Despite recent signs that the US economy is weakening slightly, it remains the most robust of the major economies. The labour market, however, is weak and continues to show elevated levels of unemployment. Long-term unemployment in particular continues to hurt the economy, although it has improved significantly over the year. Private household consumption has improved and most indicators point at a continued expansion during the coming months. The main issue is the potential negative impact of the current slowdown in the global economy on international trade and the US economy. The re-emergence of negotiations on the fiscal situation during the second half of the year may also constitute a challenging task with a potential impact on the economy’s growth.
The positive but slowing trend has been mirrored in the recent second release of the 1Q12 GDP numbers. They have highlighted that the expansionary trend has come down to a growth rate of 1.9% compared to 3.0% in the 4Q11. Private household expenditure was once again the major contributor. This positive trend in domestic demand has also been visible in the monthly retail sales numbers, which were again on the rise in April, rising by 4.7% y-o-y compared to 4.0% y-o y a month earlier. This represents a positive trend for three consecutive months and is the highest level of increase in a year. However, the monthly trend shows a marginal deceleration from March to April with growth rates of 0.43% m-o-m and 0.35% m-o-m, respectively. Consumer confidence numbers held up well, with the consumer confidence index of the Conference Board at 64.9 in May, lower than the 68.7 of April and below this year’s peak level of 71.6 in February.
The other consumer sentiment index of importance, the index of the University of Michigan, however, indicated an improvement, with 79.3 registered in May, compared to 76.4 in April, the highest level since January 2008. The labour market has improved considerably compared to last year’s level. The unemployment rate in May stands at 8.2%, which is slightly higher than a month earlier at 8.1%. But this compares to levels above 9.0% in 2011 and almost 10.0% in 2010. There are still some major structural challenges, particularly with long-term unemployment, which increased from 41.3% in April to 42.8% in May, the highest level since February. The participation rate, while still low, increased slightly from 63.6% in April to 63.8% in May. The chairman of the Federal Reserve Board (FED) recently addressed the issues of a still weak labour market. He highlighted the fact that growth seemed set to continue at a moderate pace and that the recent weakness in the labour market was due more to statistical seasonal adjustments, noting that the somewhat disappointing numbers might be exaggerated. He furthermore made clear that the FED is ready to respond to a Euro-zone crisis.
He continued by saying that the situation in Europe poses significant risks to the US financial system and economy, and must be monitored closely. He also pointed out that the fiscal situation in the US needs to be sorted out and addressed by policymakers, an issue that might gain greater importance in the coming months. In the meantime, industrial production has developed in an encouraging way. It increased by 5.2% y-o-y in April, compared to 3.6% in March. This translates to a monthly rise of 1.1%. Manufacturing orders were as well posting a positive yearly trend at 3.5% y-o-y, after 2.6% in March. Durable goods orders in particular increased sharply by 6.7% y-o-y in April, after a rise of 1.8% in March. The expansionary trend is also mirrored in the latest ISM numbers, while pointing at a slow-down in manufacturing. The ISM number for the manufacturing sector in May was recorded at 53.5, only slightly lower than 54.8 in April. The ISM for the services sector, however, increased slightly to 53.7 from 53.5 in April, but mwas still down from 56.0 in March.
The very important housing sector continues to send mixed signals. After having risen by 3.8% in March, pending home sales fell by 5.5% in April, according to the National Association of Realtors. Pending home sales are considered a leading indicator of progress in real estate because they track contract signings. On the other hand, the yearly change of the house pricing index of the Federal Housing Finance Agency has continued to rise, with an increase of 2.7% in April after a rise of 0.3% in March. This is a 1.8% rise on a monthly basis. After a slight dip to 4.47 million in March, existing home sales increased again to 4.62 million in April, almost matching this year’s highest level of 4.63 million seen in January. Given these figures, it could be said that the US economy shows remarkable robustness, particularly when compared to other OECD economies. However, it has to be acknowledged that it is running a much higher budget deficit of around 8% in 2012, compared to a weighted average of 5.6% in other advanced economies. This fiscal situation might cause unexpected tensions in the second half of the year, when further cost cutting in the federal budget will have to be negotiated, particularly after the presidential elections in November. With some uncertainties remaining, the economy is expected to expand only 2.2% in 2012, compared to last month’s estimate of 2.3%.
