While the global economy may go through a long grind, it would be good to look out for what could be the positive surprises symbolised by Bluebirds in a gloomy environment, according to Ruchir Sharma, founder of Breakout Capital and chairman of Rockefeller International.
In a discussion with NDTV's Prannoy Roy, Sharma said the world will see more of a “saucer shape” pattern where it takes a while for a downturn to set in, but it also takes a while for that to exit. He discussed ten key trends expected in 2023, including opportunities and orthodox policies in India.
Watch the full video here:
Here are edited excerpts from the interview:
NDTV: The first thing you're forecasting is there's got to be a long grind, by long grind you mean there's going to be no bust and no boom. It's not going to be a dramatic recession.
You're saying there are shorter recessions now because of easy money, higher government spending and low interest rates and if you look at the shorter recessions according to Ruchir in pre-world war one, the percentage of time that there were recessions was 44%, nearly half the time economy was in a recession, then from world war two to 1979 almost 20%.
That's high now because of all this easy money era, it's down to half that and one fourth of what it was. This is a huge change.
Ruchir Sharma: Yes, I think that this has a lot to do with the role of government stimulus, government intervention.
That in the pre-war era there was very little of government intervention, economies such as the United States or the developed economies of that era right and it's really since then that you've seen much more government intervention and specially in the last three-four decades, as inflation was declining, every time there was the slightest trouble.
Because inflation was low and falling the governments and central banks were able to come out there and put out a lot of stimulus and that was particularly true in the pandemic, that we saw stimulus like never before during the pandemic.
NDTV: And as you are saying your data shows that in this long grind ahead government stimulus or rescues increased sharply leading to shorter and fewer recessions. Look at your data on stimulus as a percentage of GDP, used to be 1% in 1990, right now it's 46% this time. Amazing change.
Ruchir Sharma: Yes, but the only downside of this is it's going to be made earlier because it's so much stimulus, so much intervention, are we keeping too many inefficient companies alive?
Are we not allowing the natural process to play itself out where a lot of zombie companies that are deadwood gets cleaned from the system, so that's the downside.
But the long grind that I'm forecasting now refers to something a bit different. Which the issue is that we being in this era now, as I said that as you had declining inflation and you kept getting lower and lower interest rates and the government's what's able to stimulate and also cut short recessions, the problem now is that inflation I think is likely to remain stickier, inflation has peaked and is coming off in many parts of the world.
But the 2% inflation that we had for much of the developed world are as likely to be more like 4%. Why? Because the demographics have shifted, the people's attitude towards work has shifted, so even now if you look at it the global economy has been slowing down and yet unemployment rates around the world are close to record lows, so it's very hard to get people to come back into the labour force.
A lot of people are still living off a lot of the stimulus that was put doing the pandemic. In fact, some research shows that nearly half of that excess savings that people built-up because of the massive stimulus following the pandemic is still sitting in people's bank accounts, so you know, like the whole idea being that, that provides a cushion, so the problem is that it delays inevitable, which is that you have so much monetary tightening and yet the global economy has been relatively resilient so far, but the problem is that once those savings run out and then the recovery time starts, the recovery may also be soft and the shape may look like a long smile rather than...
NDTV: Kind of a V, exactly the normal, the old recessions used to be a sharp down and a quick sharp up, now you're saying it is going to be a long grind, kind of a not a V anymore?
Ruchir Sharma: Yes, and that's because inflation is likely to be stickier and because of stickier inflation the capacity of governments and central banks to stimulate will be much more limited, so therefore I feel that we're in this period of the long grind.
NDTV: Finally, just wanted to look at your data on this long grind and what are the implications for India and quite important, very, very, serious actually, because as the world slows so will India slow down, because historically, India's growth rate according to all Ruchir and his team's data, India has been only slightly above the world in terms of growth rate.
So, if the world slows down India's growth rate is unlikely to be above 5%. Historically, India's growth rate has been above the rest. Look at the world on average has been 3.4% growth rate, India has been 6.1%, so has 2.7% above the world and compared to emerging markets, India has been 1.4% higher than the growth rate.
