World markets shaken by fresh Greek tremors

Global markets once again went through a tumultuous week after Greek's embattled prime minister George Papandreou stunned everyone by proposing a public vote on the EU bailout for the debt-stricken nation. He also called for a confidence vote in parliament, sending the highly indebted eurozone country into a political turmoil. The shocking development sparked off worries over the fate of Greece in the 17-member exclusive club called the eurozone. In fact, France and Germany were so upset they suspended the next tranche of emergency aid for Greece pending the referendum.

EAC sees India's FY11 GDP growth at 8.5%

India's gross domestic product (GDP) is expected to grow by 8.5% in FY11 (April to March 2010-11), said Dr. C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (EAC). He went on to add that India's Agriculture growth in FY11 is projected to be 4.5%, while Industry is estimated to expand by 9.7% and Services by 8.9%. The GDP growth in FY12 will rise slightly to 9%, Rangarajan said today. Agriculture growth in FY12 is estimated to be 4%, while Industry is forecast to grow by 10.3% and Services by 9.8%, he said.

Economy Calendar

Economy Calendar

OECD sees moderate recovery in developed world

The world's leading industrialised nations will witness a moderate recovery, which will not be enough to check the soaring unemployment until late next year or early 2011, the Organization for Economic Cooperation and Development (OECD) said. The combined GDP of the 30 member countries, which represent the world's largest developed economies, would grow by 1.9% in 2010, the Paris-based think tank said in its semi-annual economic outlook. OECD growth will accelerate to 2.5% in 2011. In the current year, the output is set to shrink by 3.5%. In June, OECD had forecast a growth of just 0.7% in 2010 following a contraction of 4.1% in 2009. "Overall unprecedented policy efforts appear to have succeeded in limiting the severity of the downturn and fostering a recovery to a degree that was largely unexpected even six months ago," Joergen Elmeskov, the OECD's acting head of economics, said in a preface to the report.

The OECD now expects US growth to shrink 2.5% in 2009, followed by growth of 2.5% in 2010 and 2.8% in 2011. In June, the OECD forecast a 2.8% fall this year and growth of 0.9% in 2010. Japan is forecast to contract 5.3% this year, compared to an earlier forecast for a 6.8% decline. Next year, Japan is expected to grow by 1.8%, followed by an expansion of 2% in 2011. The OECD previously forecast 2010 growth of 0.7%. The euro zone is now projected to contract 4% this year, compared to a previous forecast for a 4.8% fall. In 2010, the euro zone is seen expanding by 0.9%, compared to the OECD's previous call for flat economic growth. In 2011, the OECD expects growth of 1.7%.

"The recovery is being held back by still substantial headwinds as households, financial institutions, non-financial enterprises and, eventually, governments have to repair their balance sheets," Elmeskov said. "This also means that unemployment is set to move higher and already-low inflation will be under further downward pressure," he said. "It is only some time down the line that the recovery will become sufficiently strong to begin to reduce unemployment," he added.

PM's Eco Panel sees FY10 GDP growth at 6.5%

The Prime Minister’s Economic Advisory Council (EAC), headed by former Reserve Bank of India (RBI) governor C Rangarajan, said that it sees gross domestic product (GDP) growing by 6.5% in 2009-10 even as it warned about rising inflation and a ballooning fiscal deficit. "It is unlikely that GDP growth will be lower than 6.25%, but may reach 6.75%," the panel said in its Economic Outlook for 2009-10 report to Prime Minister Dr. Manmohan Singh. The RBI had in July forecast that India’s economy would grow by 6% in FY10, with an upward bias. The Planning Commission said in early September that it sees GDP growth at 6.3% this fiscal. The Indian economy had expanded by 6.7% in 2008-09 after three years of growing at over 9%.