Japan is still in the process of digesting last year’s events. It is obvious that the Fukushima disaster had an unprecedented impact and that only a strong and developed economy like Japan could have dealt with it in order to keep negative effects to a minimum. However, the consequences are still being felt. They range from the dependency of domestic consumption on local fiscal stimulus to questions over the future of nuclear energy. Prior to the March tsunami, Japan’s nuclear industry was the supplier of around a third of its power supply. All areas of the economy were hit last year and through the shut-down of the country’s nuclear facilities, even regions not affected by the earthquake or tsunami felt the consequences — via shortages in power supply. Despite these challenges, and thanks to an improvement in Japan’s export markets during in 1H12 and its fiscal stimulus, exports have risen and local demand has improved since mid-last year. However, according to the most recently published indicators, the recovery seems to remain fragile as well as dependent on the export sector and the fiscal stimulus, which was introduced at the end of last year. With the global economy slowing down, and given many leading indicators predicting a deceleration in the 2H12, it is expected that 2H12 growth will be below 1H 11 expansions.
When analysing the most recent Purchasing Managers’ Index (PMI), it seems obvious that the coming months will see a slow-down. The current composite index, combining the manufacturing and the services sector, predicts that the economy will hardly be able to expand from its current level of 50.1 registered in May. This is only marginally above the 50 level, which marks the line between expansion and contraction. It is mainly the services sector which is below this level at 49.8. This has pushed down the composite index from April’s level of 51.3. Manufacturing, on the other hand, is holding up relatively well at 50.7, around the same level as in April. This might turn out to be a supporting factor for the economy. The corresponding and equally meaningful measure of machinery orders expanded 3.3% in March, lower than the 5.4% seen in February. These points at a deceleration in the expansion. It is important to highlight that the main support for orders came from domestic demand with orders expanding by 19.1% y-o-y, compared to a decline of 11.2% in February. In contrast, foreign orders have declined for the second consecutive month, dropping 10.6% compared with a decline of 9.6% in February. Indeed, this points to an undesired deceleration in export markets at a challenging time for the Japanese economy — when it has to import energy to compensate for the shortfall in nuclear supply. It is a phenomenon that might burden the economy considerably in the future, especially as trade surpluses become a thing of the past. With this, it may be increasingly harder for Japan to finance its large debt burden, which is currently the highest among all of the OECD economies.
So far, total exports have held up relatively well with the value of exported goods rising by 7.9% y-o-y in April, after a 5.9% increase in March. With the economic slowdown in Japans’ most important trading partners (especially China), however, this is unlikely to continue. The monthly trend in April has been significantly negative already at -10.3%. This probably provides a better insight into current trends since the yearly numbers are somewhat diluted by the low base from last year, which when used as a reference, leads to motor vehicle exports having a 44% increase on a yearly basis in March and 220% in April. These are obviously both unsustainable levels and the numbers are thus expected to come down. The weakening of the yen, which started in February, has certainly been helpful for exports. The exchange rate fell from around ¥77/$ to almost ¥84/$ in March, before settling again at a ¥81/$ level at the beginning of April. It now stands again well below the ¥80/$ level at around ¥79/$, which is a burden for Japan’s export markets.
The data indicates that domestic stimulus measures have been successful — though they have come at the price of increased debt levels, which could then be a drag on growth. Retail trade expanded by 5.8% y-o-y in April, down from 10.3% y-o-y in March, but still grew considerably. The danger lies in the fact that this trade was mainly stimulus-induced via car incentives, which pushed up motor vehicle sales to a 55.6% y-o-y increase. This significant increase is obviously unsustainable and is a compensatory effect of the sharply declined car sales, which began more than a year ago and were accentuated by the various effects of last year’s triple-disaster. The first quarter GDP numbers were recorded at a solid level of 2.0% on an annualized base. This has lifted the yearly growth expectations for 2012 to 2.0%. With the above mentioned uncertainties remaining, close monitoring of further developments in the coming months will be needed.
The upcoming election in Greece and increased tensions in the sovereign debt crisis of Spain point to a Euro-zone that continues to be embattled by the consequences of self-induced austerity measures and the weakening financial situation of some of its members. Output activity seems to have continued to decline further in April and May, and it remains to be seen whether 2H12 growth will be higher than 1H12 growth, as currently forecast. While 1Q12 GDP growth was reported to be 0.0% versus an expected decline, the most recent indicators point to an even more severe decline in 2Q12 with a prolongation in 3Q12. 10-year yields for treasury bonds in most peripheral economies, including Spain and Italy, have risen again in recent weeks.
