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Global Economy


August 2015
GLOBAL ECONOMY
CRISIL Insights
Global economy recovering, but still fragile
The world economy is back to its growth days, suggests the latest data from major
countries. A sharp rebound in the second quarter and the upward revision of the first-
quarter growth numbers indicate that the US is on a strong footing. The 19-nation euro
area bloc also seems to be turning a corner. Even Japan, where the central bank
recently scaled back its growth forecast for the year, is expected to do well in the
The CRISIL
second half.
Insights Global
But on the downside, IMF chief Christine Lagarde cautioned last week that a drop in
Economy series
worldwide commodity prices is likely to hurt emerging market economies. And the
represents our
global economy could face the fallout if the Federal Reserve raises short-term US
outlook on the
interest rates, which it has kept near zero since late 2008. Also, while the Chinese
economy is strong enough to withstand volatility buffeting its financial market, a
financial scenario
slowdown there could prove a drag for global growth, and commodity prices in
across the world
particular.
and provides a
Gross Domestic Product (GDP) Heat Map
perspective into
GDP Growth (Q-o-Q SA annualised %)
how it will shape
Q1-14
Q2-14
Q3-14
Q4-14
Q1-15
Q2-15
up in the near
United States
-2.1
4.6
5.0
2.2
0.6
2.3
future.
United Kingdom#
0.7
0.9
0.7
0.6
0.4
0.7
Eurozone*
1.0
0.8
0.8
0.9
1.0
NA
Japan
4.4
-6.8
-2.0
1.2
3.9
NA
China*
7.4
7.5
7.3
7.3
7.0
7.0
Note: * y-o-y % #q-o-q, not annualized
Source: Statistical Bureau, Respective Countries
Improvement
Decline
Unchanged
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CRISIL Insights
US Economy
Eurozone Economy
The economy rebounded sharply in the June
Economic confidence has hit a 4-year high,
quarter after a temporary slowdown in the first
bolstered by the third Greece bailout deal
US economy bounces back
The US economy rebounded sharply in the quarter ended June after a temporary slowdown in the first, with GDP
expanding at a seasonally-adjusted annualised rate of 2.3% quarter on quarter, up sharply from 0.6% growth (revised
from -0.2%) during January-March. The fillip came from robust consumption spending, which contributes over two-
thirds to the US economy.
Personal consumption expenditure increased 2.9% in the second quarter, from 1.8% in the first. Higher exports, too,
helped - goods and services exports rose 5.3% vis-à-vis a contraction of 6% the previous quarter. While the economy
and the job market strengthen, the US Federal Reserve's rate-hike decision is also expected to be influenced by further
progress in labour market situation before its meeting in September.
According to the latest employment report, the US economy added 215,000 jobs in July, down from 231,000 in June and
well below the three month average of 235,000. The second quarter has already shown a slowdown in Employment
Cost Index wage growth - from 0.7% in the first quarter to 0.2% - which, in addition to lower crude oil prices, could crimp
inflation. While Standard & Poor's believes the first rate hike will be announced in September, the possibility of it being
postponed to December is also gaining traction, on fears the labour market could throw up weak data going ahead.
Consumer Price Inflation (y-o-y%)
Policy Interest Rate (End of Month %)
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
July-15
United States -0.1
0.0
-0.1
-0.2
0.0
0.1
United States
0.0-0.25
0.0-0.25
0.0-0.25
0.0-0.25
0.0-0.25
0.0-0.25
UK
0.3
0.0
0.0
-0.1
0.1
0.0
UK
0.5
0.5
0.5
0.5
0.5
0.5
Eurozone
-0.6
-0.3
-0.1
0.0
0.3
0.2
Eurozone
0.05
0.05
0.05
0.05
0.05
0.05
Japan
2.4
2.2
2.3
0.6
0.5
0.4
Japan
0.0
0.0
0.0
0.0
0.0
0.0
China
0.8
1.4
1.4
1.5
1.2
1.4
China
5.35
5.35
5.10
5.10
4.95
4.85
Source: Statistical Bureau, Respective Countries
Source: Central Banks, Respective Countries
Confidence rises in Europe
Euro area economic confidence has hit a four-year high, bolstered by the deal granting Greece a third bailout, averting its
exit from the bloc for now. The Index of Executive and Consumer Sentiment, computed by The European Commission,
rose to 104 in July from 103.5 in June.
