Macroeconomic news in October was predominated by US debt ceiling impasse which resulted in partial shutdown of the government services. The US shutdown which started in the first week of October lasted for sixteen days calibrating to an economic loss that will potentially reduce the GDP forecast for next quarter. Several hundreds and thousands of American citizens bore the economic brunt of the shutdown.
On 17th October an agreement to re-instate the government funding at pre-shutdown levels was reached by the US lawmakers. This funding is guaranteed till 15th January 2014 and the debt ceiling is suspended till 7th February 2014. As this deal is temporary and short spanned, the potential risks of US Congress’s inability to come out with a concrete plan regarding debt ceiling is weighing on consumer confidence in America. Outside US, the partial shutdown of government is a cause of worry to rest of the world rendering fears of devalued assets amongst investors who hold US debt.
On 30th October Fed reiterated its previous stance to hold on the economic stimulus and continue purchasing bonds. Fed in its statement maintained status quo to hold interest rates near zero as long as the jobless rate remains above comfort level and there is no inherent risk of inflation going down further.
The appointment of Janet Yellen as the next chairman of Fed comes at a crucial point in February 2014. Yellen is considered as dove ascendant and has stated in the past that unemployment is a bigger challenge than inflation. Soon after she takes over the helm of affairs at Fed, US macroeconomic news will be revolving around the outcome of debt ceiling suspension deadline on 7th February 2014.
Owing to these factors expectations of economic stimulus continuing in 2014 are reasonable. Any decent strengthening in jobless claims will be a catalyst for expectations of tapering Fed’s bond purchasing program.
Japan Economic Review
Japanese economy is showing green shoots in manufacturing growth. On 30th October the Industrial Output data was released which showed significant improvement against the previous month. Considering that in August the same data dropped by 20 basis points the rise in September data is commendable. The world’s third largest economy’s manufacturing growth is improving steadily. This can be seen by stronger production of vehicles and electronic components. The government resolved last year to re-strategize and leverage Japan’s strengths in manufacturing and technology.
Unemployment still remains high for Japan for the month of September though there was a marginal improvement over previous month result. Earlier in October Bank of Japan has decided to lend support to the ongoing bond purchase program and keep the key policy rates unchanged. The economic growth for Q2 grew by 3.8% for Japan and is forecasted at 2.77% for the Q3 results which are expected in the second week of November. The expectations for tax increase by Japanese Premier Shinzō Abe are high. But government is aware that at this juncture increasing taxes may have adverse effects on economic growth.
Japanese economy is set to benefit from the Olympic Games 2020 which will be held in the country. Despite a decent manufacturing growth there are still some challenges that can be inherent risks to the pace of this growth. For instance Japan’s challenges are not limited to high unemployment rate alone. It still remains a country that is prone to perils of natural disasters. Japan’s ageing population outweighs other nations and has hit record highs this year. Unless Japanese government succeeds to get a grip over these challenges, an increase in manufacturing growth alone cannot aid in overall economic improvement.
China Economic Review
China is the largest foreign holder of US debt. For years China has worked on a system where trades and services were sold to US and the returns where invested in US Treasury Bonds. China holds $ 1.3 trillion in Bonds and $ 3.5 trillion in US Dollar denominated assets. The Chinese Government is worried about the possibility of its US debt holding value going down considering that US debt deal solution passed by the Congress is only till 15th January.
The Q3 GDP result of China represents the fastest growth in the current year. The months between July-September have rendered exceptional growth wherein the third quarter result is 220 basis points improvement over previous quarter. However Chinese government’s efforts to restructure the economy from that of high growth to medium growth will hamper the future GDP forecasts. The reason for Chinese government’s stance to moderate growth is to tackle the inflationary pressure specifically the one caused by rising real estate prices. The People’s Bank of China however defied fears of tight monetary policy towards the end of October by injecting Rmb 13 billion into the market to ease liquidity crunch.
Indian Economic Review
India’s economic slowdown and inflation remain as matter of concern and have been the basis of downgrades and cut in growth forecasts by leading financial institutions. Despite the concerns of the lowest economic growth in preceding four years RBI has maintained hawkish stance in its monetary policy review in October. The repo rate was increased further by 25 basis points to 7.75% and an overall increase of 50 basis points in a span of forty five days. RBI maintained hawkish despite low growth tone as inflationary pressure remained high for most part of 2013.
After Dr.Raghuram Rajan took over as the Governor of RBI there is an improvement rupee found strength owing to measures taken by RBI. If owing to balance of payments Rupee shows any signs to depreciate further, export income will stand to gain. However India is not an export oriented economy and a weaker currency will destabilize the economy further and carry the risk to increase inflation. Inflation can be countered by RBI through tight monetary policy and this can increase inflows from foreign investors may increase. Albeit this can happen only if foreign investor’s confidence improves with respect to Indian growth story. Besides with growth already at low point any increase in interest rates is affecting trade cycles. As of now RBI can only let the Rupee trade without any intervention from its end and take adequate policy decisions to curb speculation. With the country heading for General Election in 2014 populist reforms will not make it easy to cut government spending.
Solutions to India’s short term and long standing problems are significantly dependent on government actions. This will be area where one needs to look into to gain an insight about future of Indian economy.
Written By Arthayantra