The EAC expects the consolidated fiscal deficit of the Centre and the States at 10.09% for FY10 and sees inflation, imported and local, as a significant risk for the economy. Wholesale price inflation could rise to 6% by the end of March 2010, it said. "Accommodative monetary policy will continue till March 2010. The accommodative policy stance will have to change, but that will depend on the growth performance of the economy and taking into account inflationary pressures," Rangarajan said. Unless inflation breaches 6%, the monetary authorities may not take action, he said. The question of rolling back tax breaks will come up for review only early next year, Rangarajan added.

Switzerland displaces US from Top in Global Competitiveness sweepstakes: WEF

Switzerland tops the overall ranking in The Global Competitiveness Report 2009-2010, released by the World Economic Forum ahead of its Annual Meeting of the New Champions 2009 in Dalian. The United States falls one place to second position, with weakening in its financial markets and macroeconomic stability.

Singapore, Sweden and Denmark round out the top five. European economies continue to prevail in the top 10 with Finland, Germany and the Netherlands following suit. The United Kingdom, while remaining very competitive, has continued its fall from last year, moving down one more place this year to 13th, mainly attributable to continuing weakening of its financial markets.

The People’s Republic of China continues to lead the way among large developing economies, improving by one place this year, solidifying its position among the top 30. Among the three other large BRIC economies, Brazil and India also improve, while Russia falls by 12 places. Several Asian economies perform strongly with Japan, Hong Kong SAR, Republic of Korea and Taiwan, China also in the top 20. In Latin America, Chile is the highest ranked country, followed by Costa Rica and Brazil.

A number of countries in the Middle East and North Africa region are in the upper half of the rankings, led by Qatar, United Arab Emirates, Israel, Saudi Arabia, Bahrain, Kuwait and Tunisia, with particular improvements noted in the Gulf States, which continue their upward trend of recent years. In sub-Saharan Africa, South Africa, Mauritius and Botswana feature in the top half of the rankings, with a number of other countries from the region measurably improving their competitiveness.

"The strong interdependence among the world’s economies makes this a truly global economic crisis in every sense. Policy-makers are presently struggling with ways of managing these new economic challenges, while preparing their economies to perform well in a future economic landscape characterized by growing uncertainty. In a difficult global economic environment, it is more important than ever for countries to put into place strong fundamentals underpinning economic growth and development,” said Klaus Schwab, Founder and Executive Chairman of the World Economic Forum.

Xavier Sala-i-Martin, Professor of Economics, Columbia University, USA, and co-author of the Report added, “Amid the present crisis, it is critical that policy-makers not lose sight of long-term competitiveness fundamentals amid short-term urgencies. Competitive economies are those that have in place factors driving the productivity enhancements on which their present and future prosperity is built. A competitiveness-supporting economic environment can help national economies to weather business cycle downturns and ensure that the mechanisms enabling solid economic performance going into the future are in place.”

The rankings are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the Report. This year, over 13,000 business leaders were polled in 133 economies. The survey is designed to capture a broad range of factors affecting an economy’s business climate. The Report also includes comprehensive listings of the main strengths and weaknesses of countries, making it possible to identify key priorities for policy reform.

The Global Competitiveness Report’s competitiveness ranking is based on the Global Competitiveness Index (GCI), developed for the World Economic Forum by Sala-i-Martin and introduced in 2004. The GCI is based on 12 pillars of competitiveness, providing a comprehensive picture of the competitiveness landscape in countries around the world at all stages of development. The pillars include Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education, Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size, Business Sophistication, and Innovation.

The Report contains a detailed profile for each of the 133 economies featured in the study, providing a comprehensive summary of the overall position in the rankings as well as the most prominent competitive advantages and disadvantages of each country/economy based on the analysis used in computing the rankings. Also included is an extensive section of data tables with global rankings for over 110 indicators.

This year’s Report also includes a number of discussions of selected countries and regions including the United States, the large emerging BRIC economies and the 12 recent accession members of the European Union, providing an in-depth analysis of the issues affecting national competitiveness.

