Global Outlook

Economies cooling off; a way to open floods of liquidity again

By Live Scrips

The world is on the verge of slowdown, is it an indication that we may see floods of liquidity in the markets again or shall we see a distant dream to become factual. A dream that countries will adopt good fiscal discipline and competitive market measures through full currency convertibility and will ensure that the old disaster which happened over past half decade will not repeat. The dreams are always dreams and the governments are unwilling to fulfill long term dreams due to pressure on creating temporary solutions.

Looking at the events over past few days, we may again see some temporary solutions from different governments in different countries that is infusing liquidity and inviting inflation in a medium term. We have analysed few countries and regions to understand their old problems, old resolutions, new problems and expected solutions. It gives an interesting picture that every government / central bank will unanimously chose infusing liquidity.

Problem with the infusing more liquidity is inviting inflationary conditions. The situation will remain more and more cyclical till the currency convertibility and the government’s approach shifts towards more and more fiscal discipline. In our earlier article, we have shown our readers that how the USA’s excess liquidity created post 2008 recession was sucked by China. This kind of situations continues till the countries adopt competitive markets.

Recent developments which inspired us writing this update

China's Nov. industrial and investment data weak

Chinese data released Friday afternoon showed the world's second-largest  economy cooling more than expected in November. Industrial production for the month rose 12.4% from a year earlier, below forecast gains of 12.8% and 12.5%,according to separate surveys from Reuters and Dow Jones Newswires, respectively. The result marked a slowing from October's 13.2% advance. Urban fixed-asset investment, a closely watched indicator of the Chinese economy, rose 24.5% during the January-November period, easing from 24.9% in January- October, and missing a 24.7% Reuters forecast. Retail sales, however, rose faster in November, gaining 17.3% year-on-year, compared to a 17.2% gain in October. China's industrial data came along with improving inflationary conditions, read  next.

China's inflation eased sharply for November

Chinese inflation fell sharply in November, cooling at a faster-than-expected rate on the back of falling food and commodity prices, and raising the prospect of further monetary easing by the central bank.

The monthly consumer price index rose 4.2% from the year-ago period, reflecting a huge easing from October’s 5.5% increase. The producer price index, which reflects wholesale prices, eased even more steeply to 2.7% from a 5% increase in October.

The data were weaker than projections, with economists polled by Dow Jones Newswires estimating the monthly CPI at 4.4% and PPI at 3.2%. A Reuters survey had tipped a 4.4% consumer-price rise and 3.3% for producer prices. While China is slowing, Japan also revised its growth rate, read next.

Japan's Q3 growth revised down to 1.4% from 1.5%

Japan revised its economic growth lower for the third quarter to 1.4% , from an original reading of 1.5%, according to Cabinet Office data released Friday. The revisions incorporated new methods for compiling the data and the revisions were expected by analysts. On an annualized rate, gross domestic product growth was marked down to 5.6% from the first reading of 6.0%. Private consumption rose a revised 0.7% in July-September, while overall domestic demand was up a revised 0.8%, against 1.0% originally reported. Japanese markets, beside its growth revision fall on account of EU's failure to reach full agreement, read next.

Europe summit fails to reach full agreement

A closely-watched European Union summit failed to secure the full backing of the 27 nations for treaty changes to help fight the region’s debt crisis by coordinating fiscal policy.

However, many members reached an agreement to provide up to an extra 200bn euros ($266.73bn) to fight the crisis and to form a new fiscal compact. European Council President Herman Van Rompuy said in a press conference after the end of the first day of the summit that euro-area and other European states willaim to make the extra money available to the International Monetary Fund. Additionally, European Financial Stability Facility leverage will be rapidly available, he said. The euro dropped by 0.1% against US dollar, read next.

Dollar rises more as Europe spurs risk aversion

The U.S. dollar rose further against the euro and various “risk currencies” Friday, as news updates on the ongoing European Union summit offered disappointment. The dollar index, a measure of the greenback’s performance against six other major currencies, rose to 78.848 from 78.789 in North American trade Thursday, as investors chased assets perceived to be safe.

The dollar’s move higher came after reports that leaders of the 27-member European Union sealed a new fiscal pact for budget discipline, but failed to agree on a treaty change for closer fiscal ties. A deal may now just involve the 17 nations that share the euro, plus others who may want to join. The dollar's rise also show strenghtening US economy compared to Japan and Europe, depicted by a sharp fall in the jobless claims, read next.

First-time jobless claims fall sharply to 381,000 - Lowest level since late February

The number of people filing for state unemployment benefits for the first time fell 23,000 to the lowest level since late February, the government said Thursday. The Labor Department said claims fell to a seasonally adjusted 381,000 last week. The level of initial claims in the week ended Nov. 26 was revised up by 2,000 to 404,000.

The four-week average of new claims also fell, down 3,000 to 393,250. This is the lowest level since early April. The monthly average is seen as a more accurate gauge of labor trends because it reduces volatility in the week-to-week data. While US economy is in the process of revival, emerging countries like India are entering into slowdown, read next.

India's IIP to post negative growth of around 7% in October

Quoting an unnamed official source, the Times of India reported that India's October industrial output shrank by 7%, first time it moved in negative territory since June 2009.

"Initial estimates show that industrial production has shrunk by 7%. But with more data coming in, the decline may be around 5%," the newspaper quoted the source as saying.

IIP data will be released next week. The industrial sector has been under stress for the past few months, hit by rising interest rates, input costs and stubbornly high inflation.

The news came along with the sentiments that overall global economic growth is slowing. This include poor Australian unemployment rate, fall in Japan machinery orders in October and rise in dollar against euro, rupee. India's industrial production decline is accompanied by declining inflation, the natural solution is infuse liquidity, read next.

India's food price inflation at 6.6% and fuel inflation at 15.53%

Food inflation fell sharply to 6.60% for the week ended November 26, reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. Food inflation, as measured by the Wholesale Price Index (WPI), stood at 8% in the previous week ended November 19. It was recorded at 8.93% in the corresponding period last year.