Now explain what happens if there's this long grind, what are we looking at?
Ruchir Sharma: The point I'm trying to make here is that we underestimate systematically, this is a debate I've had with so many people in India. We underestimate the global linkages.
India's growth rate is very tied to what happens to the rest of the world, at least at the margin there's a 70% correlation between India's growth rate and the rest of the world's growth rate and the point is that it is very difficult for the Indian economy and it is historically so, to grow that much faster than the global economy.
It's quite significant that we have grown nearly three points faster than the global economy, but it's impossible to sustain a growth rate much above. That is what we have seen even during the boom years of the 2000's. Compared to the developed markets and even other emerging markets, India's growth rate was capped beyond a point.
So, I think that if the global economy slows down in 2023 as we forecast to about 2% or so, that India's growth rate is likely to be closer to 5% based on this historical fact pattern.
NDTV: The dollar has been rising compared to all other currencies but you're seeing the peak of the dollar. If you look at Ruchir's data this what it looks like, every time the dollar rises it's followed by a downturn.
Look at those three and you're now hitting eleven years which is much longer than peaks that dollar's taken and so you're saying we're going to have a downturn now, the dollar which means the rupee will strengthen in comparison, all other currencies.
Ruchir Sharma: Yes, I think that the, you know, in terms of the rupee, has weakened significantly against the dollar over the last 75 years as we last spoke about it.
But the rupee's depreciation against the dollar has been particularly sharp over the last couple of years and I think that that's likely to slow down because the dollar in general is looking very expensive against major currencies around the world.
Now this is a very important graph in some way that the dollar is the world's reserve currency, but it doesn't always rise, the dollar spends time going down, it spends time going up, it fluctuates against the major currencies.
NDTV: Very crucial for policymakers to hear that. Okay. You're saying there's a long-term decline of the rupee against the dollar but it was very sharp decline in the last two years, while it might continue to be a decline in won't be as sharp as the last two years.
Ruchir Sharma: Yes, I think that's the finding and that it's backed by the fact that it feels very expensive as this graphic shows.
NDTV: Amazing actually that you've looked at that because of this expensive dollar the U.S. cities have become the most expensive cities in the world.
The rising dollar you're saying is a major cause. In fact, in the ten most expensive cities, New York, where you live, New York City is the world's most expensive along with Singapore, then there's Tel Aviv, Hong Kong and then Los Angeles; that's dollars. Zurich, Geneva, traditionally expensive, San Francisco, again the dollar and then Paris and Copenhagen and Sydney.
So, the dollar's made cities in America expensive. How you do you manage?
Ruchir Sharma: Yes, I've been in New York for twenty years. It's never felt that expensive and it's backed by this data and in fact, I can't think in my memory when New York was the most expensive city in the world. And that's what's happened out here. So that tells you further that a dollar has become very overvalued, very expensive and is likely headed for some sort of a correction.
6.NDTV: Right, this is almost like burger. When burgers get too expensive...
Ruchir Sharma: The burger index or even the hotel price
NDTV: So nobody should go to New York right now, that's what you're saying deep down. Okay, in this peak dollar forecast, Indian cities are becoming the cheapest in the world.
Three out of the top ten cheapest cities or bottom ten cheapest cities are in India, the world's least expensive cities and those are Bangalore, Chennai, Ahmedabad and then you can see all the rest on that list and these are world rank 161 down to 172 cities, so everybody should come to India.
Ruchir Sharma: This is a survey done by The Economist intelligence unit. They do this. I think on an annual basis and yes, it's a telling sign, these are many indications of where the dollar is.
It's a telling sign that some of the most expensive cities in the world are in America and some of the most cheapest cities in the world are in developing economies, which they always are, but the fact that India has three out of those ten spots is interesting.
NDTV: On the next forecast, you say that when America goes down, which it will, the rest of the world will rise. The data from that is actually also fascinating. America down, rest of the world rises.
First of all, America down and the rest of the world up because U.S. stock market values are disproportionately high, I never realised that.