UK economy contracts more than expected in Q2

The UK economy shrank at more than twice the pace expected in the second quarter due to persistent weakness in crucial sectors such as construction, banking and business services. Gross Domestic Product (GDP) contracted 0.8% in the April-June quarter from the first quarter, the Office for National Statistics said. Economists had predicted a 0.3% drop, according to the median forecasts of economists. From a year earlier, the British economy shrank 5.6%, the most since records began in 1955. The pound dropped as much as 0.5% against the dollar after the report.

The figures underscore the possibility that the Bank of England could still move to expand its 125 billion pound (US$205bn) asset-purchase facility, economists said. Bank policy makers earlier this month deferred a decision on whether to expand the quantitative-easing program to the full 150 billion pounds authorized by the Treasury. Today’s report is the first among the Group of Seven (G7) nations for the second quarter. The International Monetary Fund (IMF) forecasts that the UK will contract 4.2% this year, compared with 4.8% in the euro area and 2.6% in the US.

Prime Minister Gordon Brown said that the G20 nations need to take steps to revive the world economy. "We are at a point where banks have been stabilized, but we don’t yet have a strategy for a return to growth," Brown said at the opening of a meeting in his office in London.

Japan...GDP contracts at record pace in Q1

Japan's economy contracted at a record pace in the first three months of the year as domestic demand continued to slide and exports too remained weak amid a worldwide economic downturn, official data showed. The world's second-largest economy has now shrunk for a record four quarters in a row. Gross Domestic Product (GDP) in Japan declined at an annualised rate of 15.2% in the January to March period, or 4% from the previous quarter, according to the preliminary data released by the Cabinet Office. The contraction marked the quickest pace since comparable data were available in 1955. The drop followed an annualized fall of 12.1% in the October-to-December quarter and a revised decline of 3.8% in the fourth quarter of last year. The official first-quarter GDP reading was still better than economists' forecast. On average, economists had expected an annualized 16.5% drop and a decline of 4.4% on the quarter.

Equities in Economic Crisis

Equities in Economic Crisis

ECB surprises with lower than forecast rate cut

The European Central Bank (ECB) pruned its benchmark interest rates by a quarter percentage point to a new record low, but the decision left the markets stunned as most economists were looking for a wider cut. The ECB cut its key lending rate to 1.25% from 1.5% while the rate for overnight deposits at the central bank was also trimmed to 0.25% from 0.5%. The decision stunned economists, who had expected a reduction of 50 basis points. At 1.25% the main lending rate is the lowest since the ECB took charge of monetary policy in 1999. The euro shot higher on the decision, rising as high as US$1.3415. It most recently was up 1% at US$1.3361. Stocks in Europe were off session highs but still sporting impressive gains. The pan-European Dow Jones Stoxx 600 climbed 3.1% shortly after the ECB decision. The Frankfurt-based ECB, which sets interest rates in the 16 countries that use the euro as their common currency, arrived at the decision after considering economic data showing rising unemployment, slumping industrial output and dwindling consumer spending. ECB president Jean-Claude Trichet will hold a press conference later in the day to explain today’s decision as well as to discuss whether the central bank will announce other measures to stimulate the euro-zone economy, like buying short-term corporate debt.

Global Outlook 2009

Global Outlook 2009

Govt announces extra borrowing of Rs460bn

The Government will borrow an additional Rs460bn (US$9.44bn) from the market in four parts between Feb. 20 and March 20, Economic Affairs Secretary Ashok Chawla said in New Delhi. Apart from the debt sales that begin Feb. 20, the Government is scheduled to sell Rs80bn of debt on Feb. 13. The Centre has thus far raised Rs2.4 trillion through sale of securities in the fiscal year ending next month compared with Rs1.79 trillion it had budgeted to borrow at the start of the year. Bonds fell after the Government announced the additional borrowing plan. "We will ensure that the borrowing program is conducted in a non-disruptive manner," RBI Deputy Governor Shyamala Gopinath told reporters after the central bank and finance ministry officials met. The Government is borrowing more to bridge the revenue-expenditure gap, which has been ballooning on account of two stimulus packages and tax concessions granted to boost economic growth

Economic Review

Economic Review

India Outlook 2009

India Outlook 2009

Expect global slowdown - IMF

The world economy is decelerating quickly—buffeted by an extraordinary financial shock and by still-high energy and commodity prices—and many advanced economies are close to or moving into recession, the IMF says in its latest World Economic Outlook (WEO).