Adding the political uncertainty surrounding elections in Greece and the Netherlands, as well as the uncertainty about future developments in the Euro-zone is still high. Worries about the ability to manage the sovereign debt burden have certainly grown recently with yields moving up for most of the ailing economies of the Euro-zone. Spain is moving into the spotlight with the need to receive support for its banking sector and maybe even an entire bail-out for its sovereign debt. Such support would certainly push the Euro-zone into new territory since Spain’s debt is more than Ireland’s, Portugal’s and Greece’s combined — an estimated €840 billion, according to the numbers provided by the IMF. This would make it necessary to potentially lift the current support facility for ailing economies from around €1 trillion to a level of around €1.5 trillion, which again would need approval from the Euro-zone member states. The European Central Bank (ECB), in the meantime, has left interest rates unchanged and has urged policymakers to solve the fiscal situation via fiscal measures. The ECB is not considering further loosening of its monetary policy. Most Euro-zone economic indicators remain in the negative zone. Industrial production fell by 1.9% y-o-y in March after having declined already by 1.5% in February. This is the fourth consecutive monthly drop and the highest since January 2010. Even more worrying, manufacturing orders have plunged again in March — for the sixth consecutive month — by 2.5%. This comes after an even more significant decline in February of 5.8%. This negative development in output activity is also reflected in the PMI numbers provided by Markit. The manufacturing PMI stood at 45.1 compared to 45.9 in April. This is the lowest level since July 2009, when the global economy was about to face its lowest level. The services sector, with its much higher weight in the economy, was recorded again at a level below the growth indicating level of 50 — at 46.7 — marginally lower than 46.9 in April.
This negative trend in output has been accompanied by a declining trend in retail trade. This trend now lasts for a whole year and hit its lowest point in April with a decline of 2.4% y-o-y. This level also corresponds to the declines seen in 2009, after the near melt-down of the financial system in 2008/2009. This development has been obviously supported by the rising trend in unemployment. The unemployment rate moved to a new record of 11.0% in April, again the highest on record since the initiation of the Euro-zone in 2001. The labour market is also experiencing the consequences of the Euro-zone economy’s weakness. Spain, in particular, has been affected with an unemployment rate of 24.3%. And while youth unemployment stood at 22.2% on average across the Euro-zone, in Spain it has reached a level of 51.5%. There is strong evidence that the weakening of the Euro-zone will continue in the coming months. Taking this into consideration, the forecast for 2012 GDP growth has been kept unchanged from the previous month with a cautious -0.4%.
Disappointing release of performance data of major OECD economies and developing countries (DCs) in the last couple of months has lowered expectations for global economic growth in 2012. Many observers have marked down their estimates of economic growth and growth forecasts for the US, Euro area and China have been softened, reaffirming the view that global growth will be weaker in 2012 compared to last year. China’s economy slowed to 8.1% on an annualized basis in 1Q12 and its trade performance for April has been poor. US job creation fell back last month and in Europe, the debt crisis remains unresolved with the economies of Greece and Spain showing no signs of recovery. There is a possibility of a breakdown of the European monetary union should Greece leave — or be forced to leave — the Euro-zone. This is no longer an unthinkable scenario, given the strong performance of anti-austerity parties in Greece’s election and the fact that they are expected to do well again in the upcoming election. Lower than expected economic growth has also exerted pressure on commodity and oil prices. Since there is strong relationship between the economic performance of developing countries and commodity prices, lower economic growth for major emerging and developing countries will affect commodity and oil prices in 2012. Indeed, commodity markets are already being affected. According to JP Morgan (1 June 2012), commodities fell sharply in the first week of June with a -4% change on average.
All major commodities are experiencing losses due to the uncertainties surrounding Greece, the Euro-zone crises and their implications for growth. Weakness of the Chines PMI in recent months suggests that these effects are being felt not only in the Euro-zone and in OECD economies but in emerging markets (EMs) as well. As the Economist Intelligence Unit (EIU, June) has noted, economic recovery in 2012 depended mainly on significant amounts of fiscal and monetary stimulus as governments raced to prevent a depression. As much of that stimulus has been withdrawn, economies have been left to generate their own momentum, and few have done so. From South Korea to India to the UK, governments have been reducing their growth forecasts for 2012. This is already leading to a new round of stimulus measures — with interest rates, for example, now falling in Brazil and India.
