During the third quarter of the year, the developed economies showed signs of improvement which in turn weighed heavily on the developing economies. The US economy started the quarter on a positive note by posting an increase of 2.5% in GDP during the quarter ending in June. The data supporting the expansion of manufacturing activity in July supported the hopes around consolidation of economy over the second half of the year. However, it is the uncertainty around the continuation of Quantitative Easing dominated the news during the quarter. With the increased positive news on the macroeconomic indicators, the expectations were riding high on Fed’s move to roll back the QE program during the FOMC meeting in September. However, all the talk about the statements made by Fed’s Chairman Ben Bernanke regarding the rollback of QE program lost its steam during the quarter. FOMC, during its meeting in September decided to delay the asset purchase program. It signified the stand of Fed to continue its lower interest rate over a longer term and its concerns over the improvement of the economy. The rollback of QE which is initial planned during this year is postponed to 2014 as of now.
While the concerns over involvement of US military in Syria Crisis played its part during the quarter, the real problems for US economy surfaced during the end of the quarter. The political parties were unable to reach unison on the negotiations over the debt ceiling and budgetary terms. The decision over Affordable Care Act (ACA), also known as Obama Care has become the main point of contention. The disagreement among republicans and democrats over the ACA bill led to the shutdown of the government for the first time in 17 years. The impact of this shutdown can have striking impact on the GDP of US in the coming quarter.
Euro zone’s economy headed out of contraction by posting a growth rate of 0.3% during the second quarter. This subsided the fears of fallout of the region and its single currency. Germany lead the growth in the euro zone followed by France and Portugal. Spain, Netherlands and Italy continued the contraction. The worrisome part is that Germany contributed to 28% of this growth and the rest of Eurozone grew by a miniscule 0.1%. On the political front, it was a relatively calmer quarter for the Euro zone. Apart from the tensions in fall out of the government in Portugal and Italy, the otherwise tensed political situation of Euro Zone remained calm in the third quarter.
The European Central Bank (ECB) signified its stand to maintain the lower interest rates over a longer period. With low interest regime and significant improvement in inflation the sentiment for economic growth is improving as indicated by the PMI and GDP figures. The risk of keeping the interest rates low can impact economies of countries like Germany and France with inflation increasing on account of liquidity. However, keeping interest rates low is a supportive measure of the austerity program extended to countries like Greece, Italy and Portugal who are still coming to grips with their sovereign debt issues. Though the outlook for the coming quarter remains positive, Euro Zone still has to make substantial progress to solve its debt crisis.
In Asia, China also made significant progress in moving out of the economic stagnation. The strong
manufacturing data was well supported by the Purchasing Manager’s Index (PMI) indicating a faster
expansion over the third quarter. The increased activity on the export orders also signified the pickup in
demand for export of Chinese goods. With the inflation being under control and increased trade activity, the Chinese economy looks to stabilize and make steps for further expansion in the coming quarter. Japanese economy also continued its good run during the third quarter. The sentiments of both domestic investors and overseas investors strengthened with the election results. Mr. Abe’s government now enjoys the majority in both the houses.
This would help the government to push through on the reform front and further implement the steps towards economic recovery. The other positive for the Japanese Economy is the Olympics 2020. Japan has been chosen as the host for the Olympics event for 2020. This would help the nation in creating more job
opportunities and provide boost on the employment numbers in the coming quarter.
Fueled by the statement of Fed Chairman, the emerging markets faced increased pressure. In the Indian front, the third quarter was dominated by the volatility of the currency. During the first two months, the rupee continued its free fall and registered new lows every day. The depreciation of rupee lead to increased import bill, pushing the inflation numbers higher. In India the India’s WPI in August 2013 read 6.10 percent mark from 5.79 percent in July. During August, in a move to curb the free fall of the Rupee, RBI incorporated measures to increase the short term rates. This created a liquidity crunch in the system. RBI tried to address this issue by introducing a bond buying program through open market auctions. It also supported the State owned Oil companies by providing them means to buy US dollars directly to fund the oil exports.
In the midst of these rupee depreciation events, Raghuram Rajan took over as Governor of RBI on 4th
September 2013 as a successor to Duvvuri Subba Rao. The new RBI Governor announced himself with the
measures to curb the down slide of rupee. The markets also responded on a positive note with rupee
recovering a substantial ground against the US Dollar during the month of September. RBI in its September 20th monetary policy increased the repo rate by 25 bps to 7.5 percent, as an attempt to refrain inflation pressure on economy. Simultaneously, the marginal standing facility rate was reduced by 75 bps to 9.5 percent in order to preserve the value of the rupee. The CRR was scaled back allowing banks some more room in terms of liquidity to be parked with the central bank.
Raghuram Rajan, during the last month has shown that he would not refrain from making the tough decisions to please the markets. Though he succeeded in restoring the calmness in the markets, there a quite a few problems he needs to address. The move to increase lending rate to arrest the downslide of the rupee is having a negative impact on the growth of the country. India’s Gross Domestic Product grew at 4.8 percent between April-June 2013 which is small change from previous quarter’s revised 4.7% growth. The Services sector paid a significant contribution to this growth. The economic growth has reduced to half its mark from the peak of 9.2% in Q1′ 2011, despite the increase in GDP from preceding quarter. The figures point out that the global decoupling of the economies is still a myth and Indian economy is largely correlated with rest of the world. Weak currency continues to contribute to the existing high inflationary problems. Current account deficit (CAD) is at 4.9% of GDP $21.8 Billion for the months from April-June 2013. Adding to the CAD woes is the governments new Food Security Bill and the Land Bill, which is expected to increase once these bills, are rolled out.
Written By Arthayantra
