Observing the macroeconomic numbers of 2012, the expectations around global economic recovery in 2013 were set very low. The economic indicators of the major economies were in sync with the expectation set. Only United States defied the odds and started posing the signs of recovery. The US economy came out from the fears surrounding implementation of sequester and started to gain momentum in the month of March 2013. The employment data of US was encouraging with the private sector adding a substantial number of new jobs and posting good amount of gains in the first quarter. Being a personal consumption driven economy, United States found support in the form of increased activity in motor vehicles and housing sectors. This in turn started stimulating the much needed labor market activity resulting in increased employment opportunities. Increased household wealth, Increased spending at retail outlets and stores also showed signs of recovery. Even the Home foreclosures and layoff rates were recorded at pre – recession levels.
With US displaying vital signs of recovery, the question looms over sustainability of this recovery. Though there is an increased activity in job creation, the employment rate is still persistent at 7.7 percent compared to the 5 percent rate in December 2007. There are still 3 million fewer jobs when compared to good old pre recession days of 2007. Housing sales started picking some momentum. However, it is still lagging the average rate displayed during the healthy economic run. The industrial output also has got some catching up to do. Though the signs being displayed by the US markets are a welcome change, this coming spring will determine it’s course to sustained steady growth.
The economic news from Euro Zone during the month of March was dominated by discussions around Cyprus bailout plan. Following the suit of its predecessors Greece, Portugal and Ireland, Cyprus also surrendered to the imbalances of Euro Zone caused by fixed exchange rate regime and single currency. But the noteworthy point of Cypriot crisis is: Why did an economic breakdown in such a small island nation causing so much panic across the globe. The proposed bailout package for Cyprus is miniscule compared to other bailout packages rolled out in the Euro Zone. However, the solution offered remains the core point of concern. Considering the fact that bank deposits in Cyprus are equivalent to 400 percent of the Cypriot GDP, all the citizens were asked to directly finance some of the bailout via taxes on their bank deposits. For Insured Bank Deposits worth less than 100,000 Euros will be taxes at 6.75%, while deposits in excess of this amount will be taxed 9.9%. The taxation rates are even higher for a non insured bank deposit.
The economic and social implications of the proposed measures are colossal in nature. For the first time, Euro Zone authorities are penalizing the bank deposit holders for the sins of one of their member countries banks. The global concerns over such decision are riding high considering the fact that the banking systems in Greece, Ireland and Spain still remain shaky. If these banking systems are to be revamped further, will the EU authorities stick to their current plan of taxing the deposit holders remains a spot of bother for everyone associated. Depositors in such countries mentioned above could begin to withdraw funds before being subjected to such taxation measures. Portugal and Slovenia could be the next countries that need attention.
Chinese economy recorded its slowest year of growth for the past 13 years in 2012. The economic stance of China during the past year can be termed as easy. In a statement by Chief China economist Ting Lu, it was expected that the Chinese would maintain neutral policy stance in the first half of 2013. This statement came after the modest recovery numbers posted by China during the first quarter of 2013. China has recorded a good numbers in industrial production and posed stronger export data as well. The signs that the property market is back on track, prompted the Chinese Government to increase tax on second home purchases. The biggest positive which emerged for the China during the month of March was relatively lower Inflation numbers. Lower Inflation will greatly ease investor’s concerns that the policy makers would begin to tighten the monetary conditions. However the slowdown in domestic consumption and weakness in the European markets are proving to be hindrance for substantial economic growth in China. The geopolitical situation of the Korean Peninsula will also start playing role in Chinese economic developments.
Japanese continues their determined efforts to pull the nation out of it’s current stagflation state. The scale at which the stimulus measures are being implemented, is taking every body by surprise. Prime Minister Shinzo Abe, started a new chapter in his “Abenomics” by announcing that he would start free – trade negotiations with 11 nations, including US. BOJ supported the PM by running its stimulus programs at full throttle. With more stimulus package in the store, Japanese Yen is expected to continue its free fall in the coming months. Impact of this “Keynesian” economic thought process have to be seen.
India, on the other hand failed to move on from its stale mate state. The RBI, during its quarterly monetary policy review in March, slashed the repo rate by 25 base points while keeping the Credit Reserve Ratio Unchanged. The evident factors of high consumer price inflation, high current account deficit and supply side bottlenecks continue to prevail as the main hindrances for any major monetary policy changes. Even RBI reiterated that the influence of above stated factors in high on the Indian economy and provided these constraints; the room for additional monetary easing is quite limited.
The growth revival in India would depend on the measures that would instill more fiscal reforms and address the supply side issues. The instability in the ruling coalition government is not helping India’s cause. A flurry of news statements regarding the instable nature of the current coalition government started after one of the major government supporter withdrawn their support. The Indian financial markets displayed the signs of nervousness. These signs were instilled on the fear that the government may step back from the reform path because of lack of support. In the process of gaining public popularity, the markets feared that the government may get back to populist path. This might undo all the good work done till now to attract the foreign investments and curb the current account deficit. From the emerging market perspective, India continues to be unattractive for the global investors. The Foreign cash inflow during the last quarter displayed a downward trend. From India’s stand point, it is important that the economic reforms take the centre stage rather than the political news.