In Eastern Europe’s economies, spillover from the Euro-zone crisis has blunted growth prospects. The sovereign debt crisis in the Euro-zone, Eastern Europe’s key export market, has reduced growth prospects and raised doubts about the mediumterm outlook. A recession in the Euro-zone in 2012 will act as a sharp brake on economic activity in Eastern Europe due to weaker trade, investment and financing through banking channels. Domestic demand remains generally weak in Eastern Europe, given high unemployment, excess capacity in some cases and the inability of governments to provide fiscal stimulus. External bank loans and foreign direct investment, both of which had helped to drive growth in pre-crisis years, are likely to be constrained in 2012 (EIU, April 2012). If the credit squeeze becomes more severe, this would raise the spectre of another recession in Eastern Europe, as several countries in the region — including Hungary, Slovenia and Croatia — are already believed to be on the brink of recession. However, as sentiment towards the euro improves, the accommodative liquidity policy of the ECB and resilience in the German economy are expected to contribute to the recovery of economic activities in Eastern Europe.
The downside risk to Asian growth in 2012 mainly stems from the weak state of global demand. Export-driven economies such as Singapore, Hong Kong, Malaysia and Taiwan have all slowed in 2H11, largely owing to sluggish demand in the West, particularly the EU. The flooding in Thailand in November was also a factor, interrupting supply chains for some electronic components. In Malaysia, manufacturing on a seasonally adjusted month-on-month basis contracted 3.5% in January, then surged 12% in February, before contracting again by 5.8% in March. Similar patterns have been evident in the manufacturing data of other Asian economies such as South Korea and Taiwan — that are sensitive to global demand. Survey data of consumer and business confidence have also paint a lacklustre picture for the coming months. This is unsurprising given the outright contraction in Europe, as well as the sluggish growth in the US and the slowdown in China.
Following a strong rebound in 2010, growth in the Latin American region slowed to 4% in 2011. We forecast a further slowdown — to 3.4% — in 2012, in a context of outright contraction in the Euro-zone and below-par growth in the US. Growth is expected to accelerate in 2013, supported by continuing sound macroeconomic policies, resilient domestic demand and a recovery of economic activity in the OECD area. It is worth noting that economic growth in South American countries depends also on Chinese demand. On the other hand, historically low OECD interest rates, coupled with an improving investor perception of the region's potential, will continue to benefit the larger economies and those well integrated into the global financial markets. In September of last year, when global volatility hit most Latin American countries, their currencies depreciated significantly, underscoring the vulnerability of the region to shifts in market sentiment. A recovery in sentiment early in 2012 following the ECB's first long-term repo operation (LTRO) led to renewed capital inflows into the region.
This caused regional currencies to recoup part of the losses suffered in September. But this was short-lived. Since February, Latin currencies have generally resumed a weakening trend against the dollar. Regional currencies continue to be hit by renewed worries about the Euro-zone, as well as fears about a slowdown in Chinese growth, and its potential impact on commodity demand and prices. For Latin American policymakers, a spell of currency weakness would be welcome given concerns about a loss of competitiveness. This is particularly the case in Brazil, which is set to become a large oil producer and exporter, and faces the risk of "Dutch disease" (EIU, June 2012). While the Latin American region's economies would be adversely affected by an escalation of the Euro-zone crisis or a marked slowdown in China, the region’s external balance sheet would provide some protection. External debt is much lower relative to GDP and foreign-exchange reserves are at record levels. But Latin America is now running a current account deficit, which we estimate at almost US$50 bn in 2011, compared with a surplus of US$16 bn in 2007. This could be a source of vulnerability in the event of an external shock which could have lasting adverse effects on capital inflows and/or the region's terms of trade. (EIU, June 2012). Economic growth in South American countries is expected to be boosted partly by China's demand for soft and hard commodities exports. Historically low OECD interest rates, coupled with an improving investor perception of the region's potential, will continue to benefit those Latin American economies that are well integrated into global financial markets.
