GLOBAL ECONOMIC MONITOR

September 2013

The Federal Reserve in its Monetary Policy left its $85 billion a month stimulus programme unchanged and decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. The action is not a surprise but in line with the expectations. The fact is that advanced economies are still in a sluggish growth trajectory and recent up tick in the growth numbers is majorly with the support of stimulus programmes. Earlier, the financial markets across the globe faced considerable volatility, owing to prospective changes in US monetary policy, a new policy in Japan , and instability in China ’s banking system. However, the Fed’s monetary policy to maintain the stimulus owing to concerns about the sluggishness of the economy led to swift and sharp changes in the global markets. The U.S. dollar fell to a seven-month low against major currencies and the price of gold, a traditional inflation hedge, soared more than 4%.  However, the Fed has provided a respite which could be temporary for the emerging markets that had seen their currencies fall against the dollar in anticipation of a gradual withdrawal of the stimulus.

On the global front, the economic environment is changing with the Euro Zone finally coming out of recession, growth remains subdued. The global economy has yet to elude the fallout from the crisis of 2008-2009. Global growth dropped to almost 3% in 2012 and this slowing trend will likely to continue with the growth of the economy for the remainder of 2013 remaining a mix of a cautious improvement in economic conditions in mature economies and a stabilization of the slower growth rates in major emerging markets. Across the advanced economies, there could be a slight up-tick in growth largely due to Europe , which is expected to return to very slow growth of 0.3% percent after the -0.2% contraction in 2012. On the manufacturing front, the PMI suggests that the global recovery is on track although fractured with the European factories experiencing robust growth in over two years in August and China experienced rising demand, lifting prospects for broad-based recovery.

Another trend that is evident and also worthwhile to be mentioned is that the economies are moving at different speeds with the fruits of growth not being evenly shared. The U.S. economy is growing though at a modest level under 2% and, after a long time, the Euro Area is also growing. In Japan , aggressive policy support and the ongoing reform process is helping to spur growth. However, the emerging market economies are slowing which reflects the need to address imbalances that have made them more vulnerable to the recent market turbulence.

The developing and transition economies whose development strategies have been heavily dependent on exports should move towards a more balanced growth strategy with more focus on domestic and regional demand as demand growth in the developed economies is likely to remain weak for longer period of time. Above all, there is a need to find joint solutions to secure a lasting, balanced and widely shared global recovery. 

GEM for the month of September 2013 is attached.

We welcome your suggestions and comments for the same.

Warm regards,

Dr. S P Sharma

Chief Economist