Nowadays alphabet R has become centre of attention all over the world. The word causing tension in, minds of all policy makers is recession. The global economy is on a stringy spot, stuck between aggressive slowing demand in advanced economies and surging inflationary trends in emerging and developing economies.
The growth slowdown is on a run
The global growth deceleration which started last summer has taken a flight. Global growth decelerated to 4½ percent in the first quarter of 2008 (measured over four quarters earlier), down from 5 percent in the third quarter of 2007, with activity slowing in both advanced and emerging economies. With weakened industrial production, pulling back of business and consumer sentiments in advanced economies and sluggish business activities in emerging economies indicate further slowdown in second half of 2008.
Accordingly, global growth is projected to moderate from 5 percent in 2007 to 4.1 percent in 2008 and 3.9 percent in 2009.
Indicators show that growth figures for United States in 2008 would moderate to 1.3%. The economy is estimated to contract moderately during second half of 2008 as consumption would deteriorate by rising oil and food prices and tight monetary policy, before it start gradually to recover in 2009. Growth projections for other advanced economies such as Euro and Japan will also put up a show of slowdown in second half of 2008.
Growth in developing and emerging economies is also on verge of slowdown. Growth in these economies is ease to around 7% in 2008-09, from 8% in 2007. In China, growth is now projected to moderate from near 12 percent in 2007 to around 10 percent in 2008-09.
Global economic outlook
Global economy is in the grip of slowdown. Weakening of economic growth around the world reflects the fallout from sub prime crisis and financial market turmoil. A recession has been strongly approaching United States, now question arises about its severity and length. With this also other developed countries is expected to go slow. And this slowdown is occurring in period with ample of inflationary pressure, complicating the job of macroeconomic policy makers.
US accounts for quarter of global economy and has important trade and financial linkages around with almost every economy around the globe. Therefore any kind of slowdown of US economy leads to chain effect in other economies.
The proximate cause of the US recession is its housing sector. Construction of new houses has fallen sharply, reflecting an unwinding of an oversupply of houses. Exacerbating the construction downturn are rising mortgage default rates -- particularly the sub-prime ones -- and falling house prices. Flowing on from all this is an intensifying credit squeeze -- put simply, banks and lending institutions have become extremely cautious, denying loans to some borrowers who have projects that would have been funded in other, less turbulent, times. The housing and financial market developments are mutually reinforcing. As a result, the IMF's baseline scenario has the US economy dipping into a mild recession in 2008.
Sustained growth in emrging economies
However projections made by IMF do not predict a drastic decline in the emerging economies. This is broadly consistent with” decoupling theory” which holds that major emerging economies – namely India and china and smaller ones such as NIE’s or ASEAN 5 – have matured enough so that US recession might not effect them as much as in the past.
For e.g. turning our focus to some of these emerging economies, we find that Chinese economy continues to grow forward. However growth will slowdown from 11.5% to 10% this year and next. On the policy front, the key action that should be taken—but that the Chinese authorities have so far refused—is a significant step appreciation of the renminbi against the dollar and in real effective terms, combined with policies to stimulate domestic demand.
In the rest of emerging Asia, growth will likely moderate somewhat in 2008 and 2009 but stay above 6 percent, with India continuing to grow at nearly 8 percent.
In Latin America, Mexico will suffer spillover effects from the slowing US economy, and growth this year is likely to fall to about 2 1/2 percent before recovering modestly in 2009. In contrast, Brazil should be able to sustain growth of nearly 5 percent, despite the strong appreciation of the real against the dollar. Growth in Argentina and Venezuela is expected to slow from the high rates of recent years, bringing down the growth rate for all of Latin America to about 4 1/2 percent this year and slightly less in 2009.
For the Middle East, high oil prices will help keep growth strong in the energy-exporting countries. The larger and more diversified economies of Egypt and Israel should also maintain growth rates in the 5 percent range.
High commodity prices will continue to benefit many African countries, and growth in the region appears likely to continue at least at a 5 percent rate.
Slowdown in other industrial countries
If we see among industrial countries other than United States, growth will slower from 2 3/4 % advances of 2007 to barely more than 1 1/2% this year. There is significant risk of recession to be in Japan and Italy. The impact of the yen's recent appreciation and weakening of exports to the United States, together with deteriorating sentiment among Japanese businesses and consumers, could push GDP into a couple of quarters of negative growth, even if year-over-year growth remains slightly positive. And the Japanese policy authorities have little room to provide offsetting stimulus.
In Canada, growth this year will likely fall a little below 2 percent, under the impact of slowing US growth and a strong Canadian dollar. However, solid income growth from strong export revenues should keep domestic demand relatively robust, and the Canadian authorities have considerable room to ease policy should that appear needed to forestall very weak growth or recession.
