Concerns over the European fiscal crisis persisted during April as political opposition to the ongoing austerity measures appeared to be growing in several countries in the region. Francois Hollande, who opposes cuts in public spending, is currently leading in the French presidential elections, while the Dutch government had to resign after failing to build a consensus over its fiscal reform plans.  The U.K. and Spain saw mild declines in GDP during the first quarter, and there are signs of a slowdown in the relatively healthier economies such as Germany. Spanish bond yields remain elevated after another credit rating downgrade and investor response to the recent sovereign bond issues has been subdued. The credit ratings of several Spanish banks have also been lowered, increasing investor anxiety about their ability to raise additional capital.

                                    

Global equity prices corrected marginally for the second successive month, while energy and other commodity prices have also moderated in recent weeks. However, led by the U.S., China, and India, global factory output continued to expand in April. Consumer demand remains healthy in most major economies, except Europe, and data from Japan suggests that a healthy recovery is underway as expected. In its updated forecasts, the IMF has increased its global GDP growth expectations for the current year to 3.5 percent from 3.3 percent earlier.

Monetary policy expected to remain supportive of economic growth across the globe

Inflation risks have remained fairly contained across most developed economies and the moderation in energy prices will likely lower such risks in emerging economies where consumer prices remain relatively elevated. Providing further relief to central banks in emerging economies, global food prices corrected in April after the uptrend during the first quarter. The Brazilian central bank lowered its benchmark rate yet again in April and indicated further rate cuts later this year, while the Reserve Bank of India surprised with a larger than expected reduction. Central banks in major developed economies continued to hold their low interest rates, except in Australia where a substantial reduction in the benchmark rate was announced in April.

Industrial manufacturers sustain earnings growth while select technology segments face slower demand

Despite slower demand from Europe and parts of Asia, the large industrial and capital goods manufacturers have sustained their earnings growth during the first quarter and remain optimistic about revenue growth for the rest of the year. The sector’s prospects came under a cloud during the second half of last year when Europe appeared headed for a mild recession and the large emerging economies such as China were slowing down. However, the subdued sales growth in these regions has been mostly offset by stronger demand from the U.S. and Japan, where reconstruction efforts are now progressing at full pace. Further, demand has only moderated in

the emerging countries and has not declined as yet. Most industrial manufacturers are now seeing the strongest demand growth in Latin America.

The technology industry is currently seeing divergent trends across different segments, in terms of revenue and earnings growth. Hardware and software product companies, especially marketers of high demand products such as smart phones and tablet computers, continue to enjoy healthy revenue growth and some of them have improved their margins further. At the same

time, software and other technology services providers as well as manufacturers of microprocessors saw a fall in earnings growth during the first quarter. However, as the global economy gathers pace, it is expected that business spending on technology upgrades will be sustained and will improve the prospects of this sector.

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