It's got 4% of the population and is punching well above its weight. It's got 4% of the population and 60% of the market cap. That is just out of whack. And 25% of GDP and still that's the economy and 60% of the stock market capitalization.
Ruchir Sharma: Yes, America has always had the most dominant and best-performing stock market in the world. Over a very long period of time, if you look at the last hundred years or so, America has been at the top of the charts.
It truly has a true capitalist system that way, but what's happened in the last decade is extraordinary, which is that the American stock market has done so well, has outperformed all of the global stock markets by such a massive amount that we now have a situation where, despite the fact that America is only 25% of the global economy, that share has remained stable for a while now, America's share of global stock market values is 60% and that's never happened before...
9.NDTV: Has this ever happened before?
Ruchir Sharma: Yes.
10.NDTV: Wow.
Ruchir Sharma: That number has been closer to 40-45%, because America has always had the most dominant stock market in the world, but at 60%, that number is way out of whack, and I think that number is also bound to correct itself in the next few years.
NDTV: Ruchir, another fascinating point you make is that America is like a seesaw, when America is down, the rest of the world is up, America goes up and down after each big decade, America has a downward decade, if it goes upward one decade, it goes downward the next, compared to the rest of the world.
For example, look at this graphic, America versus the rest of the world. It was going 10.1% higher than the rest of the world, and then next decade minus 3.3% lower than the rest of the world, then up 7.6%, so what do you make of that now? You're saying it's going to go down.
Ruchir Sharma: Yes, as I said, if we look at the 100-year history, then the American stock market has been the best-performing large market by a long shot.
But it follows this pattern: after it does very well for one decade, especially the recent 4-5 decades we've seen, in the subsequent decade, the American stock market tends to underperform the rest of the world, because it becomes too expensive and expectations become too high.
So after this very extraordinary decade that America has had of great performance, I think that it is now set for underperforming in the coming decade, also because its size has become disproportionate, so that will allow other countries, including emerging markets such as India, to do much better than America. That's my forecast, and I think in 2023 we are likely to see shades of that play itself out.
NDTV: The other point you make in your next forecast is that tech stocks are going to shrink, and if you look at that, that's what happened after decades in which big tech firms dominated; they shrank in the next decade. That's historically true. These are the top ten firms by market capitalization.
If you're in the top ten one decade, there is a high probability that you will not be in the top ten the next decade, just ten years, and you can transform everything.
Ruchir Sharma: Yes, so I think that this is very telling, that by market value, the top ten firms in the world at the beginning of every decade change, and as you can see, eight to nine of them change.
And when we had the last tech boom, which ended in 2000, the top tech firms in the world then were very different from what you have today; those days you had Cisco, Intel, and IBM. The only survivor in a way has been Microsoft.
NDTV: Microsoft has an amazing track record.
Ruchir Sharma: Yes, but the top tech firms in the world today are very different from what they were back then, as you can see in the last two or three years there has already been a lot of churn that has been taking place.
The Chinese tech firms have fallen off, they are no longer in the top ten. Even in America, a firm like Meta, Facebook's parent, that used to be in the top 10 is now not even in the top 25.
So this churn has begun and I've been telling people that I will not allocate any money or capital to these tech firms because that's the nature of the game, that once you become so big, so dominant, your business model gets spent, more competition comes in regulatory pressure increases and that sows the seeds for new firms to emerge.
And in general, I feel that tech space became very overvalued and overheated, and that's going to cool down and we're seeing that effect in even India now where a lot of the tech craze that we had for some of the unicorns and other companies and that's cooling off.
NDTV: Yes, tech slowdown will hit India as well, and it has already. In 2021, 35% of all capital raised through IPOs were tech, and in 2022, it was 2%, so do you think this pattern is going to continue?
Ruchir Sharma: Yes, I think this was a climax we had in 2021, so in many ways for people who have lived through it, there are shades of this of what happened in 2001 or so with the big tech boom and then you had a bit of a bust, and even though technology is here to stay, to be there for a long period of time, it will take a while now for this recovery to happen, for people to digest this mini bust that's happening.
