The World Economy at a Glance

  • Sumo

EU summit: All but two leaders sign fiscal treaty.

25 of the European Union leaders have signed a new treaty to enforce budget discipline within the bloc. This new treaty aims to prevent the 17 euro-zone states running huge debts like those which sparked the need for bailouts for countries such as Greek, Ireland and Portugal. To take effect, the agreement must be ratified by at least 70 per cent of members i.e. 12 out of the 17 member-states. The Pact enshrines balanced budget rule in law and foresees penalties for offenders. The Agreement is believed to be championed by Europe’s largest economy, Germany. UK Prime Minister and his Czech Republic counterpart refused to sign the pact. The British rejected the Pact because of its impact on London as one of the world’s financial capitals.

Downside risks to global growth outlook remain, IMF warns.
The International Monetary Fund (IMF) has warned of a downside risk to global economic growth, if the euro area failed to build on recent measures and act decisively to achieve successful resolution to the crisis.
According to the Fund, policymakers should hastily implement the agreed “fiscal compact”, make monetary policy highly accommodative and continue to provide liquidity while engaging fully in securities purchases. This would ensure stability in the financial markets and stimulate positive outlook for the global economy.

Eurozone inflation rises, unemployment at record high.
According to flash estimate from Eurostat, inflation in the 17-nation bloc rose marginally to 2.7% in February, 2012 up from 2.6% recorded in January. The uptrend in inflation was due to rising oil prices amid sovereign debt crises in the currency-bloc.
The inflation figure continues to stay above the European Central Bank’s (ECB)’s 2% target. ECB had maintained the benchmark rate at a record low of 1% in February after a consecutive reduction in November and December 2011 due to slow economic growth. Unemployment rate unexpectedly rose to a 14-year high of 10.7% in January from 10.6% in the previous month, which is above the 10.4% forecast for January. The recent improvement in sentiment with regards to the Eurozone economic position may however be short lived, given an unpleasant synergy between rising unemployment rate and persistent inflationary growth.

United States
Manufacturing index shows unexpected drop in February

Data from the Institute for Supply Management (ISM) revealed that index of activity in the U.S. manufacturing sector dropped to 52.4 in February, 2012 from 54.1 recorded in January. This was against popular expectation of a 54.6 reading. The slowdown in manufacturing index was due to a drop in new orders and production index to 54.9 and 55.3 from 57.6 and 55.7, respectively. The disappointing figures eased equities off their highs, though still buoyed by a better-than-expected unemployment report.

Lowers Economic Growth Target

China lowered its target for economic growth to 7.5% in 2012, as government pledged to maintain a “prudent” monetary policy while playing down reliance on exports and capital spending in favor of domestic consumption. The world’s second largest economy has kept the growth target at 8% in the last eight years.
Last month, the People’s Bank of China cuts the Bank’s reserve requirement rate by 50 basis points for the second time in three months to stimulate credit and boost growth. Beijing is estimated to have grown by 9.2% in 2011, down from 10.4% recorded in 2010.