrease in thedefinitions, that of a decrease in prices and a decrease in theavailable quantity of money.available quantity of money.

The second was after theThe second was after the Civil War Civil War , sometimes called, sometimes called The GreatThe GreatDeflationDeflation . It was possibly spurred by return to a gold standard,. It was possibly spurred by return to a gold standard,

retiring paper money printed during the Civil War.retiring paper money printed during the Civil War.The third was between 1930The third was between 1930- -1933 when the rate of deflation was1933 when the rate of deflation wasapproximately 10 percent/year, part of the United States slide intoapproximately 10 percent/year, part of the United States slide intothethe Great DepressionGreat Depression , where banks failed and, where banks failed and unemploymentunemploymentpeaked at 25%.peaked at 25%.


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yy There was sharp deflation in the US (1929There was sharp deflation in the US (1929- -33),but a strong recovery as the price level33),but a strong recovery as the price levelstabilized.stabilized.

yy Throughout the history of the United States, inflation has approached zero and dippedThroughout the history of the United States, inflation has approached zero and dippedbelow for short periods of time (negative inflation is deflation). This was quite common inbelow for short periods of time (negative inflation is deflation). This was quite common inthe 19th century and in the 20th century beforethe 19th century and in the 20th century before World War IIWorld War II ..


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Some economists believe the United States may be currentlySome economists believe the United States may be currently

experiencing deflation as part of theexperiencing deflation as part of the financial crisis of 2007financial crisis of 2007 20092009 ..

As Consumer prices dropped 1 percent in October, 2008, largely due to aAs Consumer prices dropped 1 percent in October, 2008, largely due to asteep decline in energy prices. .This was the largest onesteep decline in energy prices. .This was the largest one- -month fall inmonth fall inprices in the US since at least 1947.prices in the US since at least 1947.

That record was again broken in November, 2008 with a 1.7% decline. InThat record was again broken in November, 2008 with a 1.7% decline. Inresponse, theresponse, the Federal ReserveFederal Reserve decided to continue cutting interest rates,decided to continue cutting interest rates,down to a near down to a near- -zero range as of December 16, 2008.zero range as of December 16, 2008.

Some economists believe over the next two years deflation in theSome economists believe over the next two years deflation in the

United States may lead to a deflationary spiral that could bring theUnited States may lead to a deflationary spiral that could bring theU.S. into the next Great Depression.U.S. into the next Great Depression.


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Why have many US companies beenWhy have many US companies beenconcerned about deflation?concerned about deflation?

There is no stable competitive equilibrium in industriesThere is no stable competitive equilibrium in industrieswith high fixed costs and low marginal costswith high fixed costs and low marginal costs steel,steel,autos, chemicals, software, computer chips, airlines andautos, chemicals, software, computer chips, airlines andothers.others.

Unless companies can achieve a stable pricing structureUnless companies can achieve a stable pricing structureor establish unique products, they will lose money. Theor establish unique products, they will lose money. Theairline industry has never earned a normal return on itsairline industry has never earned a normal return on itscapital. DRAM makers are likely in the same situation.capital. DRAM makers are likely in the same situation.

Increased global competition has undermined establishedIncreased global competition has undermined establishedpricing practices in many industries. Things have beenpricing practices in many industries. Things have beenchanging for several years, but a weak world economychanging for several years, but a weak world economyand a strong US dollar have intensified the effects.and a strong US dollar have intensified the effects.


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OBAMA said that:OBAMA said that:

I believe that the current deflationI believe that the current deflationScenario is a perfect example of investor Scenario is a perfect example of investor irrationality.irrationality.Any investor who is looking for Any investor who is looking for gl ory gl ory

daysdays in his future should try to takein his future should try to takeadvantage of this irrationality, by goingadvantage of this irrationality, by goingagainst the shortagainst the short- -term trading crowdterm trading crowdand accumulating positions in TIPSand accumulating positions in TIPSdirectly and by purchasing somedirectly and by purchasing some

commodities.commodities.