It'll be much more pronounced in the U.S. but even in India you'll see some of that happening. Some of that is already here.
NDTV: And I did want to censor this next forecast of yours, because you're saying more money for TV doesn't mean better TV and less money for TV means better TV.
Just have a look at this data and don't take this seriously; TV needs money; in fact, less money has meant better TV, and money spent on TV content has surged from 2018 to 2014 from 89 billion to a hundred and forty-two billion, but the content has not done well.
Just look at his data on content; this is the ratings of content and shows; it's just a downward slide, and more money is spent, and it's just going, so less money could mean better, and that's what's happening.
Ruchir Sharma: I think that's what could happen. The basic point is this, this has been the golden age of television as you know, especially for streaming. We saw a surge in the number of new streaming services, and we saw so much cheap money available to fund new projects and new series, so global content spent on television surged over the last few years.
But my point is that quality went down. That so many shows were commissioned which were possibly poorly conceived with the script or the concept was improperly done, but just in a hurry to get new subscribers, new users.
We got so much content out there that the quality went down, the focus was on quantity, and now what's happened is that as you get much tighter money in general, as we've argued because of higher interest rates.
NDTV: They will sort of raise their bar.
Ruchir Sharma: Also because the tech sector, which is the funder for a lot of this stuff, has gone bust, I think what happens now is that the focus on quality goes up because a lot less number of series get commissioned, a lot less number of shows get commissioned, and I think that this always has implications for India, which we've already seen.
That in India, if you look at it what has happened, is that a lot of these major streaming services, the Netflix, Amazon, Disney, they had so much money to spend, they spent on buying all sorts of movies and buying lots of series and a lot of that was junk, was drivel in terms of that. But they sustained that by doing that, now they are cutting back dramatically.
NDTV: Even in India and in the world?
Ruchir Sharma: Yes, I've heard that some of India's leading services, if they were to buy, say, 30 or 25 to 30 movies directly to go digital, that number is likely to be in the single digits, maybe 6 or 7.
NDTV: From 25 to 6 or 7. Wow, that's a huge drop.
Ruchir Sharma: So that means the pressure on budgets and the stars' ability to charge is going to go down a lot.
NDTV: The next point you make is that after decades of being a big worry in the world, Japan, with high debt and all that, Japan is back. That's excellent news, and you said earlier that Japan had a major problem with debt, and now you're saying Japan's debt is now better than that of other developed countries.
For example, in the early 1990s, Japan's debt was many times higher as a percentage of GDP than the debt of developed markets. Now developed markets' debt is higher than Japan's. I think this is a transformation that is really welcome because Japan really did suffer for many years.
Ruchir Sharma: For many decades.
NDTV: Many decades of regret.
Ruchir Sharma: As you may recall, that in the late 1980s, Japan was the shining star accounting for 16% of the global economy and 45% of global stock market value. Because of the bust that happened and the way it was handled, but also driven by poor demographics, with the population shrinking, debt levels so high, and other issues, the Japanese economy and the Japanese market have done very poorly for the last three decades.
My point is that, now quietly Japan may be making a comeback because a lot of the problems that Japan has the rest of the world also has in terms, the debt levels have gone up, the demographics in the rest of the world; we're seeing more than 60 countries today have their working age population that is shrinking.
That number when Japan first went bust in 1990, barely 20 countries had a shrinking working age population. So the rest of the world has a way converging with Japanese standards.
NDTV: We're catching up to Japan, and Japan is ahead of us.
Ruchir Sharma: Japan is improving; its corporate profitability is improving over time.
NDTV: Yes, that's your next graph; look at it and explain to us how profits in Japan, which are now at a historic high, you know, a 2% profit margin, have increased threefold; that's huge.
Ruchir Sharma: Around the world we're seeing an increase in corporate profit margins, but for a country that was criticised for not focusing on profitability, I think it's interesting in Japan too that we're seeing this focus come through.
