The world economy showed a sign of slowdown in the third quarter of 2010, except the US and Japanese economies that experienced positive improvement. Despite the expansion in domestic consumption, inventory restocking, government expenditure and export, the US economy continues to be in recovery process from the twin deficits problem. Japanese economy picked up though the strong yen and prolonged deflation remain its major problems. Chinese economy continued to grow but at a slower pace, due to the decline in government investment and measures that aimed to control speculation in real estate market and to limit risks that may have caused economic bubbles. The summary of economic performance in major economies are illustrated as follows:
"...The world economy in the third quarter has shown a sign of slowdown, except the US and Japan which experienced higher growth rates compared to the previous quarter. ..."
-US Economy expanded by 3.1 percent on a year-on-year basis, slightly increased from the 3.0 percent growth in the second quarter. On a seasonally adjusted quarter-on-quarter basis, the economy expanded by 2.0 percent, up from 1.7 percent growth in the previous quarter. The increase in GDP in the third quarter primarily reflected positive contributions from private consumption, inventory restocking, nonresidential fixed investment, federal government spending, and exports that were partly offset by a negative contribution from real estate sector and increased imports. Imports and exports grew by 20.4 and 17.0 percent (YoY) respectively, a decrease compared to the previous quarter. This led to a trade deficit of 133.1 billion US dollars. In the first nine months of this year, the US trade deficit reached 379.1 billion dollars, higher than the same period of last year’s deficit of 270.2 billion dollars. Imports also increased consistently as the US trade deficits with China, Japan and the Eurozone widened. Trade deficit with China reached 81.78 billion dollars, a rise from 67.74 billion dollars in the previous quarter. Industrial production increased by 5.4 percent (YoY) in the third quarter, a decrease which was in line with the PMI of 55.4. However, the PMI in October increased to 56.9 as a result of a rise in new orders. Consumer price index (CPI) rose slightly to 0.3 percent in this quarter. However, the CPI in September adjusted to a lower rate of 0.1 percent which could be a sign of deflation. The Federal Reserve (Fed) continued to implement quantitative easing (QE) measures to stimulate the economy, while keeping the policy rate at a range of 0.0 percent to 0.25 percent. In this quarter, 14.8 million people were unemployed, presenting an unemployment rate of 9.6 percent, down from 9.7 percent in the preceding quarter. Nonetheless, the number of unemployed persons rose to 15.6 million in October while the total nonfarm payroll employment increased by 151,000 in some sectors such as retail sector as a result of the upcoming Christmas season.
"...Despite the expansion in domestic consumption, inventory restocking, government expenditure and export, the US economy is still recovering from the twin deficits problem. ..."
- Eurozone Economy expanded at the same rate as the previous quarter by 1.9 percent on a year-on-year basis. On a seasonally adjusted quarter-on-quarter basis, the Eurozone economy grew by 0.4 percent, down from 1.0 percent growth in the second quarter. Most countries in Eurozone expanded at a slower pace particularly the Netherlands and Romania which experienced economic slowdown. On the contrary, Greece, Hungary, and Portugal developed positively. United Kingdom and Scandinavians such as Norway, Denmark and Sweden showed signs of recovery for the second consecutive quarters, reflected positive contributions from the continued expansion of domestic demand particularly in investment and inventory, including trade balance which continued to expand but at a slower pace thereby resulted in increased food and energy prices which ultimately lead to a high inflation rate of 1.7 percent. Greece experienced the highest inflation level among the Eurozone particularly in September 2010. The euro continued to depreciate throughout the third quarter against baht and yen. An average exchange rate in the third quarter of 2010 was 40.82 baht per euro (depreciated by 17.1 percent from Q4/2009 or 0.8 percent from the previous quarter). An average exchange rate of yen against euro stood at 110.67 (depreciated by 17.3 percent from Q4/2009 or 5.5 percent from the previous quarter). In contrast, an average exchange rate of yen against US dollar stood at 1.29 (appreciated by 1.5 percent from the previous quarter).
"...Most countries in Eurozone expanded at a slower pace due to fiscal consolidation policy that deterred the increase in domestic demand.
