Dear All,
The IMF has slightly raised its 2011 outlook for world economic growth. In its projections released 3 months ago, the IMF called for a 4.2 percent growth for the year; the projection has now been bumped up to 4.4 percent. Not surprisingly, emerging markets will continue to lead the way, with developed economies lagging behind. Despite the upward adjustment, the IMF warns that risks remained elevated. While developed countries face debt problems, emerging countries can have asset price bubble risks stemming from overheated growth. The extension of U.S. tax cuts largely accounted for the growth upgrade.
On the topic of growth, normally, beating expectations is regarded as a positive; in China's case, however, investors didn't seem to like the report that Chinese economy exceeded a 10 percent growth rate last year. With the Chinese government highlighting inflation control as a primary objective, the fear is that overly strong growth will fuel inflation, forcing the government to apply more pressure to the brakes – and that this could potentially go too far and sap growth from not the Chinese economy. With China being the key global growth driver, a major slowdown there would inevitably have adverse worldwide effects.
Recent data showed that the consumer price level in China declined to a 4.6 percent year-on-year rate in December, down from a two-year high level in November. The less heated reading could give Chinese policymakers some leeway to not pursue extremely aggressive tightening actions, as it's also not in China's interests to risk having its growth rate decline too much. China will still likely grow at a rate north of at least 8 percent this year, hardly what one might consider stagnant growth. China's fundamentals look intact.
Recent data showed that the consumer price level in China declined to a 4.6 percent year-on-year rate in December, down from a two-year high level in November. The less heated reading could give Chinese policymakers some leeway to not pursue extremely aggressive tightening actions, as it's also not in China's interests to risk having its growth rate decline too much. China will still likely grow at a rate north of at least 8 percent this year, hardly what one might consider stagnant growth. China's fundamentals look intact.
While China's growth is surging despite government policies to moderate the growth rate, the U.K.'s economy headed in the opposite direction, with GDP dropping 0.5 percent in the 4th quarter (compared to analysts' expectation for 0.5 percent growth), This sparked fears of a double dip recession and highlights concerns about the impact of self-imposed austerity measures aimed at debt reduction. On the other hand, this was the first quarterly fall in GDP since the 2nd quarter of 2009 and severe weather likely played a role in these results. Overall, 2010 growth came in as a mere 1.4 percent. The U.K. has not adopted use of the euro currency and thus isn't part of the eurozone, but as a major trading partner with other European nations, economic troubles in the country will likely send ripples through the euro region.
Also this week, eurozone member Spain, struggling to crawl out from under the rubble of the property market collapse, has announced measures to shore up confidence in its banks. Regulation will be changed to allow partial government takeovers of the weakest banks; all banks will be required to increase their capital reserve rate. Spain's finance minister stated that the amount needed to recapitalize its banks is less than €20 billion ($27 billion) and that the country will be able to raise "all or part" of that amount in financial markets. Of course, this does not preclude Spain from tapping the bailout fund set up last year to rescue troubled countries if bond buyers yield demands are too high.
Finally, the tragedy in Moscow has increased political uncertainty in the region. Russia is trying to encourage foreign investment but the latest attack, which appears to be targeting foreigners in addition to Russian civilians, could give some foreign investors a pause. The immediate economic impact of the bombing, barring a major escalation of conflict between Russia and those responsible, should be fairly muted. However, what happens to oil and other commodity prices as a result of potential disruptions to supply from Russia is something to watch out for.
Also this week, eurozone member Spain, struggling to crawl out from under the rubble of the property market collapse, has announced measures to shore up confidence in its banks. Regulation will be changed to allow partial government takeovers of the weakest banks; all banks will be required to increase their capital reserve rate. Spain's finance minister stated that the amount needed to recapitalize its banks is less than €20 billion ($27 billion) and that the country will be able to raise "all or part" of that amount in financial markets. Of course, this does not preclude Spain from tapping the bailout fund set up last year to rescue troubled countries if bond buyers yield demands are too high.
Finally, the tragedy in Moscow has increased political uncertainty in the region. Russia is trying to encourage foreign investment but the latest attack, which appears to be targeting foreigners in addition to Russian civilians, could give some foreign investors a pause. The immediate economic impact of the bombing, barring a major escalation of conflict between Russia and those responsible, should be fairly muted. However, what happens to oil and other commodity prices as a result of potential disruptions to supply from Russia is something to watch out for.
Until Next Time,
Your ETF World Alert Team
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Your ETF World Alert Team
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Thanks and Regards
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