Global Insights

Topics: Monetary policy, Inflation, Economics Pages: 11 (3019 words) Published: December 21, 2012



Volume 3 | November 2012


CRISIL Insights
IMF lowers global growth projections
Insights Global
Economy series
will represent our
outlook on the
financial scenario
across the world
and provide a
perspective into
how it will shape
up in the near

Growth prospects in both advanced and emerging economies continue to remain fraught with downside risks. A worsening sovereign debt crisis in the eurozone and the possibility of sudden sharp fiscal consolidation in the US in 2013 is weighing on business confidence and causing world trade to decelerate. Central banks continue to maintain very low policy rates and are implementing monetary easing programmes to boost investment growth. Low growth and uncertainty in advanced economies is dragging down growth in emerging economies through trade and financial channels. However, greater global liquidity due to monetary easing in advanced economies is creating upward pressure on global commodity and crude oil prices, increasing upside risks to inflation in emerging economies. In October, the IMF lowered its 2012 growth projections for advanced and emerging, and developing economies to 1.3 per cent and 5.3 per cent from 1.4 per cent and 5.6 per cent respectively.

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CRISIL Insights

Eurozone Economy

The US Fed has pledged to keep short-term
interest rates near zero until 2015 as opposed to
2014 as planned earlier

US Economy

US Economy

In Germany, GDP growth slowed to 1.0% y-o-y in the second
quarter from 1.2% in the previous quarter, while in Greece and Portugal, GDP contracted by 6.2% and 3.3%, respectively

Sharp rise in government defence spending lifts US growth in the third quarter According to the advance estimate released by the US Bureau of Economic Analysis, the country's GDP grew by 2.0 per cent in the third quarter of 2012, as compared to a 1.3 per cent rise in the second quarter. The pick-up in GDP growth was aided by a revival in real personal consumption (PCE) expenditure, a stronger housing market and an increase in government defence spending. PCE, which accounts for nearly 70 per cent of economic activity, grew by 2 per cent in the third quarter compared with 1.5 per cent in the second quarter. The housing market showed signs of recovery as real residential fixed investments growth accelerated to 14.4 per cent from 8.5 per cent in the previous quarter. Furthermore, real federal government consumption expenditure and fixed investment increased by 9.6 per cent in the third quarter from -0.2 per cent in the second quarter, driven by a 13 per cent increase in government defence spending.

Non-residential fixed investments decreased by 1.3 per cent in the third quarter in contrast to an increase of 3.6 per cent in the second quarter as businesses cut down on investments over concerns about a worsening debt crisis in Europe, slowing demand from China and the impending fiscal cliff in the US. Unless an alternate solution for reducing a ballooning federal debt in the US emerges in the next few months, automatic budget cuts are set to take place from 2013 along with the expiry of tax cuts extended by the Bush administration. Anticipation of these fiscal tightening measures (referred to as the fiscal cliff) is dampening investments and adversely impacting growth in the current fiscal.

Eurozone Economy

UK Economy

Exports contracted by 1.6 per cent in the third quarter compared with an increase of 5.3 per cent in the second quarter. While exports will continue to drag down growth in the fourth quarter of 2012, reconstruction activity in the aftermath of Hurricane Sandy might create some upside to the growth figures in the next quarter.

UK emerges from recession
According to the Office of National Statistics, the UK economy grew by 4 per cent (q-o-q annualised) in the third quarter of...
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