In case of united kingdom growth is expected is slowdown by less than 2%.But this is not entirely unwelcome in view of the need to curb inflationary pressures, and the Bank of England has opulence of room to abate further should that appear warranted. The Reserve Bank of Australia has continued to tighten in recent months and would surely welcome the forecasted slowing of growth to 3 percent this year.
The euro area is no exception to these industrialized countries. Growth is expected to slowdown to 1.6%. This slowdown will affect all the countries of this area. The Italian economy is in sluggish phase and is at risk of going into the grip of recession. Growth tends to remain stronger in Germany, affirmed by good export performance in the face of weak consumer demand. France will lag slightly behind Germany, while Spain will slow considerably due to a sharp downturn in home building. The slowdown will probably be reflected in a small uptick in unemployment and will be unpopular with most politicians. However, with inflation running well above the ECB's tolerance rate of 2 percent, the central bank is likely to see the slowing of growth more as a solution than as a problem.
Plague of inflation
Inflation is spreading like an irretrievable disease in both advanced and emerging economies. In many countries pushing force behind this higher inflationary trend is higher food and fuel prices. Oil prices have surged substanially against the previous records in real terms , due to supply concerns and limited spare capacity and inelastic demand, while driving force behind food prices is bad weather conditions and strong growing demand.
This kind of inflationary environment makes the job of all macro-economic policy makers all the more challenging. In addition to this history also gives the ground of pessimism. The last time the world economy faced the inflationary shock generated by commodity boom in 1970. It ended in period of high inflation and unemployment, slow growth an episode which was named as inflation. And recessions that involve major damages to the financial systems and housing markets tend to last much longer than other recessions, with the Great Depression of the 1930s being the most extreme example of how bad things could get.
Advanced countries centeral banks are in major dilema with current inflation figures which rose to 3.5% in may 2008. The increase in inflation is more marked and broader in emerging and developing economies with figures reaching to the peak of 8.6%. In these economies, food and fuel make up a larger share of consumption baskets and sustained strong growth has tightened capacity constraints.
Peeping into future of these advanced economies inflationary pressures are likely to be refuted by inflationary presures and with commodity prices to stablize , the inflation figures will start to moderate by 2009. In emerging and developing countries, inflationary pressures are surging faster, fueled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 percent and 7.4 percent, respectively.
Global economy is in the grip of slowdown. Weakening of economic growth around the world reflects the fallout from sub prime crisis and financial market turmoil. A recession has been strongly approaching United States, now question arises about its severity and length. With this also other developed countries is expected to go slow. And this slowdown is occurring in period with ample of inflationary pressure, complicating the job of macroeconomic policy makers.
US accounts for quarter of global economy and has important trade and financial linkages around with almost every economy around the globe. Therefore any kind of slowdown of US economy leads to chain effect in other economies.
The proximate cause of the US recession is its housing sector. Construction of new houses has fallen sharply, reflecting an unwinding of an oversupply of houses. Exacerbating the construction downturn are rising mortgage default rates -- particularly the sub-prime ones -- and falling house prices. Flowing on from all this is an intensifying credit squeeze -- put simply, banks and lending institutions have become extremely cautious, denying loans to some borrowers who have projects that would have been funded in other, less turbulent, times. The housing and financial market developments are mutually reinforcing. As a result, the IMF's baseline scenario has the US economy dipping into a mild recession in 2008.
Sustained growth in emrging economies
However projections made by IMF do not predict a drastic decline in the emerging economies. This is broadly consistent with” decoupling theory” which holds that major emerging economies – namely India and china and smaller ones such as NIE’s or ASEAN 5 – have matured enough so that US recession might not effect them as much as in the past.
For e.g. turning our focus to some of these emerging economies, we find that Chinese economy continues to grow forward. However growth will slowdown from 11.5% to 10% this year and next. On the policy front, the key action that should be taken—but that the Chinese authorities have so far refused—is a significant step appreciation of the renminbi against the dollar and in real effective terms, combined with policies to stimulate domestic demand.
In the rest of emerging Asia, growth will likely moderate somewhat in 2008 and 2009 but stay above 6 percent, with India continuing to grow at nearly 8 percent.
In Latin America, Mexico will suffer spillover effects from the slowing US economy, and growth this year is likely to fall to about 2 1/2 percent before recovering modestly in 2009. In contrast, Brazil should be able to sustain growth of nearly 5 percent, despite the strong appreciation of the real against the dollar. Growth in Argentina and Venezuela is expected to slow from the high rates of recent years, bringing down the growth rate for all of Latin America to about 4 1/2 percent this year and slightly less in 2009.
