Site Description Booth Link
Header Logo sans Ad Space

Economic Update

By Georgi Popov '13  |  april, 2013, Issue 2
News Temp Placeholder Image

Fears about the strength of the global economy fueled a risk-off trade last week, driving U.S. stocks to their biggest decline since November 2012. Leading indicators came in weaker than expected, while gold posted its largest decline in 30 years. China's first quarter 2013 GDP growth slowed down to 7.7 percent, well below expectations, suggesting that a new normal may be taking hold there. Chinese officials announced that the country's potential growth rate has declined due to a slowdown in the labor force, signaling that the soft patch is driven by both structural and cyclical factors.

The massive monetary easing across the globe continues, but it has been partially offset by fiscal austerity. However, some countries are hinting at potential policy changes. The French government announced last week that it would postpone its deficit reduction target by a year so as "not to compromise the recovery of economic activity." Further, South Korea unveiled a stimulus plan through a larger-than-expected supplementary budget aimed at supporting their economy that grew by a mere 1.5 percent last year.

In the U.S., Federal Reserve officials continue to give strong indication that monetary accommodation will remain in place for a while. Janet Yellen, a member of the Federal Open Market Committee, made a statement last week that current conditions demand low rates for a while longer. Additionally, a group of regional Fed bank presidents commented that the central bank must be just as vigilant against disinflation as against inflation. Therefore, a shift in the Fed policy appears unlikely in the near future, especially considering that the economy has somewhat weakened in the last few weeks. On April 26, the Bureau of Economic Analysis will release the first quarter 2013 GDP report and the expectation is for three percent real growth, although we should not be surprised if we see a number closer to 2.5 percent or even lower.

On top of weak manufacturing and employment data, the recently announced retail sales fell at their fastest pace in nine months. The main drivers behind the decline are large drops at electronics stores, department stores, and auto dealers. The current slowdown began with tax hikes and was reinforced by the sequestration budget cuts last month. Fiscal policy has become more restrictive, while monetary policy remains highly accommodating, perhaps at least until there is significant strengthening in the labor market or until inflation rises well above the Fed's two percent target.

Last Updated 4/29/13
Last Updated 4/29/13