The October 2008 report which was released two days prior to the IMF-World Bank Annual Meetings in Washington, said that growth in emerging economies is also weakening after years of strong growth, though it will still drive global growth.

Speaking at the WEO press conference, IMF Chief Economist Olivier Blanchard emphasized the importance of implementing joint financial and macroeconomic policies at this point "to stem the negative momentum on multiple fronts." On the financial side, "this implies the design of comprehensive programs to deal with systemic problems," while on the macroeconomic side, "this implies the use of monetary and fiscal policies to support growth and break negative feedback loops between the financial and real sectors," he said.

"With the right macro and financial policies—and these policies are available—we ca

Monthly Economic Review

Monthly Economic Review

The economic outlook: Bernanke

Since late last summer, financial markets in the United States and in a number of other industrialized countries have been under considerable strain. Heightened investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates, triggered the financial turmoil. Notably, as the rising rate of delinquencies of subprime mortgages threatened to impose losses on holders of even highly rated securities, investors were led to question the reliability of the credit ratings for a range of financial products, including structured credit products and various special-purpose vehicles. As investors lost confidence in their ability to value complex financial products, they became increasingly unwilling to hold such instruments. As a result, flows of credit through these vehicles have contracted significantly.

As these problems multiplied, money center banks and other large financial institutions, which in many cases had served as sponsors of these financial products, came under increasing pressure to take the assets of the off-balance-sheet vehicles onto their own balance sheets. Bank balance sheets were swelled further by holdings of nonconforming mortgages, leveraged loans, and other credits that the banks had extended but for which well-functioning secondary markets no longer existed. Even as their balance sheets expanded, banks began to report large losses, reflecting marked declines in the market prices of mortgages and other assets. Thus, banks too became subject to valuation uncertainty, as could be seen in the sharp movements in their share prices and in other market indicators such as quotes on credit default swaps. The combination of larger balance sheets and unexpected losses prompted banks to become protective of their liquidity and balance sheet capacity and thus to become less willing to provide funding to other market participants, including other banks. Banks have also evidently become more restrictive in their lending to firms and households. More-expensive and less-available credit seems likely to impose a measure of restraint on economic growth.

The Outlook for the Real Economy

To date, the largest effects of the financial turmoil appear to have been on the housing market, which, as you know, has deteriorated significantly over the past two years or so. The virtual shutdown of the subprime mortgage market and a widening of spreads on jumbo mortgage loans have further reduced the demand for housing, while foreclosures are adding to the already-elevated inventory of unsold homes. New home sales and housing starts have both fallen by about half from their respective peaks. The number of homes in inventory has begun to edge down, but at the current sales pace the months’ supply of new homes has continued to climb, and home prices are falling in many parts of the country. The slowing in residential construction, which subtracted about 1 percentage point from the growth rate of real gross domestic product in the third quarter of 2007, likely curtailed growth even more in the fourth quarter, and it may continue to be a drag on growth for a good part of this year as well.

Recently, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced. In particular, a number of factors, including continuing increases in energy prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008. Consumer spending also depends importantly on the state of the labor market, as wages and salaries are the primary source of income for most households. Labor market conditions in December were disappointing; the unemployment rate increased 0.3 percentage point, to 5.0 percent from 4.7 percent in November, and private payroll employment declined. Employment in residential construction posted another substantial reduction, and employment in manufacturing and retail trade also decreased significantly. Employment in services continued to grow, but at a slower pace in December than in earlier months. It would be a mistake to read too much into one month’s data. However, developments in the labor market will bear close attention.

In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter, while nonresidential construction grew briskly. In light of the softening in economic activity and the adverse developments in credit markets, growth in both types of investment spending seems likely to slow in coming months. Outside the United States, however, economic activity in our major trading partners has continued to expand vigorously. U.S. exports will likely continue to grow at a healthy pace in coming quarters, providing some impetus to the domestic economy.

