S&P global chief economist Paul Grunwald was in India and spoke to TOI about the inflation challenge, the China shadow on manufacturing and large tech companies impacting bond yields. Excerpts:What is driving global growth amid the headwinds?It’s mostly the AI revolution. People are doing historical analysis of big Investment waves, canals, railroads, and this is one of the biggest in terms of GDP. So it’s a big positive demand shock that pushes up output and prices. The debt issuance by hyperscalers, which is a proxy for capex, is $800 billion this year. We’re on the steepest part of the gradient of the path and it’s going to keep rising to well over $1 trillion per year and then stay there for a while. Since we’re at the steepest part right now, we are seeing a huge contribution to growth.Sitting in the US, how do you view India? What are the challenges and the risks for India?India comes up as the new fast growing emerging market. China’s not in an emerging market anymore so the growth baton has clearly passed to India, which is very different from China. China has overcapacity in manufacturing and India has a little bit of everything. The question is what’s the path to middle income, upper middle-income status over the next generation if that doesn’t go through manufacturing. The Europeans, Americans, the Japanese, rest of east Asia have taken that path. This goes back to AI. Is it possible that services become as tradable as manufacturers? There are some examples with AI where you could start to trade, say, medical services. But the path has to have productivity. If you look at the way China’s been developing, it’s different from the way Japan and Korea did, where they moved up the manufacturing ladder. China is filling the entire spectrum. They don’t appear to be releasing the lower end. That’s blocking the countries below them from doing what China did. India has a big domestic market, unlike Bangladesh or Vietnam, which have to trade their way up.Globally, do you see inflation as a big risk? What’s your view on bond yields and will this be a shallow rate increase cycle by central banks?Bonds yields are led by the US. The size of debt issuance by hyperscalers has gone from being very small to $800 billion this year. We used to tell stories of govt crowding out the private sector. Here the private sector is crowding out govt. If we think price pressures are structurally higher now, we need higher interest rates to get our inflation targets. That gets built into the long-end of the curve. A lot of the success of central banks over the last few decades was helped by China keeping prices down by joining the global economy. Inflation has been sticky, particularly in the US. So, we are in a higher interest rate world in terms of the inflation shock right now. Crude prices jumped to $120 and are now back to around $100, but diesel, gasoline and US jet fuels are elevated. Those are going in as input prices into firms and consumers and they’re starting to leak out. We can see the upstream price pressures in the producer price indices. It will show up in margin compression for firms, which is not going to be good, or they pass it to consumers. That’s why you’re seeing a couple of notches of tightening by central banks.
