With a strong performance in the first quarter, US economy was expected to set the positive tone for world economic recovery this spring. All the hype and hope of complete and fast recovery fizzled out a bit in the month of April. Following the trend of recent years, the strong start for the year was followed by weak data in the early spring. March data indicated that the economy is losing some momentum. Household consumption is unlikely to sustain its current rate of growth, as it has come at the cost of the lowest saving rate since 2007. The manufacturing numbers were also hinting at a slowdown. Though housing sector is back on track, it has been losing steam. Low inventories are also not in favor of housing sales. All in all it is another spring slowdown for the United States. However, the problems that other economies are facing, allows US to look more attractive. The sentiment seems to be positive for US. US markets are reflecting the positive sentiment by continuously showing good results.
The support for Austerity is fading fast in the Euro Zone. The economic stagnation in the Euro Zone region is being blamed on the Austerity measures implemented by its major nations. The member nations are now asking for easier debt reduction programs and getting them their way. Greece was given an extra two years to reduce its deficit below three percent of GDP. Portugal was granted an extra year till 2015 to get its house in order. The “troika” of European Commission, the International Monetary Fund and the European Central Bank is also in favor of the new economic tradition of the Euro Zone : “The Extra Time needs”. Spain which was given a waiver of deadline this year, got an extension of two years. The Spanish Government is now in favor of structural reforms over austerity measures for economic growth. Germany and Spain announced plans for joint investments in Spanish Companies. The program has close resemblances with the assets purchase program implemented by pro Keynesian followers.
Politicians and decision makers across the Euro nations are taking more vocal anti – austerity positions. The President of France made a statement saying Austerity was not the solution to the economic Crisis. Italy’s new Prime Minister joined the chorus by urging the European Union to drop the austerity policies and promote initiatives fostering the growth instead. The final nail in the coffin for the austerity measures was the statement by President of European Commission. He mentioned that Austerity has reached its limits in many aspects. When the President of European Commission himself presents a case against Austerity, the clear change of stance is evident. Even the staunch follower of Austerity, Germany had to rethink its stand owing to pressure from its workforce.
In order to implement them successfully, Austerity measures need to have minimal political and social support. Austerity, in its simplest form is cutting down your expenses and finding the ways to increase the cash inflow to boost the weak economy. But there is “Good Austerity” and then there is “Bad Austerity”. Austerity implemented only by tax hikes in an economy with already high unemployment rate can be termed bad. Austerity based on the appropriate spending cuts is the best way to reduce a country’s public debt. Spending —based fiscal cuts complemented by supply side reforms can have a long lasting positive impact on the economy.Consider the case of Italy. The tax burden on the individuals was raised. The actual spending cuts have been miniscule. Even the spending cut measures aided in increases of local taxes.
Major cuts to corporate subsidies were ignored. With higher taxes, the austerity measures lost the support of tax payers. The political parties sung along with the voters and are now against austerity. Austerity was not the problem, Implementation of the austerity measures was. With US implementing sequestration measures and Euro Zone opting for easy debt reduction programs, the middle ground of austerity and spending measures is gaining momentum.
In Asia, China made a currency pact with Australia. China and Australia entered a direct currency deal in the month of April. Australia now is the third country after US and Japan to have a direct currency agreement with China. Australian Businesses dealing with China had to bear the additional costs in the form of currency conversion. They had to convert their Australian dollars to US Dollars or Japanese Yen and then into Chinese Yuan. The new agreement meant that the Australian Traders can now directly convert to Chinese Yuan. Considering the large trade volume between the nations, this move can prove to be beneficial for both Australian and Chinese businesses in the long run. The success of this deal will prompt other countries to make such pacts to reduce the dependency on US Dollar.
After years of tweaks, Japanese seem to have cracked the code. The magni-tude and momentum of the economic policies by Abe’s government took everyone by surprise. From additional fiscal stimulus to structural reforms, the new policies are nothing less than one of the boldest experiments in the Japan’s economic history which was stalled for nearly a quarter century. The markets responded positively for the economic measures taken by government. However, the long term success of such policies depends on how effectively they can get out of the high public debt, low interest rates. The timing of reforms to raise the interest rates and curb the public debt would avoid the current reforms going the previously failed policies way.
Falling gold prices and crude oil prices may act in favor of India. India is leading importer of both Gold and crude oil. The decline in their prices can have a positive impact on India’s Current Account Deficit (CAD) and Balance of Payments. However, the lower prices of gold can prompt for higher demand and increased import volumes. The Prime Minister’s Economic Advisory Council has projected the GDP of 2013 -14 at 6.4 percent compared to the 5 percent rate of 2012 —13. The 5 percent GDP is the lowest in a decade’s time.
CAD has a hit a historic high of 6.7 percent. The higher CAD increases the dependency on the foreign inflows. This induces currency volatility might further weaken the Indian Rupee. The Wholesale Price Inflation (WPI) was recorded at lower than expected rate. RBI was holding back its rate cuts in the view of higher Inflation rates.
Easing inflation might give a respite for the policy makers to push for rate cuts. The current Investment rate among Indians remained high at around 33 percent of GDP. This gives the economy a hope that the domestic investors are responding positively for growth oriented reforms. Over the last year, the Indian Government deregulated the diesel prices, capped the LPG cylinders and implemented a partial de control of sugar Industry. However, with the elections due in the near term, more economic reforms are not expected from the Indian Government.
Written By Arthayantra