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Global
Even as sunny summer steals into the northern hemisphere, melting snows and touching off forest fires, central bankers preferred to keep their cool.
The European Central Bank, ECB, decided to stay the existing course, waiting to see the results of their stimulus measures before taking any decision on further easing. In the first quarter, Europe surprised economists by producing better than expected growth, while the US economy pulled the same surprise on the downside. In the US, inflation remains low, below the Fed's target rate of 2%, while wage growth remains muted. The US unemployment rate is at 5%, signifying near full employment. However it is not clear if the US economy is beginning to lose steam or whether that this is just a temporary phenomenon.
On the brighter side, several perceived risks to the global economy have become muted. Overall inflation expectations are up, following the recent strengthening in oil prices. The chief factor is the apparent easing of economic conditions is China, whose economy has posted modest growth. The IMF says that China may grow faster than expected even if growth would be less than in previous years.
The status quo espoused by the ECB, provides the US Federal Reserve with an opportunity to increase interest rates. "The reality for the ECB is the euro zone isn't in nearly as bad a shape as Draghi would like to make out -- it pushes the currency and gives the Fed far more room to move," said Rob Carnell, chief international economist at ING Bank NV in London. "Sometime in the third quarter sounds like a reasonable bet for me but I wouldn't rule out the second quarter."
Since the policies of the two banks are divergent, an increase by the Fed might spark another sharp rally in the USD. According to a survey by Bloomberg, analysts feel that the Fed would most likely raise interest rates in June, followed by another increase in December. Only 63% of investors surveyed think that the Fed will increase rates just once up to December."Still, the Fed is unlikely to encourage markets to discount further Fed rate hikes -- expectations are already very low," says Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York. "At the margin, a hawkish surprise seems more likely than a dovish one." (Bloomberg, April, 25, 2016)
IMF REPORT - The IMF releasing its World Economic Outlook report on April 12 said that it expected global growth to be 3.2% in 2016, roughly the same as in the previous year. This represents a 0.2% downward revision from the forecast made in January. "The recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalize. But uncertainty has increased, and risks of weaker growth scenarios are becoming more tangible. The fragile conjuncture increases the urgency of a broad-based policy response to raise growth and manage vulnerabilities."
US
FEDERAL RESERVE - In April, the US Federal Reserve decided to keep interest rates unchanged. The Fed had increased rates in December. "Economic activity appears to have slowed," despite job market gains, the Fed said in its statement. It also noted that household spending had "moderated." "The Fed is conscious of the fragility of the underlying financial and economic conditions," says Jeremy Lawson, chief economist at Standard Life Investments. (CNNMoney April, 27, 2016)
US CONSUMER SENTIMENT - US consumer sentiment sagged in April, showing a growing lack of confidence in the growth prospects of the US economy. A report by the University of Michigan revealed that Consumer Sentiment Index dropped to a revised 89.0 reading lower than the level of 91.0 in March. The index scraped the bottom in September when it reached a low of 87.2
The slump in the index was lead by the Consumer Expectations Index, which plummeted to a revised 77.6 in April from 81.5 in March. However the overall decline was stemmed by the increase in the Current Conditions Index which grew to 106.7 in April, from 105.6 in March.
"This divergence may reflect the strength of the consumer relative to the business sectors, and may have been exacerbated by growing uncertainty about the economic policies advocated by various presidential candidates," Curtin said.(RTT News, April 29, 2016)
US ECONOMIC GROWTH -In the first quarter of 2016, the US economy slid more than expected, revealed a report by the Commerce Department. The economy faces firm headwinds. "Some of those will fade but, barring a miracle, it appears that GDP growth is on course for another underwhelming gain of around 2% this year," Paul Ashworth Chief U.S. Economist at Capital Economics said. (RTT News April 28, 2016)
The economy grew a paltry 0.5% in the first quarter, after posting a more robust 1.4% in the previous quarter. Growth in the first quarter was boosted by increases in investments in housing, increased spending by state and local governments and increased consumer spending. This was countered by negative growth in private inventories, exports and federal government spending, while imports increased 0.2%.
Core consumer price inflation, stripped of energy and food prices, reached 2.1% in the first quarter, on the heels of a 1.3% rise in the previous quarter. According to the Commerce Department, the prospect for inflation on a yearlong basis came in at 2.8%, slightly more than the figure of 2.7% in March. "Overall, the data indicate that inflation-adjusted personal consumption expenditures will grow by 2.5% in 2016,"Curtin said. Adds Ashworth, "Unfortunately for the Fed, even that modest pace of growth has been enough to bring the economy very close to full employment and that is now coming through in terms of mounting price pressures." (RTT News April 28, 2016)
Europe
EUROPEAN ECONOMIC GROWTH - Braving considerable headwinds, Europe grew a solid 0.6% on a quarterly basis, in the first quarter, double the growth of 0.3% posted in the previous quarter. This was higher than the 0.4% forecast by analysts. Commerzbank analyst Christoph Weil said, "The strong plus is partly due to special factors like calendar effects and the mild winter. However, there are important downside risks to the continuing growth. The chief of them is the possible exit of Britain from the EU after the referendum in June." According to IHS Global Insight economist Howard Archer, "It is unlikely that the Eurozone will be able to sustain this growth rate in the second quarter." (RTT News, April 29, 2016)
In tandem with increased economic growth in the first quarter, Europe witnessed a lessening of unemployment to the lowest level in more than four years. Unemployment declined to a seasonally adjusted rate of 10.2% in March. In numerical terms, the total of unemployed persons dropped by 226,000, to 16.44 million. The rate of unemployment of young persons less than 25 years of age, a key metric to gauge social unrest, reduced a little from 21.7% to 21.2%.