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DEFLATIONDEFLATIONININ


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DEFLATION :DEFLATION :

Is not a new phenomenon for global world.Is not a new phenomenon for global world.Great depression in 1930s wasGreat depression in 1930s wasDEFLATIONDEFLATION

What is DEFLATION???What is DEFLATION???It is a decline in generalIt is a decline in general

price levels,often caused by reduction inprice levels,often caused by reduction insupply of money or credit.supply of money or credit.

It can be brought about by reduction inIt can be brought about by reduction ingovernment spending,personalgovernment spending,personalspending,investment spending.spending,investment spending.


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Falling prices are good for anFalling prices are good for aneconomy???economy???

Positive factors:Positive factors:Increases purchasing power.Increases purchasing power.

Increases demand.Increases demand.Negative factors:Negative factors:decreases prices and it leads todecreases prices and it leads to

decrease in wages.decrease in wages.increase in unemployment.increase in unemployment.decrease in asset prices.decrease in asset prices.


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Deflation in Japan:Deflation in Japan:

In 1930s in Japan,deflation reflectedIn 1930s in Japan,deflation reflectedeconomic collapse and risingeconomic collapse and risingunemployment made worse of economyunemployment made worse of economywhich was calledwhich was calledLOST DECADE (1991LOST DECADE (1991 2001).2001).

Similar trend is visible in emergingSimilar trend is visible in emergingeconomies also like china, inflation waseconomies also like china, inflation was8.5% in april but in november it was 2.4%8.5% in april but in november it was 2.4%


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After effects of Deflation in After effects of Deflation in

japan: japan:Increase in unemployment level.Increase in unemployment level.Decrease in GDP.Decrease in GDP.

Decrease in consumption level.Decrease in consumption level.Decrease in asset prices.Decrease in asset prices.Level of demand.Level of demand.

Fall in prices.Fall in prices.


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2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard 27 of 44

The Japanese Slump

Table 22Table 22- -44 Output Growth, Unemployment, and Inflation, Japan 1990Output Growth, Unemployment, and Inflation, Japan 1990- -20012001

Year Year Output Growth Rate (%)Output Growth Rate (%) Unemployment Rate (%)Unemployment Rate (%) Inflation Rate (%)Inflation Rate (%)19901990 5.25.2 2.12.1 2.42.419911991 3.43.4 2.12.1 3.03.019921992 1.01.0 2.22.2 1.71.719931993 0.20.2 2.52.5 0.60.619941994 1.11.1 2.92.9 0.10.119951995 1.91.9 3.13.1 0.40.419961996 3.43.4 3.43.4 0.80.819971997 1.91.9 3.43.4 0.40.419981998 1.11.1 3.43.4 0.10.119991999 0.80.8 4.14.1 1.41.4

20002000 2.82.8 4.74.7 1.61.620012001 0.40.4 5.05.0 1.61.620022002 --0.30.3 5.45.4 --1.21.220032003 2.72.7 5.35.3 --2.52.520042004 3.03.0 5.05.0 1.81.8


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Table 22Table 22- -55 GDP, Consumption, and Investment Growth, Japan, 1988GDP, Consumption, and Investment Growth, Japan, 1988- -19931993

Year Year GDPGDP

(%)(%) Consumption (%)Consumption (%)InvestmentInvestment

(%)(%)

19881988 6.56.5 5.15.1 15.515.5

19891989 5.35.3 4.74.7 15.015.0

19901990 5.35.3 4.64.6 10.110.1

19911991 3.13.1 2.92.9 4.34.3

19921992 1.01.0 2.62.6 7.17.1

19931993 0.20.2 1.41.4 10.310.3


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Fundamental Drivers of deflation trendFundamental Drivers of deflation trendin Japan :in Japan :

DEBTDEBT: prices decreases and old debt stay: prices decreases and old debt stayfixed,companies may be facing difficultfixed,companies may be facing difficulttimes in repaying these debts and it leadstimes in repaying these debts and it leadsto bankruptcies and increase into bankruptcies and increase inunemployment .banks would suffer moreunemployment .banks would suffer moreloans losses and if wages reduces sameloans losses and if wages reduces same

will be with house holds.will be with house holds.


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Deffered spending: if people believe thatprices will be lower next month,they maywait to buy and if too many shopperswait,the economy would coil downwards .


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Why Japans economy has fallenon such hard times,and why has

recovery taken so long?Surplus in savings.Policy mis management.

