Manufacturing growth in the US has surged to a 4-year high, the UK saw the highest rise since 1994 and JPMorgan Global PMI Output saw the strongest quarter since Q3 2007. With China and India doing well, the IMF has raised global output forecasts again, reduced the likely bank writedowns from $2.8 tn in October 2009 to $2.3 tn now, and overall levels of risks are steadily falling.
With Greece leading the way, however, country spreads remain elevated and there is a danger this could see commercial spreads rising. Banks have $5 tn of debt coming up for rollover in the next 36 months, and governments have large borrowing needs also — 6% of GDP for the Euro Area, 8% for the US and 14% for the UK, and numbers that are 1-2 percentage points lower in 2011. Consequently, the IMF estimates a credit gap of 2% of GDP in the Euro Area and the US this year and 10 per cent in the UK. A cross-sectional regression of 24 countries finds fiscal problems and likely banking writeoffs are the biggest explanator for higher sovereign spreads, followed by high current account deficits. In other words, while overall risk levels are lower, including those on finance, they are high enough to raise caution over global growth.
India is in a better situation with both business confidence and industrial production up to an all-time high. Industrial production is also more broad-based. While private consumption share in GDP growth has fallen, this is expected to recover — the share of the government is down and investment levels are rising. Foreign inflows are up and while that is good for the markets and companies that are raising funds, this is a problem for the rupee, and hence exporters. Inflation is a serious concern and while RBI has tried to ensure interest rates don’t rise, more aggressive action may be needed. With oil prices rising, oil marketing firm losses are all set to rise and the fiscal deficit is in trouble since oil subsidies have been seriously underestimated. Exceptionally high 3G bids could prove to be the saving grace.
Source: Business Standard
