Macroeconomic conditions across emerging markets continue to be driven primarily by United States. The consistent policy approach towards quantitative easing is starting to impact other nations. Over the past couple of months, growth in United States has slowed down significantly compared to the heightened activity observed during the first quarter. The economic activity in manufacturing sector has been sluggish. Though the layoffs and claims of unemployment subsided, new job creation is yet to pick up. In its testimony to US congress, Fed has declared its stand on Quantitative Easing Measures and Interest Rate policy. Fed’s process of fuelling the economy is twofold: Providing stimulus through bond purchases and providing new debt to companies at low interest. Inflation and Jobs data will be leading indicators for Fed to decide on the quantity and time frame of these measures. Fed wants to stop its Quantitative easing programs once the labor markets reach a sustainable level while maintaining a desirable inflation levels. The low interest rates will start to rise once the unemployment rate hits a 6.5% mark or lower. Fed also expressed its plans to slow down its bond buying process over the next few quarters. Fed is expected to be cautious over its move to reduce the pace of its QE. Though the employment data started to gain momentum, the inflation data still lies below the targeted levels. The GDP growth is also expected to remain at subpar levels of two percent. The spending cut measures implemented in the month of March may start weighing on the economy in the coming quarters. Consumer spending recorded lower in recent months owing to higher tax rates. The future of the quantitative easing and pace of economic growth lies in the balance that can be maintained between employment rates and inflation rates. We expect status co to be maintained in the coming quarter.
Recession and social unrest have forced the Eurozone nations to retreat from their austerity stand. Hit by lower standard of life and unemployment, thousands of workers staged street rallies against austerity on May Day. Nearly one fourth of the young people in Europe are out of work. Protests and rallies were organized against across Eurozone throughout the month of May. Political reasons also made sustainability of austerity questionable. The Dutch government fell apart in 2012 over the disagreement over budget cuts. Italy’s political stalemate situation was also a result of the same. The staunch followers of austerity, France also started tracing back it steps from austerity. France economy is now facing its second recession in four years. The economy shrank by 0.2 percent in the first quarter of 2013. Germany was also faced with political unrest over austerity. Compared to the Eurozone, Britain has adopted a flexibility model in its austerity measures. Britain came into the terms with the fact that tax revenues are meant to fall in conditions of slow economic growth and high unemployment rates. They did not counter it with spend cuts, but retorted by introducing economic reforms to support the market. The current situation of Eurozone may not give it an option to exit the austerity strategy immediately. The process will be gradual. The measures being implemented by monetary union are more reactive in nature than being proactive. Eurozone may take cues from the Britain model and come up with a similar solution. However, implementing monetary easing measures in Eurozone at the time when US is making plans to retreat them could further weaken Euro against US Dollar.
India is facing slowdown in industrial production. The Index of Industrial Production (IIP) numbers were less the target numbers and were recorded at 2.5 percent. The slowdown was experienced among all the industries ranging from the mining industries which produce raw materials to consumer goods industries which process these raw materials. The growth in manufacturing sectors is constrained by shortage of power and restrained growth in core sectors of the economy. The GDP for fourth quarter of FY 12 – 13 was recorded at 4.8 percent on year on year on basis. The GDP numbers for this year remained at decade low. RBI has already implemented a series rate cuts in this year to spur the economic recovery and revive industrial growth. The interest rate cuts account for an overall cut of 75 bps over the past five months of this year. The recent macroeconomic datawould propel RBI for a rate cut over the current financial year. However, the rate cuts were not yet translated to changes on ground. In order to implement the rate cuts and reduce the lending rates, banks have to subsequently reduce the deposit rates as well. With already low investment rates a rate cut on deposit rates would prompt for a decline in investments in bank deposits. This would lead to a crunch in the cash reserves in the system. RBI is planning to counter this cash crunch by inducing cash by decreasing cash reserve ratio. Inflation over the past few months is also showing signs of easing. Though Wholesale Price Index (WPI) has been under the expected rates at 4.89 percent whereas the Consumer Price Inflation still remained high at 9.27percent.
China’s economy continued to provide negative surprises. The economic growth has been the slowest in the past decade and the economic data in the current calendar year failed to provide any respite. Japan’s economy started showing receptive sings for the bold economic reforms being adapted. GDP has grown at 3.5 percent during the first quarter of the year. Japanese exports also started gaining traction owing to lower value of yen and signs of economic recovery from its major exporters. Among these positive signs, the raising public debt still remains a major concern for Japan. Japans debt is over twice the size of the economy. Japanese economy has been piling debt since it’s the collapse of asset bubble is 1990. The latest stimulus packages to boost the economy also increased the public debt. Apart from the stimulus packages, Japanese also maintained a near zero lending rates and introduced structural tax reforms. At some point, however, the Japanese need to take action to address its high debt situation. Raising the lending rates will be the first steps of action when it happens. This can only happen once the inflation hits the targeted 2 percent level.
Japan should also be varying about the external factors which will play a major role in its economy. As an integral plan of boosting the exports from the country, Yen has been devalued. But with US showing signs of recovery and with US Dollar gaining strength, Yen will start valuing lesser. This might push the cost of imports as well which can result in an inflation rate higher than the expected 2 percent rate. Apart from the devalued Yen, boosting investments and increased employment opportunities at home will be the key for the success of Abenomics.