Structural problem.Yen appreciation.Global capital flow.


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INDIAINDIA


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INDIAINDIA

In Layman terms, inflation is a generic increase in priceIn Layman terms, inflation is a generic increase in pricelevels and deflation is a general decrease in price levels (of levels and deflation is a general decrease in price levels (of goods and services).goods and services).

For exampleFor example - - In an inflation type scenario, goods priced atIn an inflation type scenario, goods priced atRs. 100 at some base year say 2000 would now be Rs. 110Rs. 100 at some base year say 2000 would now be Rs. 110and in a deflation type scenario, they will be Rs. 90.and in a deflation type scenario, they will be Rs. 90.


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WHAT WERE THE CAUSES OF INFLATION IN WHAT WERE THE CAUSES OF INFLATION ININDIA?INDIA?

TWO MOST IMPORTANT CAUSES ARETWO MOST IMPORTANT CAUSES ARE ::

1.1. Demand pull INFLATIONDemand pull INFLATION - - This is basically when theThis is basically when theaggregate demand in an economy exceeds theaggregate demand in an economy exceeds theaggregate supply. It is also defined as `too muchaggregate supply. It is also defined as `too muchmoney chasing too few goods'. Baremoney chasing too few goods'. Bare- -boned, it meansboned, it means

that a country is capable of producing only 100 itemsthat a country is capable of producing only 100 itemsbut the demand is for 105 items. The more demandbut the demand is for 105 items. The more demandthere is, the costlier it becomes for example GOLDthere is, the costlier it becomes for example GOLD


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2. Cost push INFLATION2. Cost push INFLATION Due to increase in theDue to increase in theprice of various inputs like raw material or semiprice of various inputs like raw material or semifinished goods, wages of the labour , interest ratefinished goods, wages of the labour , interest rateon loans and borrowings etc and hence these coston loans and borrowings etc and hence these costpush factors have a direct impact on the price of apush factors have a direct impact on the price of aparticulare productparticulare product

As the aggregate As the aggregatesupplysupply

curve shifts from AS tocurve shifts from AS to AS1 AS1

(decrease in supply) but(decrease in supply) butaggregate demandaggregate demand

remainsremainssame rice level increasesame rice level increase


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WHAT ARE THE CAUSES OF DEFLATION IN WHAT ARE THE CAUSES OF DEFLATION ININDIA?INDIA?

FACTORS CAUSING DEFLATION ARE:FACTORS CAUSING DEFLATION ARE:1.1. The supply of money goes down.The supply of money goes down.

2.The supply of other goods goes up.2.The supply of other goods goes up.

3.Demand for money goes up.3.Demand for money goes up.

4.Demand for other goods goes down.4.Demand for other goods goes down.


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EFFECTS OF DEFLATIONuEFFECTS OF DEFLATIONu

1.1. Decrease in Aggregate demandDecrease in Aggregate demand

2 Reduction in Velocity of money2 Reduction in Velocity of money

3. Devaluation of Currency3. Devaluation of Currency

4 . Less Investments4 . Less Investments

5 . Transfer of wealth5 . Transfer of wealth


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INFLATION IN INDIA(95INFLATION IN INDIA(95--06)06)

0

12345

67

95-96

96-97

97-98

98-99

99-00

00-01

01-02

02-03

03-04

04-05

05-06

inflation


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CHINACHINA--SOME FACTSSOME FACTS

POPULATION, 2009POPULATION, 2009 1,329,740,0001,329,740,000

UNEMPLOYMENT RATE, 2006UNEMPLOYMENT RATE, 2006 4.3% (official); 17% (unofficial )4.3% (official); 17% (unofficial )

INFLATIONINFLATION 4.9% (CPI: 8.7%,Feb 074.9% (CPI: 8.7%,Feb 07 - - Feb 08)Feb 08)

4.5% (2007 av)4.5% (2007 av)1.7% (2006 av)1.7% (2006 av)

GDP (GDP ( PPPPPP ) (2008)) (2008) $7.8 trillion$7.8 trillion

GDP BY COMPONENTS (2006)GDP BY COMPONENTS (2006) Private consumption (36.4 %)Private consumption (36.4 %)

Government consumption (13.7 %)Government consumption (13.7 %)Gross fixed investment (40.9 %)Gross fixed investment (40.9 %)Exports of goods/services (39.7%)Exports of goods/services (39.7%)Imports of goods/services (Imports of goods/services (- -31.9%)31.9%)

source:wikiepedia


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INFLATIONARY TRENDS IN CHINAINFLATIONARY TRENDS IN CHINA

Over the past 30 years china hadOver the past 30 years china hadexperienced 4 major periods of inflation.experienced 4 major periods of inflation.