For the Middle East, high oil prices will help keep growth strong in the energy-exporting countries. The larger and more diversified economies of Egypt and Israel should also maintain growth rates in the 5 percent range.
High commodity prices will continue to benefit many African countries, and growth in the region appears likely to continue at least at a 5 percent rate.
Slowdown in other industrial countries
If we see among industrial countries other than United States, growth will slower from 2 3/4 % advances of 2007 to barely more than 1 1/2% this year. There is significant risk of recession to be in Japan and Italy. The impact of the yen's recent appreciation and weakening of exports to the United States, together with deteriorating sentiment among Japanese businesses and consumers, could push GDP into a couple of quarters of negative growth, even if year-over-year growth remains slightly positive. And the Japanese policy authorities have little room to provide offsetting stimulus.
In Canada, growth this year will likely fall a little below 2 percent, under the impact of slowing US growth and a strong Canadian dollar. However, solid income growth from strong export revenues should keep domestic demand relatively robust, and the Canadian authorities have considerable room to ease policy should that appear needed to forestall very weak growth or recession.
In case of united kingdom growth is expected is slowdown by less than 2%.But this is not entirely unwelcome in view of the need to curb inflationary pressures, and the Bank of England has opulence of room to abate further should that appear warranted. The Reserve Bank of Australia has continued to tighten in recent months and would surely welcome the forecasted slowing of growth to 3 percent this year.
The euro area is no exception to these industrialized countries. Growth is expected to slowdown to 1.6%. This slowdown will affect all the countries of this area. The Italian economy is in sluggish phase and is at risk of going into the grip of recession. Growth tends to remain stronger in Germany, affirmed by good export performance in the face of weak consumer demand. France will lag slightly behind Germany, while Spain will slow considerably due to a sharp downturn in home building. The slowdown will probably be reflected in a small uptick in unemployment and will be unpopular with most politicians. However, with inflation running well above the ECB's tolerance rate of 2 percent, the central bank is likely to see the slowing of growth more as a solution than as a problem.
Plague of inflation
Inflation is spreading like an irretrievable disease in both advanced and emerging economies. In many countries pushing force behind this higher inflationary trend is higher food and fuel prices. Oil prices have surged substanially against the previous records in real terms , due to supply concerns and limited spare capacity and inelastic demand, while driving force behind food prices is bad weather conditions and strong growing demand.
This kind of inflationary environment makes the job of all macro-economic policy makers all the more challenging. In addition to this history also gives the ground of pessimism. The last time the world economy faced the inflationary shock generated by commodity boom in 1970. It ended in period of high inflation and unemployment, slow growth an episode which was named as inflation. And recessions that involve major damages to the financial systems and housing markets tend to last much longer than other recessions, with the Great Depression of the 1930s being the most extreme example of how bad things could get.
Advanced countries centeral banks are in major dilema with current inflation figures which rose to 3.5% in may 2008. The increase in inflation is more marked and broader in emerging and developing economies with figures reaching to the peak of 8.6%. In these economies, food and fuel make up a larger share of consumption baskets and sustained strong growth has tightened capacity constraints.
Peeping into future of these advanced economies inflationary pressures are likely to be refuted by inflationary presures and with commodity prices to stablize , the inflation figures will start to moderate by 2009. In emerging and developing countries, inflationary pressures are surging faster, fueled by soaring commodity prices, above-trend growth, and accommodative macroeconomic policies. Hence, inflation forecasts for these economies have been raised by more than 1.5 percentage points in both 2008 and 2009, to 9.1 percent and 7.4 percent, respectively.
Financial markets turmoil
Financial markets all over the globe are facing tough times. This current financial turmoil is being regarded as key source of uncertainty in United States for present economic situation with spillovers in Europe, Japan and emerging markets. Among this global turmoil the markets for credit instruments and financial institution which deals in such instruments have suffered the most.
Now one needs to find out what caused such a trigger to financial markets.
Before probing the cause’s one thing that is needed to be noted is the turmoil has been most severe in US financial markets and institutions. In United States the main difficulties arose from subprime mortgages and financial instruments involving such mortgages. Analyzing on broad gamut credit markets has become illiquid and dysfunctional. The extent of this crisis in credit markets is even more remarkable in view of the exceedingly aggressive actions taken by the Federal Reserve and the important but less aggressive actions of other leading central banks.
Bombshell in Indian stock markets
India is not any exception, in the era of economic integration with world economy, the ripple effect of global financial turmoil can also be felt in India. With sensex, crossing 20,000& plus, the brokers, trade pundits predicted new highs for 2008. And their predictions started to become true with sensex crossing 21000 mark on 8th January 2008. But this jovial period was short lived. The mounting sensex suddenly took a different route of dropdown. Sensex witnessed a biggest absolute fall in history, shedding 2062 points intraday. It closed at 17605.35, down 1408.35 points or 7.4%. This fall was sparked off by weakness in global markets. These markets crashed on the account of broad based sell off that emerged in the global equity markets. Fears over solvency over major western banks rattled stocks in Asia and Europe.
