September 2011

Global Overview

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Financial markets stabilize but global economic outlook remains subdued

While global financial markets have stabilized after the heightened volatility caused by the U.S. debt downgrade and fears about the European debt crisis, the global economic outlook remains subdued. Second quarter GDP growth was weaker than expected for most large economies as consumer spending growth slowed and production schedules were disrupted by natural disasters.

The recovery in global equity prices towards the end of August could cover only part of the decline during the first half of the month and most markets have now given up all of their gains from earlier this year. Gold prices surged to a new high, and U.S. treasury yields fell despite the rating downgrade, as investors preferred safer assets. On the other hand, select barometers of global industrial activity, like copper prices, declined. Nevertheless, most developed economies continue to expand, though at a restrained pace, and are expected to gain speed during the second half of the year. Also, the Japanese recovery appears more vigorous while the moderation in second quarter growth for China and India was not as damaging as feared.

Weaker second quarter trade flows cloud global economic outlook

External trade volumes declined appreciably for most major economies during the second quarter, for the first time since the recovery began in 2009. Exports from the top-12 economies increased by only 1.9%, as compared to 7.7% in the first quarter, while import growth declined to 1.1% from 10.1%, according to data from the OECD. While some of the deceleration was due to disruptions in component supplies after the Japanese earthquake disaster that affected production in several countries, slower growth in consumer demand also played its part. As component supplies from Japan have resumed, the third quarter will likely see a recovery in global trade volume growth. However, the rate of growth is likely to be restricted as consumer demand is expected to remain subdued in the U.S. and Europe. Also, though demand from China remains healthy, the weaker global economic outlook may limit the hunger for commodities and industrial materials during the second half of the year. Hence, it is likely that growth in aggregate global trade volumes this year may fall short of the 6.5% forecast by the World Trade Organization. World trade had expanded 14.5% in 2010.

Despite economic uncertainties, merger and acquisition activity maintains pace

Despite the uncertain economic outlook and increased financial market volatility, global merger and acquisition activity has surged this year. If the current tempo is maintained for the rest of the year, it is likely that 2011 may turn out to be one of the busiest ever for acquisitions. Several of the big ticket purchases have been in the pharmaceuticals and technology industries, as the larger companies are seeking attractive targets to bolster their technological strengths and expand into newer, fast growing segments. The technology sector in particular has seen several deals aimed to take control of patent banks, either to aid new product development or to prevent rivals from entering key product segments. With more suitors chasing fewer targets, valuations have trended higher, raising concerns about the viability of some of the deals. However, with their cash reserves at record highs and exceptionally low borrowing costs, large companies are expected to continue their pursuit of attractive acquisition targets.

After growing at a healthy rate for nearly two years, the automobiles sector has seen slower growth in select markets in recent months. During the first half of this year, new car sales declined across most major markets in Europe, except Germany and France, while sales growth in the U.S. has moderated since April. Among the large emerging markets, sales growth remains very strong in Russia, but the pace of volume gains has slowed in other markets like China, India, and Brazil when compared to last year. Nevertheless, aggregate volume growth is expected to remain healthy for the global automobile industry this year.