International equity prices remained subdued during the month of April as concerns over the European fiscal crisis continued to cloud market sentiment. Accordingly, price declines were the greatest in Europe while select markets in Asia and Latin America outperformed. As expected, the economies of both the U.K. and Spain contracted during the first quarter, and underscored the mild recession the region is facing at the moment. Bond yields of some of the troubled countries such as Spain and Italy have increased in recent weeks, and investor response to new bond issues remains lukewarm. Recent political developments in countries such as France suggest growing discontent against the fiscal austerity programs that appear essential to underwriting long-term economic stability.

Though industrial activity remained subdued across most of Europe in April, factory output continued to expand in major economies in other regions. Further gains in factory activity in the U.S. and China have helped strengthen the optimism over the economic outlook of these countries. Data from Japan suggest that the slowdown in overseas demand is being offset by stronger domestic demand for capital equipment and consumer durables, especially for automobiles. In Australia, the central bank has made a substantial interest rate cut to counter a further economic slowdown.

The outlook for the emerging economies has stabilized and concerns over a significant decline in growth rates have eased, though GDP expansion in most of these countries is expected to moderate this year. Weaker than expected import growth helped China swing back to a trade surplus in March, after an unexpected deficit in February. The Korean economy continued to expand during the first quarter, though the pace slowed from the last quarter of 2011. Brazil cut interest rates close to an all-time low for the country and indicated the possibility of further reductions later this year. The central bank in India surprised with a larger than expected cut in April, the first since 2010.

Near-term Outlook

While the first quarter GDP growth data from Europe showed continued contraction in output, it should be noted that the extent of the decline is not worse than forecast. When viewed within the broader context of the prolonged financial crisis in the region and the steep cuts in government spending in several countries, the fall in economic activity in these countries is not considered alarming. However, the fiscal austerity measures that seem vital to restore the fiscal health of these countries are becoming increasingly unpopular. Political parties that oppose these measures are gaining steam, as seen in the ongoing French presidential elections, and if this trend continues, it could jeopardize the earlier European consensus over the plan to tackle the fiscal crisis. Rising unemployment in countries such as Spain may also make it politically difficult for governments to persist with drastic reduction in public spending.

However, unless the crisis in Europe worsens, the global economy is likely to sustain the moderate pace of growth. Consumer spending remains relatively healthy in major economies, except in Europe, and could benefit from the recent moderation in energy prices. Accordingly, the IMF has lifted its global growth forecast for the current year to 3.5 percent from 3.3 percent earlier, and now believes that the odds of a steep decline in the growth rate to below 2 percent are insignificant.

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