Economic growth slowed in the Middle East and North Africa (MENA) region in 2011 as a result of political upheaval and civil unrest. Most of the countries that experienced serious unrest last year — such as Tunisia, Yemen, Bahrain and Libya — will witness something of a rebound in 2012, as the political and economic scene stabilizes (albeit to varying degrees). However, those countries that are still affected by internal strife — such as Egypt and Syria — will continue to suffer economically. In North Africa, recovery will be constrained by weaker EU demand, which will lead to lower workers' remittances from Europe and decreased tourist inflows (EIU, June 2012). We expect stronger economic growth in 2H12 as hydrocarbons output continues to rise, and as oil prices stabilise at high nominal levels and some large infrastructure projects in GCC countries start to come on stream.
Despite the overall weakness in the global economy, fundamentals have been improving in many EMs in recent weeks. Nevertheless, policy mixes to support economic growth adopted in Ems differ significantly according to their economic circumstances. In many emerging Central and Eastern Europe countries, tight monetary policy is still on the agenda to curb elevated inflation. In Asia and Latin American countries, a more accommodative monetary policy is being adopted given concerns over sluggish economic growth. Inflation in Latin America has been moving lower, allowing policymakers to turn to economic growth policies. The Central Bank of Brazil cut 50 basis points off its policy interest rate on 30 May on top of interest rate cuts earlier this year. A series of initiatives totaling 1.5% of GDP are being considered to shield domestic industry from external competition. India’s Central Bank (RBI) has also cut its policy rate by a surprising 50 basis points at its meeting of 17 April, double the expected 25 bp. India’s rupee is expected to remain under pressure due to the current account deficit. Meanwhile, although China’s National Bureau data indicated strong improvements in its March manufacturing PMI, its May manufacturing PMI of 50.4 confirmed deceleration of activity. In Russia, investment demand remained firm in February while consumption growth seemed to be losing momentum. Labour markets are also tight given an unemployment rate of 5.9% and real wage growth of 13.3% on an annualized basis (JP Morgan, 30 March 2012).
In April 2012, the government launched a comprehensive package to boost domestic industrial activity to complement the country’s August 2011 plan. The package includes measures to increase public and private investment, enhance competitiveness — particularly through special incentives to boost productivity and innovation — and reduce production costs. It consists of three main pillars: actions to curb exchange rate appreciation (such as financial transaction taxes on international flows, which were recently extended to cover all loans maturing within the next five years), changes to the corporate tax structure and measures to stimulate domestic production. With regard to the first pillar, the government has stated that all measures recently taken have a permanent character and are unlikely to be reversed. Although no new announcements on the exchange rate front were made under the new plan, the minister of finance, Guido Mantega, specifically mentioned during a press conference that the Selic rate — the main monetary policy instrument of the Banco Central do Brasil (BCB, the Central Bank) — would be used as an indirect measure to counteract strong capital inflows.
The government has made slight changes to the complex corporate taxes focused on shifting companies' payroll contributions to the social security system, which amounted to a tax rate of 20% on payrolls, by introducing a new tax on turnover, with a rate varying between 1% and 2.5%, depending on the sector. In addition, the government announced that it would boost public sector credit, with a new transfer of R45 bn (US$27 bn) to the Banco Nacional de Desenvolvimento Econômico e Social (BNDES, the state development bank). The figure is greater than that previously anticipated (R30 bn) and is to be used within the framework of the Programa de Sustentaç?o do Crescimento (a programme providing cheap loans for, among other things, capital goods purchases, innovation and exports). On the other hand, a large expansion of fiscal spending would make it difficult to keep interest rates low for a long period. This would make predictions of the economic effects of Brazil’s policy mix even more complicated.
The primary surplus in the public sector for February has been above expectations at around US$5.7 bn. The primary surplus amounts to 3.3% of GDP over the last 12 months. This could reduce the nominal deficit overall for the public sector, which is obtained by subtracting interest expenditure from the primary surplus. Brazil’s nominal public sector deficit is estimated at 2.7% of GDP for 2012. Also, a government bill has been approved by the Senate which imposes a ceiling on the share of government contributions for social security for newly hired employees of the federal government workers, with the remainder to be funded by federal workers. On the monetary policy front, the Brazilian government had raised concerns about the high interest rates that private banks charge on corporate and consumer loans. To address the issue, the BCB and the CEF (the federal saving bank) have announced changes to its lending rates on some consumer and corporate credit lines in the hope that this will encourage private sector banks to follow suit. However, as the rates have risen in recent months, it seems unlikely that the private sector follow the government to the extent desired. The public sector share of total banking credit in estimated to be around 44%.
