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January 29, 2017

Global Economy: Tailwinds to fan stronger global recovery in 2018

  • The United States (US) Fed raised its target range for policy rates by 25 basispoints (bps) in December from 1.25% to 1.50%
  • The People’s Bank of China raised its repo rate by 5 bps to 2.5% for 7 days’ and2.8% for 28 days’ agreements
  • Global energy indices rose owing to higher crude oil and coal prices, while nonenergyindices shed some heat with a fall in agriculture and fertilizer indices in December

In its January edition of the Global Economic Prospects report, the World Bankestimates the global economy to grow 3.1% in 2018, a tad higher than 3%(estimate) in 2017. Recovery in investment, manufacturing, and trade is seen asthe major stimulant to growth this year. Growth in advanced economies isexpected to moderate slightly to 2.2% from 2.3% (estimate), as central banksgradually tighten the easy monetary policy pursued following the global financialcrisis. On the other hand, emerging markets and developing economies as a wholeare projected to strengthen to 4.5% from 4.3% (estimate), as commodity exportingeconomies benefit from firming commodity prices.


Tax cuts boost US growth prospects


The US Bureau of Economic Analysis revised down gross domestic product (GDP) growth estimate for the third quarter(Q3) to 3.2% (earlier 3.3%). The downward revision was on account of a lower than estimated growth in personalconsumption expenditure, partly offset by an upward revision in state and local government spending. Meanwhile, theUS Congress passed the proposal to announce tax cuts worth ~$1.5 trillion spread over the next 10 years.


Current account deficit narrowed to $100.6 billion in Q3 from $110.3 billion a year ago, on account of an improvement inprimary and secondary income receipts. Trade deficit, however, widened by $13.5 billion on-year to $134.4 billion inQ3. In November, the trade deficit widened to $50.5 billion compared with $46.4 billion a year ago, as imports (8.4%)grew slightly faster than exports (8.3%).


Annual Consumer Price Index (CPI)-linked inflation rose 2.2% in November, compared with 2% in October. Inflationwas fueled by rising energy prices, with gasoline prices surging 16.5% on-year. However, core inflation (CPI excludingfood and energy) moderated to 1.7% after a 1.8% increase in the preceding month.