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India's inflation worries, US economy and more... - Views on News from Equitymaster
 
 
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  • Apr 15, 2008

    India's inflation worries, US economy and more...

    • Woes of rising inflation continue to bog the Indian economy as escalating food and metal prices (steel in particular) have been the chief culprits in stoking inflation. While the government has responded by banning the exports of pulses and rice (except basmati) and reducing the import duty on certain edible oils, whether these measures will be effective in cooling down prices remains to be seen. Steel prices have also been charting an upward path, which have been hurting industries such as auto for instance. This has put immense pressure on steel companies to reduce prices, which in turn are unwilling to do so as the input costs (namely iron ore) are heading northwards due to the shortage of the same. Rising inflation has not made matters easier for the government either given that elections are due early next year. The only certainty seems to be the fact that the RBI is unlikely to soften interest rates in the near future till the inflation to a certain extent is tempered.

    • Meanwhile, US stocks were battered on Friday as news regarding weak corporate earnings continued to trickle in. The Indian stock markets, which have been increasingly mirroring the trends in the global markets, were spared, as Monday was a holiday. Recessionary trends are increasingly haunting the US economy with corporates reporting subdued quarterly results. This week is not expected to provide any relief either as a slew of financial companies announce their quarterly results. Further, as per the Economist, the latest labour market figures reveal a jump in the unemployment rate to 5.1% and the loss of 98,000 private sector jobs in March, the fourth consecutive month of decline.

      The IMF in its World Economic Outlook April 2008 has stated - "The U.S. economy slowed considerably to grow 2.2% in 2007, down from almost 3% in 2006. The pace of activity weakened sharply in the fourth quarter to only 0.6% (at an annualized rate). With the housing correction continuing full blast, the contraction of residential investment sliced a full percentage point off growth in 2007. Consumption and business investment also softened markedly toward the end of the year, as sentiment soured and lending conditions tightened significantly after the outbreak of financial turbulence in August, despite the Federal Reserve's aggressive turn to monetary easing. Rising oil prices helped dampen consumption, while also boosting 12-month headline inflation to 3.4% in February".

      IMF expects the US economy to fall into a modest recession in 2008, followed by a gradual recovery starting in 2009. This is expected to be somewhat slower than that following the 2001 recession as household and financial balance sheets are repaired. All major components of domestic demand are expected to perform poorly during 2008. Residential investment is expected to drop, consumption is expected to decline on the back of tight credit and deteriorating labor market conditions, despite tax credits in the recently enacted fiscal stimulus package. Business investment is also expected to remain sluggish.

      In 2009 too, consumption is expected to remain subdued, as households continue to raise their savings rate after a long period during which personal wealth was bolstered by robust capital gains on assets rather than by savings from income. US exports off late have been growing at a strong rate due to buoyant demand from the emerging economies and a sharply depreciating dollar and the IMF expects net exports to continue to be the silver lining in the dark cloud, bringing the current account deficit further down to about 4.2% of GDP, despite sustained firm oil prices.

     

     

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