Annual inflation has now fallen much lower than expected — to around 5.24%, which is below the BCB’s estimate. Different measures of core inflation have also been reduced substantially. Recent figures in industrial production have generated optimism that the worst is over in this sector, particularly in the automotive industry, which had registered a large decline in early 2012. However, structural problems in the industry and the poor state of the country’s infrastructure imply that there would be a long way to go before making the industry internationally competitive.
The Chinese economy posted its weakest rate of growth in three years after real GDP growth in 1Q12 moderated to 8.1%. China’s PMI for May released by the National Bureau of Statistic eased more than expected — to 50.4 compared to 53.3 in April. It seems that last month’s estimates of economic activity underestimated the pace of the slowdown in industrial production. Although the government has stepped up efforts on policy easing, uncertainty has grown over the performance of the economy in 2Q12. Looking to 2H12, the risks associated with China’s economic growth have recently grown significantly, driven mainly by the Euro-zone’s economic crisis. With increasing signs of a deceleration in economic growth, the government has intensified its efforts to address structural imbalances. Given the fact that the annual rate of inflation now is now below 4%, the recent cut in the benchmark interest rate by the Central Bank has been interpreted as a move to boost economic activity by lowering the cost of borrowing from the banking system. However, many observers expect more interest rate cuts in the coming months. Also the reserve requirement ratio was reduced by 50 basis points effective 18 May. This is the third reserve ratio cut in six months and is in line with the Central Bank’s statement that targeted action would be taken to ensure stable credit growth. Pressure to appreciate the yuan against the US dollar is also expected to ease in 2012, given the downward trend in the country’s trade surplus and the recent strength of the US dollar.
Constrained credit demand has brought renewed calls for the government to provide a fiscal stimulus to the economy (EIU Country Report, June 2012). The Chinese government has already taken steps in this direction. Government spending increased 26% on an annualized basis in January-April, above the 12.5% increase in revenue. Low unemployment and a steady increase in real wages reduced the imperative to intervene. Having brought down inflation in recent months, it might be seen imprudent for the government to overstimulate the economy and thereby risk a return of elevated inflation. Therefore, a dramatic softening of fiscal policy seems unlikely — unless GDP growth falls below the government’s comfort zone of around 7-7.5%. China’s recent moves towards liberalizing aspects of its capital account and ensuring a more flexible exchange rate have been welcomed by the US, reducing frictions between the two economic powerhouses. The US has welcomed the Chinese government’s pledge to cut indirect taxes and increase dividends paid by state-owned enterprises for public spending. These measures are expected to support private consumption and boost import demand.
Amid growing uncertainty in the global economy, China’s declining foreign trade surplus, as well as the weaker than expected performance of industrial sector, modest growth (0.7%) in electricity output and a slowdown in the growth of cement production (from 7.3% in April to 4% in May) have all raised concerns over the pace of China’s economic slowdown. The weakness of the industrial sector is related to the property sector, which continues to depress demand for important industrial products (EIU Country Report, June 2012). A major part of commodity imports is related to construction activity and a mere 0.3% growth in imports of commodities in April has revealed a weakness in demand for investments in the housing sector. The downward correction in property prices engineered by government imposed restrictions on house purchases appears to be gathering pace. Housing sales fell 11.8% y-o-y in January- April. Given that developers are reluctant to add to their stock, the area of land bought for property development dropped 19.3% during that same the period (EIU Country Report, June 2012). External demand also continued to soften, mainly due to the EU’s sovereign debt crisis. Exports increased by 4.9% y-o-y to US$163 bn in April, following growth of 8.9% in March. China’s imports from Taiwan fell sharply — by 7.8% on an annualized basis — in April. Table 3.3 below gives the latest official information on China’s manufacturing PMI and related indices.
Last month, the Reserve Bank of India (RBI) cut borrowing costs by more than expected — by 50 basis points — after nearly three years, thereby reducing the benchmark borrowing rate to 8.0%. Because of elevated inflation, further cuts are unlikely as this would increase the money supply and inflate prices above prudential levels. Inflation remains a major risk to India’s economic stability. The wholesale price index rose by 7.23% y-o-y in April, picking up about 6.7% a month earlier. On 18 May, the government reported that the consumer price index (CPI) had risen by 10.4% y-o-y in April, following an increase of 9.4% in March. A weak Indian rupee, coupled with rising costs of crude oil imports, have exerted upward pressures on overall prices. The rupee depreciated by 2% against the US dollar in May, reaching a record low. With the recent strength of the dollar, further depreciation of the rupee is expected. Industrial production contracted by 13.5% on an annualized basis in March, recording its first decline since October. Average industrial growth in 2011-2012 stood at a feeble 2.8%. Manufacturing output contracted by 4.4% in March, while mining production declined by 1.3%. However, electricity production rose by 2.7% (EIU Country Report, June 2012).