Now what can be the reasons for such a trend?
Let’s try to figure out answer for this question.
Analyzing the financial figures it turns out that first month of financial year 2008-09, turned out to be positive for investor, with BSE index closing at a gain of 10.5%. A combination of firm global markets and technical factors like short covering were the main reasons for the move up in the market.
April was last month when sensex closed in green. There after there is no stability found and sensex mostly ending in red. Sometimes sensex gained 600pts but the very next day it tumbled by 800 pts and this trend till now seems to be never ending. All the predictions made by analyst, trade pundits, brokers have failed. This see-saw game played by sensex is initiated by high inflation rates, mounting crude prices tightening RBI policies, weak industrial production data, and political uncertainties and sentiments of domestic as well as FII’s. The only positive sign which came as sign of relief was depreciation of Indian rupee which enlightened the IT sector and UPA gaining confidence. At current phase sensex is revolving around 14000 to 14500 and it’s hard to predict in which direction it will move.
The market declined sharply when hike in fuel price were announced by government 4th June 2008. This fueled the possibility of reaching inflation into double digits. The BSE sensex declined 843.39 points or 5.24% to 15,572.18 in the week ended 6th June 2008.
Presently we witness market tumbling after the RBI announced further hikes in repo rate as well as CRR both increased to 9%. Also blasts of Ahmadabad and Bangalore adding to the worries and enhancing negative sentiments.
Currently hike and seek is being played by crude oil prices and inflation & RBI are effecting are markets to great extent. It seems to quite surprising that epicenter of sub prime crisis is US and tremors are being felt in India also. The loss of market cap in US is 14% vis-à-vis 38% in India. Even after analyzing these causes of financial there is lot in more store for Indian story. Or else $ 200 billion institutional investors would have fled to safer waters.
Exports account for 14% of India’s GDP, India is less sensitive to external shock than many Asian nations. Savings in India have risen to 35% on the growing GDP base: 17% of this is in gold, commodities and real estate while rest 18% represents financial savings. Even this is skewed towards deposits both banking and non banking, while percentage of savings in share and debentures is just 6.3%. If there is increase in percentage of this to 25%, there would be in total $ 40 billion diverted to capital markets. So even after a facing such financial turmoil, we can hope for a positive market.
Uncertainties surrounding global economy
· Oil prices kicked off to$150: mounting of oil prices will put central banks in a fix. With no control over oil prices or oil supply central banks counts upon slowdowns to reduce inflation pressures. How these high oil prices add further fuel to the fire to an sensitive global economy dealing with weak consumer demand, taut credit and slow income growth. These higher oil prices cut demand in long run, but in short run we have to bear this trend of high global inflation.
· Skate into global recession: already hitted by US and European housing woes, Asian countries may face another round of turmoil from it. If demand pulls back in shock, we could be well into a recession before policy can stop the glide. Geographic and/or asset diversification would likely do little to protect investors as all markets ride the slump together.
· Stagflation: though today’s conditions are widely different from those of 1970’s, but there is a constant fear of economies falling in to the grip of 1970’s stagflation. However such a cycle would be painful for bond and equity markets, but it should be for shorter period than 1970’s experience.
Policy framework to curb inflation
Policy makers are going through a tough time. They have to maintain two things of curbing inflation plus also being mindful of downside risks to growth.
Many central banks have tightened monetary policy stances but interest rates in emerging and developing economies generally remain negative in real terms, particularly in countries where exchange rate management has limited monetary policy flexibility.
The risk of second-round effects from the surge in commodities prices and continued stress in financial markets complicates the response to the slowdown, particularly in advanced economies. The case for policy tightening in these economies is stronger than before the recent oil price increase but still not established, given that inflation expectations and labor costs are projected to remain well anchored and growth momentum is weak. However, inflationary pressures need to be monitored closely. In many emerging economies, particularly those that continue to operate above trend growth, monetary policy needs to be tightened combined with greater fiscal restraint and, in some cases, with more flexible exchange rate management, in order to reverse the recent build-up in inflation.
In summing up it can be said that though this US slowdown crisis will affect every economy’s growth trajectory. In an attempt to cushion economies from ill effect of this crisis, it is desirable that steps should be taken to increase demand.
As far as Indian economy is concerned it will get affected but impact would be moderate on India’s growth story. India is now far headed from period of 1970’s , shocks wont be hampering its growth story.
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1 comment:
The economic conditions in europe and the united states can best be described as dire indeed.
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