Posted by: Deepa Vasudevan on Mon, Oct 14th, 2019
It's a bird, it's a plane.... It's the economy!
Economists often use aviation metaphors to explain the state of the economy. Perhaps it is because a modern economy is a bit like an aeroplane. Both have multiple components and complex systems, rely on skilled guides (air traffic controllers/policy makers), and are affected by external catastrophes (bad weather/global trade war). A plane, when flown properly under normal conditions, reaches its destination safely. Similarly, an economy, when guided by appropriate policy in a conducive environment, is likely to take its residents towards growth and prosperity. The connection is direct and obvious, but casual readers may not be able to correctly interpret and understand the aviation-related terms commonly used to describe economic growth. This is a brief primer of some of the phrases widely seen in media reports.
- Engines – How many need to be up and running?
One of the most popular aircraft of all times- the Boeing 747 “Jumbo Jet”- flies on four engines. That is pretty much like an economy- where growth is driven by four sources of demand- private consumption, government spending, investment and net exports (exports minus imports). The Boeing 747 can usually continue flying normally if one or even two engines fail, and there are instances of safe emergency landings on just one working engine. Yet, ideally, this plane needs all four engines to be fired up and functioning for optimal performance. The same is true of an economy. The Indian economy is consumption driven- private consumption spending has grown at an average of 7.7% over the past seven years, and has rarely fallen below 6%. Consumption has been India’s most reliable growth engine over the past two decades, while other engines have fired up now and then. During the 2004-07 boom years, exports and investment showed double-digit growth, giving the economy three fully firing growth engines. When the financial crisis hit in 2008, the government announced a massive fiscal stimulus, so that government spending was the major demand driver during 2008-09 and 2009-10.
In general, two out of four engines functioning- good, three engines working- even better, all four fired up- we are set for a boom! If only one engine is running- an emergency landing may be needed, unless one or more engines can be started up again. Now take a look at quarterly growth numbers: in the last two quarters, growth in consumption, investment and exports have been falling, and for the most recent quarter (Apr-June 2019) all four demand drivers show declining growth! This explains why the government rushed to announce tax cuts and the RBI is supporting with interest rate cuts: unless the growth engines are revived, the economy is in danger of grinding to a halt.
- Stall Speed: Is our Growth Stalling?
The stall speed of an aircraft is the minimum speed required to maintain level flight. At speeds below the stall speed, the aircraft will start descending. For an economy, if growth drops below the stall rate, the economy will slow down and may go into a recession. Recent estimates suggest that the US economy has a stall speed of 1%-1.5%. This means that if growth falls below this level for a few quarters, unemployment would increase, and households and companies would cut back expenditure, leading to further growth declines, which may eventually lead to a recession. There are no official stall speed estimates for the Indian economy: but it is likely that a growth rate of 5% or below for a while would create uncertainty about jobs and income, and lead to a rapid decline in consumption and investment. That explains why there was such a fuss about the 5% GDP growth in Apr-June 2019! When economists speak of “stalling” growth, they usually mean that growth is approaching stall speed.
- Head winds/Tail winds
Headwinds are winds that blow against the direction in which the aircraft is flying. Tail winds are winds blowing in the direction in which the aircraft is flying. Tailwinds increase the speed of an aircraft, while headwinds may have the opposite effect. In the context of an economy, tailwinds improve economic growth; headwinds have the potential to reduce growth. For example, low crude oil prices and a good monsoon are important tailwinds; while the trade war and geopolitical tensions can be considered as headwinds for the Indian economy. In its October 2019 monetary policy, the RBI highlighted some global and domestic headwinds for the Indian economy (Pic 3).
Pic 3: Growth Headwinds, October 2019
- Hard Landing/Soft Landing
A hard landing occurs when a plane hits the ground with great speed and force, with the potential to damage the aircraft as well as injure the passengers. In contrast, a soft landing does not endanger the plane or passengers, and has no adverse impact. These terms are often used to describe shifting trends in economic growth. When a rapidly growing economy faces a sudden and steep slowdown, it is called a hard landing. On the other hand, if policy makers are able to steer an overheated economy gently towards a lower growth path, that is a soft landing. Soft landings are extremely hard to achieve because they aim to cool an overheated economy and deflate asset bubbles without cutting off growth completely- and this is a delicate balancing act that requires both careful policy action and luck. For example, the US Fed is currently cutting interest rates in order to achieve a soft landing. But despite the most well-thought out policy actions, an unexpected worsening of the trade war could lead to a sharp decline in growth.
When an aircraft goes into a tailspin, it spins round and round while descending quickly to the ground. A plane in a tailspin is out of control and hurtles dramatically to a crash landing. If an economy, or a currency, or stock markets, or even a company’s profits go into a tailspin, it means that its performance has worsened rapidly. For example, the stock price of YES Bank went into a tailspin on Oct 1, 2019, on concerns about its financial health and exposure to NPAs (Pic 4).
Pic 4: Stock Price of YES Bank
Source: Hindu Business Line, Oct 2, 2019. Downloaded from https://www.thehindubusinessline.com/markets/stock-markets/stock-price-slump-due-to-forced-sale-of-pledged-shares/article29576816.ece
A nosedive is a steep plunge, nose down, by an aeroplane, usually due to a loss of control by the pilot. The word “nosedive” is used to describe a sudden steep fall in value of any economic or financial variable, such as stock price, or economic growth, or industry revenue. Nosedive and tailspin are often used together and interchangeably. For example: “sanctions from the US have sent Iran’s economy into a tailspin, and the economy could nosedive further as tensions continue to rise between the two countries”.
Let us end with a brief, metaphor-heavy description of the current state of the Indian economy. Economic growth nosedived to 5% in Q1FY2019. The Noble Laureate and economist Abhijit Banerjee suggested that the economy may be going into a tailspin. The steep slowdown in consumption- the main growth engine- is a matter of concern. If the fiscal and monetary measures being announced to prevent a hard landing do not revive growth, the economy may hit stall speed, and slip into a deeper slowdown!
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