- Japanese Economy experienced a stronger-than-expected growth of 4.4 percent on a year-on -year basis, up from 2.7 percent in the second quarter owing to the low base effect in the same quarter last year. On a seasonally adjusted quarter-on-quarter basis, the Japanese economy expanded by 0.9 percent, increased from a 0.4 percent growth in the previous quarter as a result of increased domestic demand. Private consumption, especially in sales of fuel efficient cars expanded by 1.1 percent as purchase rose significantly before the government stimulus program to promote environmentally-friendly products came to an end in early September. Nevertheless, Japanese Economy began to show signs of slowing down in this quarter. The PMI fell to 50.8 from 54.1 in the previous quarter. Besides, PMI of September fell below 50 and stood at 49.5 for the first time in 15 consecutive months. Exports grew by 14.4 percent in September, down from 15.8 percent in August as a consequence of lower external demand and the yen appreciation. Deflation has remained Japan’s major economic problem as seen by the consumer price index which contracted by 0.6 percent in September. On the 5th of October, the Bank of Japan decided to adjust the policy rate to 0.0-0.1 percent in order to stimulate the economy and will maintain this level until CPI exceeds 1.0 percent. In this quarter, unemployment rate stood at 5.0 percent, decreased from 5.3 percent in the previous quarter.
"...Japanese economy experienced a stronger -than-expected growth in this quarter but deflation and strong yen remain problematic. ..."
- Chinese Economy expanded at the slower pace of 9.6 percent on a year-on-year basis,compared to 10.3 percent in the previous quarter. This was a result of the deceleration of industrial sector which expanded by 13.5 percent as compared to 15.9 percent in the previous quarter, as coincided with the declined manufacturing PMI from 53.9 in the previous quarter to 52.2 in the third quarter, signaling the slowdown of Chinese economy. This was partly owing to the implementing measures to control property speculation aimed at reducing risk on economic bubble, and the decline in public investment. In the first nine months of 2010, retail sales expanded by 18.3 percent, totaling to 11,102 billion yuan. Exports and imports continued to expand but at a decelerated rate corresponding to reduced external demand. In this quarter, exports and imports expanded by 32.2 and 27.4 percent, down from 40.9 and 44.1 percent in the previous quarter respectively. This was partly due to yuan depreciation after the Chinese government adjusted the exchange rate policy on 19 June 2010 and that affected China’s price competitiveness. Inflation rate reached 3.5 percent in this quarter, exceeded its target of 3.0 percent due to soaring food prices by flood and drought. People’s Bank of China raised the policy rate by 25 basis points on 19 October 2010. One-year deposit rate increased from 2.25 percent to 2.50 percent and the one-year lending rate increased from 5.31 percent to 5.56 percent. This tightened monetary policy which aimed to curb inflation rate within its targeted range became effective on 20 October 2010 and was the first rate hike since December 2007
"...Chinese economy continued to expand but at a slower pace, while inflation has become a concerning problem. ..."
- New Industrial Economies (NIEs) and India generally, had a slow growth. Singapore, Taiwan and South Korea grew at a slower rate of 10.6, 9.8 and 4.5 percent, down from a 19.5, 12.9 and 7.2 percent respectively. Hong Kong, on the contrary, grew by 6.8 percent, higher than the expansion in the previous quarter, primarily reflected positive contributions private consumption and public expenditure which expanded by 5.7 and 3.4 percent respectively. Indian economy is likely to grow at a slower pace in the third quarter as shown by a slowdown in industrial production in September to 4.4 percent from a robust 15.2 percent (YoY) in July and 5.6 percent in August. Inflation (WPI) in India slowed to 8.6 percent in September, down from a surge of 11.07 percent in April. In the next quarter, South Korean economy is expected to grow at a slower pace due to lower industrial production and exports affected by the strong won against the US dollar plus the decline in global demand. The Bank of Korea (BOK) has tried to curb currency fluctuation through implementing measures to control foreign exchange and the size of foreign currency derivatives, in order to prevent financial risks that might occur if there is a sudden change in the current capital flows between countries.
"...NIEs economies experienced economic growth but the expansion was at a slower pace. ..."