The Russian economy expanded by 4.9% y-o-y above its long-term trend. The surprising positive number illustrates the resilience of the oil exporting economy to negative developments in Western Europe. Domestic demand also helped the expansion of the economy as a whole, as the government stepped up its spending prior to the presidential election in March. Nevertheless, economic growth remains fragile as the industrial sector only expanded by 2% in March, down from 6.5% in February, while gross fixed investment growth also dropped to 4.9% from 15.1% in the same period.
Inflation, meanwhile, grew much slower than expected in March, increasing the possibility for a more accommodative monetary policy by the Russian government. Inflation has fallen to a record post-Soviet low of 3.6% on an annualized basis. A monthly increase in food prices of only 0.2% brought annual food price inflation down to a record low of 1.2%.
OPEC Member Countries
Nigeria's inflation rate rose to 12.9% y-o-y in April, driven largely by non-food items and a very price-stable month compared to last year, according to data from the National Bureau of Statistics. Though its economy is one of the fastest growing in the world and with attractive bond yields, fiscal management has had a tendency to generate inflationary pressures. The central bank has warned that inflationary pressures are too strong, hinting that it is likely to keep monetary policy tight this year. But nobody expects a rise in rates at the bank’s next meeting. The bank held rates at 12% last month, noting a "resurgence of inflationary pressures". The bank has also praised the government for its efforts to introduce fiscal discipline in its 2012 budget.
Kuwait's annual inflation eased to a four-month low of 3.3% in April and prices fell on a monthly basis for the first time in more than a year due to a drop in food prices. Inflation in the country edged up to 4.1% in March after easing gradually from a peak of 5.4% in May 2011. Consumer prices contracted 0.6% m-o-m in April, compared to a 0.8% rise in March, according to the Central Statistics Office. The IMF advised Kuwait to cut its spending, diversify its economy, and improve its infrastructure and its investment environment in order to stay in robust financial health. According to the IMF, the country needs to cut its fiscal deficit, excluding oil and debt servicing, by at least 7 billion Kuwaiti dinars by 2017 in order to guarantee long-term fiscal sustainability. Under current projections, the government plans to raise its spending to more than 25 bn dinars in 2017.
Preliminary data from the Department of Statistics and Information in Saudi Arabia show that GDP rose 15.96% y-o-y during the 1Q12 compared to 2011. It has reached 612,295 million riyals in 1Q12 compared to 528,002 million riyals in the same period in 2011. In real terms, the percentage rise in the value of GDP for this period was 5.94% compared with 1Q11, marking a minor slowdown from the 6.6% growth recorded in 4Q11.
Oil prices, US dollar and inflation
On a monthly average from April to May, the US dollar increased compared to all major currencies with the exception of the Japanese yen. The US dollar rose 2.8% against both the euro and the Swiss franc, while it gained 0.6% compared to the British pound sterling. Only against the yen did it face a decline, falling 2.2%. While the decline of the euro against the US dollar has now stabilized, concerns about near-term developments in the Euro-zone remain, which might put the euro under further pressure. Since the beginning of June, the euro has stabilized around the $1.25/€ level. The near-term developments will, to a large extent, depend on the outcome of approaching elections and, consequently, the political response to the current crisis, including the future monetary policy of the ECB. Equally interesting is the recent development of the yen to US dollar exchange rate, which again fell below mthe critical ¥80/$ level and is now, since the beginning of May, constantly trading below this level. It remains to be seen if the Bank of Japan will continue to support the yen’s weakening in the foreign exchange market.
In nominal terms, the OPEC Reference Basket price fell sharply by $10.11/b or 8.6% from $118.18/b in April to $108.07/b in May. In real terms, after accounting for inflation and currency fluctuations, the Basket price fell by 7.1% or $5.12/b to $66.94/b from $72.06/b (base June 2001=100). Over the same period, the US dollar rose 1.2% against the import-weighted modified Geneva I + US dollar basket while inflation fell by 0.3%.