The cuts are not that large in the context of the USD 3. At this point, we expect the spending cuts to be modified later on to minimise the damage inflicted on the economy.
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The political gridlock and contractionary fiscal policy will hold back the US recovery in But the good news is that the underlying pace of activity is picking up in speed. Once the fiscal uncertainties have cleared, there is a lot of pent-up investment demand waiting to be unleashed and that should also be accompanied by stronger employment growth. Consumers may also spend more given the bottoming out of the US housing market.
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The fact that private sector deleveraging in the US is at an advanced stage allows households to slightly loosen their purse strings as soon as they regain confidence. Meanwhile, the Fed will continue to support the recovery with extremely loose monetary policy. In the coming weeks, the budget battles on Capitol Hill will flare up again. Without doubt, the most significant budget battle will commence once the debt ceiling is hit on May This could delay a default by around two months. Even though we believe the debt ceiling will eventually be raised given the enormous economic and political costs of sovereign default, the brinkmanship in Washington may weigh on private sector confidence and hold back the US recovery until mid Since Shinzo Abe took over as the new Prime Minister in late , the near-term prospects of Japan have improved.
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This is based on Mr. On the fiscal front, the government has swiftly put together a JPY 10trn stimulus package around 2. On the monetary policy front, Mr. And the nomination of the highly dovish Haruhiko Kuroda as BoJ governor is probably meant to lead to more aggressive QE measures in the future. Recall, the BoJ already has one of the largest balance sheets, as a share of GDP, in the industrialised world figure 4. Sadly, the administration has been very vague regarding the structural reforms they wish to take to increase the growth potential.
Figure 5 shows that, compared to currencies of the G20 countries, the yen has experienced the strongest depreciation, on a trade-weighted basis, between January and January Needless to say the stimulus would be self-defeating if it results in higher yields for Japanese government bonds. Until now, the stable domestic domestic investor base has shielded the government from the whims of the market figure 6.
As more workers retire and liquidate their holdings of government bonds e. This might push long-term interest rates higher if foreign investors expect the exchange rate to depreciate or that the government will eventually default explicitly or implicitly i. All in all, we do not expect Japan to face a fiscal crisis in the short-term, but the government cannot postpone the day of reckoning forever. The Chinese economy, that had shown declining annual growth figures for seven consecutive quarters, dug itself out of that hole to end the year on a higher note, posting 7.
The benefit is that inflationary pressures will be more limited while the adverse impact on banks is smaller as well. Although the short-term growth outlook remains relatively strong, the medium-term risks in China are still non-negligible.
Six years ago, Premier Wen Jiabao cautioned that the economy is "unstable, unbalanced, uncoordinated and unsustainable. Much to our regret, the government has not taken enough measures to rebalance the economy towards more private consumption. Although official figures state that non-performing loans are still at a low level, the real situation is direr, in our view. The amount of credit in China is likely to be much larger than official figures lead us to believe.
Economic activity seems to have picked up in many emerging economies. Recent monetary policy loosening figure 8 and a general increase in global trade should provide a boost to growth in Figure 9 shows that manufacturing PMIs in most major emerging countries are now above 50, indicating an expansion of output. Economic growth in is therefore expected to be slightly higher than in This would imply that in spite of sluggish growth in the industrialised world, there are signs that the emerging economies are partly decoupling from their bigger brothers.
If power were in the numbers, the emerging market consumer would definitely be capable of keeping the global economy afloat. With the industrialised countries unable to find the throttle, and governments being less willing and able to go on another spending spree, private sector consumption in the emerging countries will now have to prove itself as a sustainable source of domestic growth.
And this will be difficult. We can take Brazil as a successful example of a country in which domestic consumption has supported growth. Not only were the poverty alleviation programmes of the government hugely successful in generating new consumers, these efforts were backed by booming commodity prices, leading to windfall gains for the public sector. Also, Brazilian banks have been very willing to lend to consumers. While the latter is a typical Brazilian phenomenon, the former windfall gains leading to increased consumer demand is not.
The emerging markets have benefitted from high commodity prices due to rising demand in the western world in the s. This is simply not a sustainable growth model, and a rebalancing act, towards a more consumption-driven model will have to take place.
However, in the mean time there are far too many restrictions for consumers that will need to be addressed such as insufficient healthcare systems, a lack of social safety nets and financial illiteracy. And lest we forget, the emerging market consumer is vastly poorer than his western counterpart. As the world is anticipating a rise in the Asian consumer, the two most populous countries in the world have All these are structural impediments to consumers around the world to support the global economy.
Currently, the emerging market consumer will still need demand from western economies to spur growth, and boost domestic consumption. Given the mixed signals emanating from the global economy, it is difficult to identify the type of light we are seeing at the end of the tunnel. On a positive note, the eurozone crisis has not completely returned even after the disappointing election results in Italy.
Acre, Israel - December 20 People walking along the narrow alleyway in the Old City Acre, an ancient port city.
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