And also some other points we discussed, like female labour force participation in Japan is very high, at about 85%, and you need more of that to try and offset the demographic disadvantage that Japan has and other countries too have.
So it's a quiet comeback, it's not something which is headlined out there but I suspect this year in 2023 we're likely to see Japan do relatively well because of the fact that on the downside the rest of the world has converged with it; on the upside Japan has seen some major improvement from its corporate profitability to the female participation in its labour force, that should help Japan in general.
NDTV: One interesting point you bring up is that with Japan returning to and rising, it could lift India; foreign investment from Japan to India could go up from 3% to 7% and higher, that's the trend.
Ruchir Sharma: So, Japan's been a major investment partner of India. Having a healthier Japan with better corporate balance sheets could further that process.
Even Indo-Japanese trade has slowed down a lot in terms of that. If you look at the exports that India does to Japan, Japan's become a less and less significant partner on that. But the Japanese economy does better, which could help our exports too at the margin.
But the most important point is that Japan has been quite significant as an investment partner of India.
NDTV: Japan is improving, and the better Japan does the more India benefits.
Ruchir Sharma: Yes, that's correct.
NDTV: Your next point is about people no longer outsourcing to China but instead outsourcing outside China, and that could be a big opportunity for countries in Asia, etc.
If you look at outsourcing to China from America, China's share of U.S. imports has gone down by about 4%, while the rest of Asia has gained. India has only made a small gain, so China also seems to have gone down 4%.
Other countries excluding China in Asia have gone up 4%. So far, India's outsourcing has increased by only 0.2%, why is it that we are not getting more of that change?
Ruchir Sharma: Well, first, to put this in context, for much of the last two or three decades, China was the factory of the world, where everyone in America or Europe wanted to set up a factory in China given the scale they have and the low wages they've had.
The last few years a couple of things have happened: one, Chinese wages have shot up a lot, making it a bit more uncompetitive, and two, for geopolitical reasons, I think that people don't want to put all their eggs in the Chinese basket, they want to diversify out and so they look for new investment destinations. But very interesting, they still want to outsource because the wages are still so much cheaper in the rest of the world.
Because wages in the manufacturing sector in America are over $5000 per month, but wages in the rest of Asia are not even $500 per month, so there is a lot of incentive to still outsource, it's just that people don't want to do it to China anymore.
So which are the places that they are looking for? It's been Vietnam and Cambodia. Bangladesh's and even India's wages are very competitive, and we've seen some gains.
NDTV: To get this outsourcing that is currently going away from China, for a moment they come look at India and then go to Vietnam, so there is something we need to change and we need a solution on that.
Your next point is that there will be a return to orthodoxy, and what do you mean by that? Just look at this, 10 developing countries with the biggest twin deficits, you mean fiscal plus external account deficit and India is in the top 10 of the world in terms of that, so this is a worry and now orthodoxy means change that.
Ruchir Sharma: No, in terms of the point I'm making here, which is that because the era of easy money is over, interest rates have risen everywhere, and financing in general has become much more difficult.
In this environment, the scope for policymakers to do something too experimental, something away from what is defined as economic orthodoxy, which is that you need to follow a tight fiscal policy, you need to have relatively high interest rates, if you try do so something different the market's going to come and punish you.
We saw that in the last year or so, exhibit A being U.K. where Liz Truss tried to do something too different in terms of cutting taxes and still not cutting spending and thinking she could blow the fiscal deficit out, the markets revolted and she in fact lost her job.
NDTV: So the world now looks very closely at deficits including your twin deficit?
Ruchir Sharma: The focus has come back when money is easy and there is too much abundance around. You could finance a lot of bad economics and bad behaviour.
NDTV: Unorthodox.
Ruchir Sharma: Unorthodox stuff like, so to speak, now that the scope is very limited, the question is for India, and it is the fact that we have generally followed an orthodox economic script that even though we have large deficits, we are not blowing them out, and one of the things for which I did sort of commend even the current folks for, was that we did not over stimulate too much because there was so much pressure to do so.
