Sunday, August 28, 2016

Drivers of economic cycle

While arrogance is an indicator of economic cycle topping out, despair reflects the trough. Hope takes the cycle up and reality brings it down. In between these fluctuations, there lies the trend.
Major political events can lengthen or shorten the cycle. Similarly monetary policy shifts, technology trends, employments levels and change in physical infrastructure will have an effect on economic cycles.

In the last 30 years span, during 1989 there was a peak and the next peak came by 1996 after a gap of 8 years. We had to wait for 11 years till 2007 for another peak to surface. We cannot time these cycles, but going by history, if we can assume that 8-12 years is the cycle time between two peaks, it seems the next peak of economic cycle is waiting to reveal itself.
There are three factors which will act as indicator of such a thing happening.
1.     Monetary system (Inflation-interest rates, Money supply): In the last one-two years, RBI has reduced the rates significantly, some of it is transferred to consumers but banking system drowned in bad debt is not passing the complete benefit. Policy rate reducing is a positive sign but preventing the benefit to be passed on shows that system is not ready yet for a peak.
2.    Employment levels and Wages: Recently seventh pay commission has come into force that leaves more money in the hands of Govt. employees and pensioners taking their spending power up. Money at the hands of consumers will have a better velocity and farther reach than the direct spending by Govt, itself. Along with this wages need a boost in private sector and the total employment levels need to go up. When that happens, it helps to fuel the drive to reach a new top.
3.    Infrastructure development: It had come to a halt during the ending years of UPA-2. But with a new stable Govt in place, it is slowly picking up. Once Banks are able to clear their bad debt mess, they would let more money flow into large infra structures and when those projects gain momentum, it would mark the new peak.

Taking a balanced look at these three factors, it appears like we are out of trough but the upward movement is facing lots of resistances. So this cycle is taking a longer time to reach a new top. But keep watching these factors, it will let you identify the top of next cycle.