19881988--1989198919931993--19961996

2007200720082008


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DIFFERENT FACTORS OF INFLATIONDIFFERENT FACTORS OF INFLATION

Mistakes made in the process of formulating and implementingMistakes made in the process of formulating and implementingeconomic policy,specification,expansion of excess aggregate.economic policy,specification,expansion of excess aggregate.

Monetary ReasonsMonetary Reasons

a. Budget deficit Borrowing money from the central bank a. Budget deficit Borrowing money from the central bank Increase of monetary supply InflationIncrease of monetary supply Inflation

b. Increase in money supply by the central bank that is used tob. Increase in money supply by the central bank that is used tofinance the statefinance the state- -owned firmsowned firms


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CURRENT SCENERIOCURRENT SCENERIOSOURCE:BUSINESS TIMESSOURCE:BUSINESS TIMES

BEIJING:BEIJING: China fell into deflation at the consumer level last monthChina fell into deflation at the consumer level last monthfor the first time in more than six years, as ministers painted afor the first time in more than six years, as ministers painted agloomy picture of the economy's near gloomy picture of the economy's near- -term prospects.term prospects.

The 1.6 per cent drop in the consumer price index (CPI) in the year The 1.6 per cent drop in the consumer price index (CPI) in the year to February, which was bang in line with a Reuters survey of 26to February, which was bang in line with a Reuters survey of 26analysts, gives the central bank ample scope to cut interest ratesanalysts, gives the central bank ample scope to cut interest ratesfurther if need be to boost the economy.further if need be to boost the economy.

Goldman Sachs said now seemed a "natural point" to lower Goldman Sachs said now seemed a "natural point" to lower borrowing costs to ease the financial burden on firms, which areborrowing costs to ease the financial burden on firms, which arebattling a slump in overseas demand and in domestic construction.battling a slump in overseas demand and in domestic construction.

Commerce Minister Chen Deming and Industry Minister Li Yizhong,Commerce Minister Chen Deming and Industry Minister Li Yizhong,speaking at a joint news conference, both used the word "grim" tospeaking at a joint news conference, both used the word "grim" todescribe the immediate outlook for Chinese exports and thedescribe the immediate outlook for Chinese exports and themanufacturing sector.manufacturing sector.


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Li said he was encouraged that power consumption had declined at a slower pace in the first two monthsof the year.

But he added, "The situation of industrial production remained grim." The year-on-year drop in the CPI,

reported by the National Bureau of Statistics, was the first since December 2002.

Economists worry that, unless China's four trillion yan, or US$585 billion (US$1 = RM3.70), stimulus plankicks in soon, these deflationary pressures will intensify because the economy is saddled with excesscapacity at a time of depressed demand.

Consumers who expect more price declines in future may delay their purchases, weakening the economyand undermining corporate profits.

"I think this is the first sign of deflation," Qing Wang, China economist for Morgan Stanley in Hong Kong,said of the CPI drop.

"We expect an additional policy response, mainly to prevent deflationary expectations from gettingentrenched."

Shanghai stocks recouped early losses and ended 1.88 per cent higher as investors shrugged off the

slide into deflation and took comfort from strong lending data.

Wang expects consumer prices to decline 1 per cent in 2009.


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China: Inflation no longer an issue, but deflation could become anChina: Inflation no longer an issue, but deflation could become anissueissue

.../ figu rb i bl i otek /

02 03 04 05 06 07 08 09

p e r c e n

t

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

p e r c e n

t

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5 % y/ y y y

DB forecast

Producer prices

Consumer prices excl. food

Consumer prices

Inflation has declined as prices have normalised


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