However worries on the inflation front continued to dog Europe. Prices slid into negative territory on the back of falling oil prices, fuelling fresh fears of deflation. Prices decreased by 0.2% in April, after maintaining status quo in March. Analysts were prepared for a 0.1% slide in prices. Core inflation, without food, alcohol, tobacco and energy prices, slowed form a 1% growth in March to 0.8% in April. The target rate for the European Central Bank, ECB, is 2% annual inflation.
RUSSIA - The Russian central bank retained interest rates at 11% at its April meeting. The bank has held this rate for the last six months. The decision is in tune with economists' expectations. "The Board of Directors sees the positive processes of inflation slowdown and inflation expectations decline, as well as shifts in the economy which anticipate the beginning of its recovery growth," the bank said.(RTT News, April 29, 2016)
The bank sees inflation at 5% in April, while the target rate of 4% is likely to be met in the second half of 2017. GDP growth is expected to be positive in the latter half of this year.Yet the bank expressed concerns about the risks of higher inflation, changes in nominal wages and the lack of clarity in national budgeting processes. "Moving forward, should inflation risks fall as much as to ensure with greater certainty that the Bank of Russia achieves its inflation target, the Bank of Russia will resume a gradual lowering of its key rate at one of its forthcoming Board meetings," the bank said. (RTT News, April 29, 2016)
Asia
CHINESE MANUFACTURING - In April, the manufacturing sector in China posted a second month of growth. The official Purchasing Managers Index, PMI, reached a figure of 50.1, while analysts were expecting a reading of 50.3. The PMI had come in at 50.2 in March. Any reading above the 50 mark denotes growth. The sub-index for new exports declined to 50.1in April from 50.2 in the earlier month. The production index dropped 0.1 points to 52.2, while new orders too showed a decline from 51.4 to 51.0. The employment index slid marginally from 48.1 to 47.8. The growth in the construction and services sectors too slowed as the non-manufacturing PMI index decreased to 53.5 from a reading of 53.8 in the earlier month.
However the private Caixin survey compiled by Markit revealed that the Chinese PMI declined from 49.7 in March to 49.4 in April. Analysts were expecting see a number of 49.9. A reading below 50 indicates contraction. The Caixin PMI concentrates on small and medium enterprises, while the official PMI surveys large enterprises. The survey showed that there were few new orders, while export orders continued their five-month decline. It may be noted that the Caixin PMI last witnessed expansion in February 2015. According to analysts, a modicum of economic stability has been achieved in China by the hurried rate cuts, andthe loosening of reserve requirements.
"The fluctuations indicate the economy lacks a solid foundation for recovery and is still in the process of bottoming out. The government needs to keep a close watch on the risk of a further economic downturn," said He Fan, chief economist at Caixin Insight Group. (CNBC, May2, 2016)
"Although consumer sentiment survey indicates a comparatively optimistic mood amongst consumers, there needs to be a material improvement in employment prospects for this optimism to translate into actual activity," said Elliot Clarke economist at Westpac Institutional Bank. (RTT News, May 2, 2016)
JAPANESE ECONOMY - In the meanwhile,economic activity in Japan continued its decline in April. The Markit/ Nikkei Manufacturing Purchasing Managers' Index, or PMI, plunged from 49.1 in March to 48.2 in April. This is the fastest decline in nearly three years. Production reduced drastically, pulled by the biggest decrease in new orders in three years. The silver lining is that employment kept growing, as it has in the last seven months. "Latest survey data signaled a marked deterioration in operating conditions at Japanese manufacturers, partly a consequence of the two earthquakes which struck one of Japan's key manufacturing regions," Amy Brownbill, economist at Markit, said. (RTT News, May 2, 2016)
INDONESIA MANUFACTURING - In Indonesia, the largest economy in the Asean, manufacturing picked up pace in April. The seasonally adjusted Nikkei PMI moved up from 50.6 in March to 50.9 in April. The increased activity was due to gains posted in acquiring new orders, even as export orders decreased, while employment levels were stable. USD denominated raw materials caused input prices to increase, while manufacturers resorted to raising prices to offset the same.
India
The Indian economy gave mixed signals in April. Manufacturing growth slowed down even though it remained in positive territory. The Nikkei PMI dropped from 52.4 in March to 50.5 in April. Yet new business orders remained robust as in the previous three months. Input prices, pushed by increases in prices of chemicals, plastics, metals, food items and paper climbed to the highest level in eleven months. Accordingly firms increased their selling prices.
Adding to the gloom, the Nikkei/Markit Services PMI decreased from 54.3 points in March to 53.7 in April. Services form a key part of India's economy. The index last attained 54.3 in January, the highest level in nineteen months. This is the third consecutive month the PMI has declined, even though fall is the lowest in the period. Overall the market witnessed solid competitive pressures, as firms continued to hold enough capacity to attend to existing business. The decline in the index was caused by a decrease in new orders in April, after posting the fastest growth in three years in March. The transport and storage sub-sector resumed growth from the previously static performance. Financial intermediation, posts and telecommunication witnessed robust expansion.
"A softer expansion in activity, combined with unchanged employment and a dip in business expectations among the services sector suggest that companies are not fully convinced about the recovery and that March's stronger numbers might have been a one-off," said Pollyanna De Lima, economist at Markit and author of the report. (Business Standard, May 4, 2016)
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