Equity Prices Reflect Concerns over Global Growth Slowdown
Thomas White International
June 15, 2012
International equity prices corrected in May on heightened worries over a further global growth slowdown as the European fiscal crisis worsened. Political consensus on ways to address Europe’s fiscal problems dissipated after political parties opposed to austerity measures gained popularity in countries such as France and Greece earlier this year. However, Germany and select other countries continued to insist that structural reforms agreed as part of last year’s pact should be adhered to. These countries have so far resisted calls to issue common bonds that would likely bring down the borrowing costs of the troubled countries. In the absence of clear and specific plans to recapitalize its banking industry, Spanish bond yields have increased and the country has admitted to difficulty in finding buyers for new bond issues. There are also growing apprehensions that Greece may exit from the European Union. Meanwhile, the European Central Bank (ECB) has refrained from lowering its benchmark rate or announcing other monetary policy measures.
While Japanese first quarter GDP growth was better than forecasted, confirming the rebound from last year’s earthquake-triggered recession, most other global economic signals in recent weeks have been subdued. Global manufacturing output growth slowed in May, as most major economies including the U.S., China, and India reported a decline in the pace of expansion. Manufacturing output in the Euro-zone contracted at a faster rate in May while Japan held steady. Canada and Russia were the only large economies that reported manufacturing activity gains during the month. The Australian central bank unexpectedly cut its benchmark interest rate again in May, to prevent a further slowdown. Economic growth moderated in the major emerging economies during the first quarter, with China, Brazil, and India reporting weaker than expected GDP expansion during the period.
While the fiscal crisis in Europe has worsened and a new rescue plan that is broadly acceptable to a majority of the countries continues to elude policymakers, the region’s economic prospects have not deteriorated appreciably from forecasts made earlier this year. GDP data was better than expected during the first quarter, when export gains helped the Euro-zone avoid a technical recession. The ECB has maintained its earlier forecast of a mild recession this year, followed by a moderate recovery in 2013. Growth in credit flows to households in the region was moderately positive in April, when it was expected to weaken. In addition, the ECB retains room to reduce the benchmark rate further if required. The likelihood of Greece exiting the monetary union has increased, but the departure may not be as disruptive as previously feared, with policymakers in other countries already laying out plans to counter such an event.
The correction in energy and commodity prices could ease the pressure on household budgets across the globe, and further reduce inflation risks. The international Brent crude oil benchmark has slipped closer to the $100/barrel level, from above $125/barrel touched during the first quarter. Prices of metals and agricultural commodities have also declined appreciably from their first quarter levels. Lower commodity prices will likely allow central banks in emerging countries to cut interest rates more aggressively and support growth. In addition to the steps taken earlier this year to increase credit availability, interest rates have been lowered in China for the first time since 2008. The Brazilian central bank has brought down its benchmark to a record low in May, indicating a further reduction in the coming months. Governments in emerging countries are also rolling out fiscal programs to prevent further decline in economic growth. China and India have already announced higher infrastructure spending while Brazil has offered lower taxes to boost consumption.
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