July 2010
Global Overview
Global growth concerns rise as economic data disappoints
More than a year since the global economic recovery took root, fears about a growth slowdown are now rising. If the concerns earlier this year were mostly about the European economy, the prospect of weaker economic conditions in other large economies, including the U.S. and even China, disturbed investor sentiment last month. Adding to the unease, there is no global consensus unlike last year on the policy options to be deployed to support growth. The difference in policy preferences were perceptible in the recent G-20 summit where European countries argued for restraints on government spending while most others favored more expansionary policies.
Though select markets registered marginal gains, most global equities extended the price decline in June. The Americas, which had outperformed other regions until June, saw the most price correction during last month. Weaker asset and commodity prices reflect the renewed concerns about a global growth slowdown, accentuated by the less than impressive economic data released recently. Surveys of global manufacturing activity and consumer confidence in leading developed economies have turned less promising. While global trade volumes slipped in April, the leading indicators index for China has been revised lower. Although the loss of momentum in the global economy is becoming more evident, it should be viewed against the backdrop of the better than expected recovery since last year.
Structural imbalances likely to persist in the global economy
Since the difference in economic growth models between consumer-dependent economies and export-driven economies was identified as a major reason for the recent financial crisis, rebalancing of these growth models is seen as a priority by global policymakers. Countries like the U.S., which ran large current account deficits, were expected to adopt more fiscal restraint and promote savings, while exporters like China, which built up massive trade surpluses, were encouraged to boost domestic consumption. While the savings rates in the developed countries and domestic consumption in the emerging economies improved during the early stages of the recovery, the gains have not been significant enough to address the structural imbalances. Though last month’s G-20 summit yet again declared its commitment to more balanced global growth, further progress towards this goal is likely to be very slow because of the renewed growth concerns in several leading economies.
Restrictive regulations cloud the outlook for key industries
After the oil rig accident in the Gulf of Mexico, the prospect of significant financial losses from such major accidents could deter the energy sector from investing in non-traditional sources like deep-water offshore fields. Governments are also likely to impose more restrictions on exploration and production activity in areas deemed environmentally sensitive. This will keep vast areas with large potential energy reserves out of exploration activity, and could influence long-term energy prices as production from traditional sources decline.
The moderation in factory output growth, especially in China, has led to increased weakness in commodity prices. However, as industrial output continues to expand in large emerging economies, though at a slower pace, it is unlikely that demand for materials will decline. The government of Australia is rethinking the additional tax on mining profits announced earlier this year, a move which will dissuade other resource exporting countries from imposing similar taxes and benefit the mining sector.
Efforts to revamp banking and financial sector regulations have progressed further in several countries. The G-20 meeting again emphasized that the banking industry needs to raise additional capital and reduce leverage. While there is no consensus yet on imposing additional taxes on banks to finance future bailouts, other regulatory aspects like increased consumer protection and restrictions on proprietary trading and investing seem settled.
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