The economy continues to show signs of traction. Manufacturing activity is in expansionary mode - the flash euro area
manufacturing Purchasing Managers' Index for July is estimated at 52.2 compared with 52.5 in June. Despite a 5.6% fall
in energy prices, annual inflation rate stayed put at 0.2% in July as food, alcohol and tobacco prices rose 0.9%. Although
unemployment remains high, steady job growth and rising real wages have underpinned a rebound in consumption. The
recovery is supported by cheaper oil, monetary easing and a weaker euro. Continuing buoyancy will translate into the
euro area growing a modest 1.5% this year and 1.7% in 2016, according to the International Monetary Fund.
The UK is on a firm footing, too, with GDP growth looking up in the second quarter to 0.7% from 0.4% in the first -- marking
the tenth consecutive quarter of expansion for the economy. Services output, which makes up more than three quarters
of the economy, also rose 0.7% compared with 0.4% in the first quarter. Domestic demand remained strong, with
households bolstered by higher wages and temporarily low inflation.
China Economy
Japan Economy
China's GDP clocked 7% growth in the first half,
Japanese exports rose at their fastest pace in five
growing at the same pace in both quarters.
months in June
Japan pins hopes on second half
Lending credibility to fears that the Japanese economy likely contracted in the second quarter (GDP data for the quarter
will be released on August 17), the Bank of Japan (BoJ) cut its growth forecast for fiscal 2016 to 1.7% from 2%. It also
trimmed its inflation forecast to 0.7% from 0.8%.
Continuing with its easy monetary policy stance, the BoJ said it believed the current slowdown was temporary and there
would be an upturn in the second half of the year. The central bank is already buying yen 80 trillion (roughly $649 billion)
of assets annually as part of its aggressive monetary stimulus programme. BoJ governor Haruhiko Kuroda said recently
that he expected inflation to accelerate in coming months due to a tight labour market, and brushed off the idea of more
quantitative easing measures. Kuroda also said that consumer prices are on track to meet the central bank's 2% inflation
target sometime around the first half of fiscal 2016.
There was positive news on the trade front. Japanese exports rose at their fastest pace in five months in June, partly
because of a weakening yen and partly on account of some improvement in external demand, primarily in the US. The
dollar was trading around yen 124 at the beginning of June compared with around yen 101 a year earlier. This helped
exports grow 9.5% year on year in value terms in June, with automobiles and semiconductors comprising the bulk.
Imports fell 2.9% in value terms during the month, marking the sixth straight monthly decline. Consequently, Japan's
trade balance was a deficit yen 69 billion in June, a sharp improvement over the yen 217.2 billion deficit logged in May.
China still in lower gear
China's GDP clocked 7% growth in the first half, growing at the same pace in both quarters. Despite months of monetary
easing, the country's economy is still expanding at its slowest pace in almost 25 years. The People's Bank of China has
cut its benchmark lending rate to a record low (4.85%), after reducing interest rates four times since the start of
November.
Amidst weak global and domestic demand, China's factory growth stalled in July - the official PMI stood at 50 in July,
compared with the previous month's 50.2; the 50-point mark separates growth from contraction. After having tried
monetary policy stimulus by lowering lending rates, the Chinese government, in an effort to lend support to the struggling
economy, launched a Rmb 1 trillion (approximately $161 billion) infrastructure bond programme to fund construction
works. China has authorised its policy banks (such as China Development Bank, Export-Import Bank of China and
Agricultural Development Bank of China) to issue new bonds in order to plough money into infrastructure.
A first batch of Rmb 300 billion ($48 billion) out of a planned Rmb 1 trillion will be issued soon by policy banks that were
recapitalised recently. The money raised will be invested in housing, pipeline infrastructure and other domestic projects.
This is in line with the central bank's efforts to develop more targeted monetary policy tools to stimulate the economy.
Source: CRISIL Research
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Last updated: August, 2014
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