- ASEAN economies tend to grow at a slower pace. Malaysia, Indonesia, and Vietnam appear to grow at a sluggish pace due to the slowdown of global economy in addition to the withdrawal of stimulus measures. Indonesian economy grew by 5.8 percent, decreased from 6.2 percent in the previous quarter, resulted from a fall in domestic consumption, private investment and public spending. Vietnamese economy grew by 7.2 percent, increased from 6.4 percent in the previous quarter, as a result of export expansion by 36.9 percent. Most ASEAN countries have experienced a continual currency appreciation in the first three quarters of this year.
"...ASEAN economies generally grew at a slower pace compared to the second quarter. Currency appreciation is the common problem in the region. ..."
- Global Economic Outlook in 2010 and 2011
The global economy is expected to grow by 4.3 and 3.8 percent in 2010 and 2011 respectively. The main factors contributing to the continued global recovery includes policy adjustment to adopt stimulus measures, contractionary fiscal policy to solve public debt in Europe and the adjustment of trade balance. Ultimately, a balanced trade will be achieved since the countries with net trade balance surplus will tend to have a reduced surplus size while those with net trade deficit will tend to have a reduced deficit size. Domestic demand and inventory stock also show a sign of improvement. In 2010, the US, Eurozone, Japanese and Chinese economies are expected to grow by 2.7, 1.6, 2.7 and 9.6 percent respectively. In addition, the new industrial economies (NIEs) such as Singapore, South Korea, Taiwan and Hong Kong are expected to grow by 13.0, 6.1, 7.9 and 5.5 percent accordingly, while Indian economy is expected to expand by 8.3 percent. The ASEAN economies including Malaysia, Indonesia and Vietnam are expected to grow by 7.1, 6.0 and 6.0 percent respectively.
"...The global economy is expected to grow by 4.3 and 3.8 percent in 2010 and 2011 respectively. ..."
In 2011, the global economy tends to slow down and it is expected that the US, Eurozone, Japanese and Chinese economies will expand by 2.2, 1.4, 1.3 and 9.0 percent respectively. The NIEs including Singapore, South Korea, Taiwan and Hong Kong are expected to grow by 4.8, 4.0, 4.2 and 4.5 percent accordingly, while Indian economy is expected to grow by 8.3 percent. In addition, The ASEAN economies including Malaysia, Indonesia and Vietnam are expected to grow by 4.9, 6.1 and 6.4 percent respectively.
It is expected to see a slowdown in the Eurozone starting from the fourth quarter of this year due to lower consumption, fiscal consolidation policy8, credit restriction and global economic slowdown. Unemployment tends to be higher than the current 10.0 percent. Consumption may expand within a range of 0-0.2 percent, reducing the risk of high inflation. In 2010, the level of public debt as a percentage of GDP in Eurozone is expected to reach 72-85 percent.
Developing countries especially China and India will be the key contributors to the global economic recovery. Considering the current account, it can be seen that ASEAN5 economies retain highest current account surplus (3.2 percent of GDP), following by other developing countries (1.54 percent) and Eurozone economies (0.17 percent). The US and the PIIGs economies are still facing the problem of persistent current account deficit. Japan, on the other hand, has had a current account surplus of 3.05 percent of GDP, while the problem of high public debt as a percentage of GDP remains prominent. The IMF forecasted that Japan’s and the US’s in 2010 will reach 225.8 and 92.7 percent respectively, higher that the 72.6 percent of the Eurozone. Moreover, the US’s debt-to-GDP ratio tends to grow at increasing rate, while it is a less worrying problem in developing countries. Therefore, it can be seen that developing countries will play a crucial role in driving the global economy in the next quarter.
Low interest rates in the US and Europe will deter institutional investors from investing in these regions since they will diversify their investment to other developing countries where they yield higher returns. Thus, the capital control measures are needed in those developing countries. In the short run, the developing countries need to stimulate their domestic demand and transfer their savings into investment in non-tradable goods and services in order to reduce potential inflation problem. In addition, the rise in agricultural prices as a result of floods in Southeast Asia has raised the inflation concern and thus could lead to the adjustment of interest rates in the region.