Financial conditions continue to pose a downside risk to the outlook. Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future. On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news thus has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.

Even as the outlook for real activity has weakened, some important developments have occurred on the inflation front. Most notably, the same increase in oil prices that may be a negative influence on growth is also lifting overall consumer prices. Last year, food prices also increased exceptionally rapidly by recent standards, further boosting overall consumer price inflation. The most recent reading on overall personal consumption expenditure inflation showed that prices in November were 3.6 percent higher than they were a year earlier. Core price inflation (which excludes prices of food and energy) has stepped up recently as well, with November prices up almost 2-1/4 percent from a year earlier. Part of this rise may reflect pass-through of energy costs to the prices of core consumer goods and services, as well as the effects of the depreciation of the dollar on import prices, although some other prices—such as those for some medical and financial services—have also accelerated lately.1

Thus far, the public’s expectations of future inflation appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. Further, futures markets suggest that food and energy prices will decelerate over the coming year. Given these factors, overall and core inflation should moderate this year and next, so long as the public’s confidence in the Federal Reserve’s commitment to price stability is unshaken. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly inflation expectations.

Monetary Policy Response

The Federal Reserve has taken a number of steps to help markets return to more orderly functioning and to foster its economic objectives of maximum sustainable employment and price stability. Broadly, the Federal Reserve's response has followed two tracks: efforts to improve market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy.

To help address the significant strains in short-term money markets, the Federal Reserve has taken a range of steps. Notably, on August 17, the Federal Reserve Board cut the discount rate--the rate at which it lends directly to banks--by 50 basis points, or 1/2 percentage point, and it has since maintained the spread between the federal funds rate and the discount rate at 50 basis points, rather than the customary 100 basis points. In addition, the Federal Reserve recently unveiled a term auction facility, or TAF, through which prespecified amounts of discount window credit can be auctioned to eligible borrowers. The goal of the TAF is to reduce the incentive for banks to hoard cash and increase their willingness to provide credit to households and firms. In December, the Fed successfully auctioned $40 billion through this facility. And, as part of a coordinated operation, the European Central Bank and the Swiss National Bank lent an additional $24 billion to banks in their respective jurisdictions. This month, the Federal Reserve is auctioning $60 billion in twenty-eight-day credit through the TAF, to be spread across two auctions. TAF auctions will continue as long as necessary to address elevated pressures in short-term funding markets, and we will continue to work closely and cooperatively with other central banks to address market strains that could hamper the achievement of our broader economic objectives.

Although the TAF and other liquidity-related actions appear to have had some positive effects, such measures alone cannot fully address fundamental concerns about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions. Hence, they alone cannot eliminate the financial restraints affecting the broader economy. Monetary policy (that is, the management of the short-term interest rate) is the Fed's best tool for pursuing our macroeconomic objectives, namely to promote maximum sustainable employment and price stability.

Monetary policy has responded proactively to evolving conditions. As you know, the Federal Open Market Committee (FOMC) cut its target for the federal funds rate by 50 basis points at its September meeting and by 25 basis points each at the October and December meetings. In total, therefore, we have brought the federal funds rate down by 1 percentage point from its level just before the financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The FOMC will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Financial and economic conditions can change quickly. Consequently, the FOMC must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.

A number of analysts have raised the possibility that fiscal policy actions might usefully complement monetary policy in supporting economic growth over the next year or so. I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone. But the design and implementation of the fiscal program are critically important. A fiscal initiative at this juncture could prove quite counterproductive, if (for example) it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term.

To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving. Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed. Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government's structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult.

Footnotes

1)Prices for some financial services are implicit; for example, depositors may pay for "free" checking services only indirectly, by accepting a lower interest rate on their deposits. The Bureau of Labor Statistics uses estimates of such prices, as well as other nonmarket prices, in calculating the inflation rate