India saw some improvements, so for now, even as I believe they present the budget, I believe the focus should be on orthodoxy and not any experimentation, because the temptation will be, with an election coming up in 2024, let's spend more, let's do more like stocks and stimulus. You do not want the market to revolt against that because that would be a real problem?
NDTV: Let's look at what your data says. 2023 unusually will be a light year for elections around the world, just before the elections storm in 2024; in 2023 no country has elections this year; this has not happened this century.
Ruchir Sharma: Among the G7 countries.
NDTV: Advanced yes, yes, yes.
Ruchir Sharma: In democracies, there isn't a single country that is having elections in 2023, and that hasn't happened this century, so it's quite a coincidence that it's happened
NDTV: And you're saying in G20, the lowest number only two elections is the lowest in 35 years.
Ruchir Sharma: Yes, that is right.
NDTV: And that's what you are saying, but there are two elections, and the spotlight will be on possible regime change in Turkey and Nigeria. Are you saying this is based on opinion polls? Do you run a forecast? That's what people are talking about.
Ruchir Sharma: That's what people are talking about, the fact that there among the G20 economies, which also include some emerging markets there are hardly any elections this year.
So very rarely is something newsworthy for something not happening, and the fact, that we have a bit of a pause in 2023, is very unusual as far as the global electoral cycle goes, but a couple of countries that are having elections that are not that big but still significant are Turkey and Nigeria and both those places if I can dare say so, that if you get a regime change it could end up being good for those countries, because in Turkey's case we are seeing Erdogan who started off strong has really run his economy into the ground.
Now it's far from clear that he will lose but the opinion polls are pretty tight, so we'll see how that plays itself out so that election worth keeping on.
NDTV: You're saying we should look out for Bluebirds when there's gloom and doom, when things are going well people look for black swans; we already knew that, but now we want to look for Bluebirds and the gloom that is being forecast, that you highlight here, is that not since surveys began, have forecasters thought that a recession is going to come, is more likely than it is now; the probability of a recession is the highest it has been for 50 years.
Forecasters are now, of course, economists are invariably wrong, specially Bengali forecasters, but we do forecasts at least and we're wrong, but now a large, almost 50, over 40% are saying there will be a recession.
Ruchir Sharma: Yes, so the context here is this, one, as you point out that in the history of surveys, economists have never forecast a recession, so if a recession does happen in 2023, it will be the first time in the history of surveys that economists actually called a recession.
But the broader point here is that generally, there is a lot of gloom around the world, and it's partly because of economics and partly because of politics because we've been through such a difficult period.
There was the pandemic, and then there was the invasion of Ukraine, and then politics in many countries was not that favourable, with all sorts of surprise election results, and now black swans in general have become, rightly or wrongly, a symbol for what could go wrong.
NDTV: When things are going well, they tell you to be cautious of this or that, but when things are going badly, you look for Bluebirds, which I adore.
Ruchir Sharma: Yes, so I discovered that the Bluebird is a symbol of joy, of unexpected happiness, and thus it is a symbol of even hope. Even in the darkest of times, you should keep some hope that a Bluebird will arrive.
So my point is that even though this is a difficult era and money has become much more difficult and interest rates are higher there is a lot of forecast about what will happen.
NDTV: It's going down in growth and inflation.
Ruchir Sharma: Growth while also being conditioned by shocks, such as the pandemic.
NDTV: In fact, you have a lovely list. In times of gloom, it may be best to look for Bluebirds rather than black swans, so it is bye-bye black swans. No, one second, black swans are what we have just been through more in Ukraine, with the terrible pandemic and Brexit having a huge impact on Europe and thus the rest of the world.
We are looking for Bluebirds now, which you think may be Ukraine peace settlement, U.S.-China reconciliation, maybe, and maybe inflation disappears. Look for them in this period of gloom.
Ruchir Sharma: Yes, because all of these are difficult to predict and are not the base case forecast, but my point is that in times of gloom, something unexpected may arrive and bring us joy, so the focus shifts to looking for Bluebirds.
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