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October 31, 2017

Global Economy: A round of sanguinity

  • Rise in gasoline prices pushed up inflation in the United States (US) in August as hurricane Harvey forced temporary closure of refineries
  • S&P Global Ratings cut China’s sovereign credit rating from AA- to A+ as risks from prolonged period of strong credit growth increased
  • Crude oil prices surged to two-year high in September as global inventories shrank

Synchronized pick-up or a short-lived surge? Structural growth or a fragile uptick? Thedebate about the state of the global economy persists even as growth gathersmomentum. The International Monetary Fund (IMF) in its October edition of the WorldEconomic Outlook has upgraded its global growth forecast by 10 basis points (bps) to3.6% for 2017 and 3.7% in 2018, compared with 3.2% in 2016. The IMF has cited a broadbasedcyclical upswing in Europe, China, Japan, the US, and emerging Asia for therevision. Even then, caution abounds, with the IMF flagging the rapid tightening offinancial conditions, protectionism, and geopolitical strife as risks. The IMF also statedthe recovery is incomplete as growth remains low, especially in Latin America, the MiddleEast and Sub-Saharan Africa. Moreover, weak productivity growth, low inflation, and anageing population pose as a long-term threat to the recovery of many economies. Thus,the jury is still out on whether this latest acceleration in global growth will endure.


Hurricanes cause high inflation and job loss in US


The US economy recovered in the second quarter (Q2), growing 3.1% on-quarter compared with 1.2% - the fastest paceof expansion since Q1 2015. However, given the present government’s legislative struggle to push through pro-growthpolicies promised by President Trump during his election campaign, there seems little in the offing to spur growthfurther. S&P Global has, thus, revised its growth forecast for 2017 down to 2.1% (earlier 2.2%). Further, S&P Globalexpects the economy to grow at 2.3% in 2018 and remain ~2% annually through 2020.


Current account deficit widened to 2.6% of gross domestic product (GDP) in Q2 compared with 2.4% in Q1. InSeptember, there was a sharp decline in employment with a non-farm payroll job loss of 33,000, reflecting the impactof hurricanes Irma and Harvey. The annual consumer price index (CPI) rose 1.9% in August, as against 1.7% in July, dueto a sharp rise in gasoline prices as hurricane Harvey forced a temporary closure of refineries. The core CPI, whichexcludes food and energy prices, rose 1.7% in August for the fourth straight month.