By Aditi Singh

Abstract

Economic supercycles refer to a time period of a high economic growth in any nation which results in a continued high demand for commodities. Owing to the fall in economic activity due to covid-19, there was a slowdown in economic growth. However, as we see now, the economy is back on track. Does that open the gates for an economic supercycle? This article attempts to answer this questions through studying the case of India. 

Introduction

The global economy is very cyclical, which means it experiences booms and busts on a regular basis. Expansion, peak, contraction (sometimes known as a recession), and trough are the four stages of an economic cycle, which are followed by another expansion to signal the start of a new cycle. The stock market and the economy both follow oscillating patterns on a graph. The rise and fall of the chart occur at various times. Investor sentiments, geopolitical and government factors, and consumer purchasing power and outlook all factor into this. Stock and commodity prices fluctuate due to a variety of factors. Their prices go through cycles as a result of this. The price of a stock at the market close is frequently used to gauge its performance. The economy is far more difficult to quantify. Consumer Price Index (CPI) is used by the Federal Reserve (the Fed). However, other metrics can be used to assess financial performance. The economy’s strength changes for a variety of causes, and it also tends to follow cycles.  Making investment decisions based on what the market performed yesterday or last month is like attempting to drive while staring at the rear view mirror. Stock markets are forward-looking, meaning that their prices reflect predicted future earnings. Given their proclivity to lead the rest of the economy, stock markets have a history of rising even while their economies are still in recession.

The concept of economic supercycles refers to a long period of expansion, usually fueled by strong increases in demand for goods and services. We will look at it in detail in the next section. 

Economic Supercycles

A typical economic cycle lasts roughly 5.5 years, while some are shorter (as little as 18 months) and some are longer (over a decade). A supercycle ,on the other hand, is a long period of expansion, usually fueled by strong increases in demand for goods and services. Economic supercycles are known for generating significant, long-term demand for raw and manufactured resources such as metals and plastics, surpassing commodity producers’ capacity. Super cycles are generally associated with long-term periods of expansion for commodity markets, which are often favourable for stock prices.

increase the amount of cash held by commodity producers, prompting many of them to expand their production capacity. Many commodities producers reacting similarly to supply shortages increase the risk of creating too much additional production capacity, a trend amplified by supercycles’ extended duration. Commodity prices are pretty volatile due to the difficulties of matching supply and demand.

Factors in the Indian Economy Which Point Towards the onset of an Economic Supercycle

India’s relative situation stands out among developing markets/Asia. According to IMF estimates, the GDP growth in the Indian economy for 2023 would be 5.9% which is higher than many other growing nations. According to the research, India’s development momentum is boosted in part by a more open economy approach to Covid than China, which has a “zero Covid” policy. Various factors and trends have been presented here along with data and graphs collected from sources like the World Bank database, and the Reserve Bank of India which has been used to make the assignment a well-researched one.

The global economic downturn,  where major economies like that of the US will slow to 1.4% according to the IMF; offers India with an ideal circumstance. Lower pricing patterns help India’s imports, cutting inflation and exerting downward pressure on the INR, because India is a net importer of several commodities. As a result, domestic rate hikes are expected to be modest; South Korea, Brazil, and Russia are some countries that have already begun to boost rates. India has avoided raising policy rates in the past, but this is projected to change in near future.

An examination of six important economic cycle components finds that India’s conditions are favorable for the start of a large cyclical upturn. Housing, nonperforming loans, and corporate profit cycles all went positive in 2022, with these cycles typically lasting 6-10 years.

Corporate leverage is at an all-time low, allowing companies to take significant investment risks. Although the bigger capex cycle has not yet flipped, it usually follows the housing cycle. Interest rates will almost probably rise, but this will not be an issue in the early stages of the cycle. In FY23, we expect India’s GDP to grow by at least 7%.

The housing cycle in India lasts 6-8 years, and following a slump in 2013, the cycle flipped in 2021. The graph in Figure 1 shows that the trend of the housing cycle has been on a hike and is expected to rise even further due to many factors and trends that have emerged in the market currently. As new product releases have yet to catch up with rapidly rising sales, inventories have plummeted to eight-year lows, which should lead to price hikes and a continuation of the cycle.

Figure 1- Trend of Housing Sector Prices in India

Source- National Housing Bank, India

The other noteworthy change is in bank balance sheets, where gross non performing loans (NPLs) have declined from 12% in March 2018 to 7% now (shown in Figure 2), and net non performing loans (NPLs) have decreased by 59 per cent despite an increase in provisioning. As a result, banks’ ability to lend has greatly expanded.

Table 1- Non- Performing Loans In India

Figure 2- Non-performing Loans

Source- Author

Over the period FY11-FY20, corporate profit growth was abysmal, with a CAGR(Compound Annual Growth Rate) of only 0.4 percent. With a 51% increase in earnings from FY20 to FY22, the tide has turned (shown in Figure 3). For the first time since 2013, home sales in the Top-7 cities have crossed 400 million square feet. Housing demand is expected to remain strong in 2023, possibly expanding by 10% or more year over year. A rise in premium and luxury property sales propelled the early recovery. Along with that, as India’s economic recovery develops and non-salaried sector jobs return, demand for low-cost housing would rise.

Figure 3- Corporate profits in India

Source- Centre for Monitoring Indian Economy Pvt. Ltd. 

Conclusion

In the past, the economic supercycles have shown the trend that there will be a rise in demand for two commodities: industrial metals and energy, both of which are critical inputs to the industrial economy. Commodity supercycles for the materials most heavily used by particular sectors can be triggered by supercycles in specific sectors of the economy. Precious metals might not see a rise in industrial demand during commodities supercycles, but they do see an increase in investor demand since they may be used to hedge against inflation effectively. In the past, supercycles have been triggered by a variety of economic causes. A few examples from recent history are the late-nineteenth-century industrialization of the United States; The post-World War II reconstruction of Europe and Japan and China’s rise to prominence as a global manufacturing powerhouse. Each of these eras of persistent economic expansion resulted in significant shifts in commodity demand.

However, it is vital to remember that a long-term shift to low-emission power sources and modes of transportation and a shift away from industrialization and toward digitization might drastically alter which commodities see the most prominent demand growth during a supercycle. These broad market shifts may have a detrimental influence on demand for fossil fuel commodities like oil, coal, and natural gas, which have all seen robust and expanding demand during commodity supercycles in the past. Given this likelihood, investors should pay close attention to what is fueling an economic boom so that they can invest in commodities and producers that will benefit the most in the long run.

Image Source: Bloomberg

About The Author

Aditi Singh is currently pursuing her Masters in Economics from Indian Institute of Foreign Trade, Delhi. She has a keen interest in Macroeconomics, Financial Markets, International Trade and Behavioral Economics. She has worked as a finance intern at Stock Holding Corporation of India Ltd. and at ITC Limited. She is presently a summer intern at National Stock Exchange (NSE), Mumbai in the Economic Policy and Research Department. Having had internship experiences at such organizations, she is able to throw light on such topics by giving a real-time market perspective with all the intricacies involved in day-to-day finance and economics.