Doctors carry out triage on patients by checking the vital signs as to who can be saved or who can’t. Investors can visualise economic growth as taking a patient’s temperature, with “normal” in the region of 2.5 per cent to 3.5 per cent – perhaps double in a developing economy. Too high, and bull market passions put the patient in danger of overheating; too low and the economy shivers.
Out of 45 developed and developing economies around the world, there are few whose vital signs look optimistic. The world has chronic fatigue syndrome and policymakers and their spin-doctors continue to look for the cure for low economic growth.
As in medicine, all of the vital signs are related in some way, and few links are as strong as inflation and interest rates. Inflation is like blood pressure; when too high it can threaten to burst the bubble, and when too low, it represents weak economic demand. Interest rates are the heartbeat of an economy and vary in line with inflation, as they can be controlled by central banks.
India stands out best in the growth/interest rates sweet spot as its high 7 per cent growth relates well to relatively high 6 per cent interest rates. The interest rate is high enough to be used to manage the economy – like an effective drug.
Indonesia and non-commodity-based ASEAN and Latin American nations have similar vital signs, as has Turkey – although it recently caught the Russian flu.
Australia has the best vital signs of all developed markets with growth and interest rates both around 2 per cent. The advantage of having relatively high interest rates is that it might provide some immunity to rising rates elsewhere.
In much of Europe, notably France, the vital signs are flatlining – zero growth, zero inflation and zero interest rates. Russia and Brazil need intensive care as their economies are losing 3-4 per cent of their body mass this year, hit by the collapse of the oil price, falling currencies, and high interest rates.