Market Overview

Global Economic Overview: April 2014


Global Outlook Still Positive, but Persistent Slowdown in China Remains a Concern

Global economic trends remain mostly positive, though concerns about slowing growth in the major emerging countries such as China persist. The pace of GDP growth for China slowed further during the first quarter, as exports remained weak. Though the Chinese currency has depreciated against the U.S. dollar since the beginning of this year, the steeper declines in some of the other emerging market currencies have made Chinese exports less competitive. The property market in China also appears to be slowing down as recent data suggest a decline in average prices and sales activity. Among the other emerging countries, there is growing optimism about an improved economic outlook in India and Indonesia as new governments are likely to come to power.

Among the developed countries, first quarter U.S. GDP growth was weak as expected. Positive trends in the labor markets and consumer confidence indicate a stronger showing for the U.S. during the current quarter. The Euro-zone economy is likely to sustain the moderate pace during the current quarter, led again by Germany. The European Central Bank has lowered its inflation estimates and has indicated the possibility of additional monetary measures by June of this year. The Japanese economy likely benefited during the first quarter from consumers advancing their purchases ahead of a hike in consumption taxes.

Manufacturing output continued to expand across most major economies, except Japan where businesses remain apprehensive of lower consumer demand after the tax increase. Factory output increased across the Euro-zone while the pace of growth was sustained in the U.S. The large emerging economies saw moderate gains in manufacturing output, except China where activity remained subdued for the third month. Global equity prices saw only marginal gains as select Asian markets such as Japan, China, and India corrected. Emerging markets in Europe declined further on persistent geopolitical risks following Russia’s annexation of Crimea and the country’s continuing standoff with Ukraine over disputed territories.


The financial health of the major global banks is now far more robust when compared to the period that followed the global financial crisis, as they have shed their troubled assets and rebuilt their capital base. Nevertheless, regulatory restrictions on profitable business segments and lukewarm growth in credit demand continue to cloud their outlook.

More than five years after the global financial crisis, the debate over tighter regulation of large global banks and whether to protect their current business models is as yet unsettled. Public sentiment turned very negative against the universal banking business model in the aftermath of the crisis, as these institutions had to be rescued with taxpayer support. The global banks were seen as major risks to the financial system, taking undue advantage of deposit insurance and other risk protection mechanisms to profit from excessively expanded proprietary trading activities.

Public perceptions about the universal banking model have become more balanced now, as there is renewed acknowledgement of the benefits of large banks to the wider economy. Their wide reach and scale of operations make them essential for large businesses, especially for global corporations that increasingly drive world trade. However, regulators in the major economies have taken steps to reduce the risk of another financial crisis. Tighter regulations to restrict or have better control over some of the riskier business activities of banks are being put in place and capital requirements have been increased. The U.S. Federal Reserve has even mandated that foreign banks have a separate holding structure and capital requirements for their U.S. operations. The banking regulators also continue to stress test the large banks to assess their vulnerability to systemic shocks.

As a result of the increased regulatory scrutiny and additional capital requirements, most large banks in the U.S. and Europe have significantly scaled back their trading activities. Most of them have exited their commodity trading and warehousing businesses while income from trading in fixed income securities has steadily declined. Several of the major banks continue to pay hefty penalties to settle charges related to some of their business practices before the financial crisis. The only bright spot in investment banking appears to be transaction advisory services, as the mergers and acquisitions market continues to see several mega deals.

For U.S. banks, demand for mortgages appears to be waning after the healthy growth in recent years. Average home prices continue to rise due to low supply and inventories, limiting the home affordability of average buyers. While mortgage rates are still low by historical standards, credit standards remain relatively tight with substantial down payment requirements. Demand for mortgage refinancing has also slowed as most borrowers with good credit have already taken advantage of low interest rates in recent years.

Nevertheless, consumer lending could pick up as the labor markets continue to strengthen and as average wages start rising at a faster pace. This trend could be more visible in Europe which is recovering from a deeper and longer downturn when compared to the U.S. In addition, the European Central Bank continues to looks for ways to expand credit availability to consumers. Business lending is another segment that could see higher demand as economic growth strengthens further. The relatively lower bond yields and rising investor confidence would allow the banks to raise additional funding as and when required.

Among the emerging countries, there are persistent concerns about the risk of a credit crisis in China if the real estate market in the country weakens appreciably. Further economic slowdown could restrict the ability of small businesses to service their bank borrowings, and could potentially worsen loan losses for banks. However, the major banks in China appear to be adequately capitalized and the government is expected to provide further capital support, if required. The tighter liquidity measures and other controls initiated in China from last year appear to have limited the growth of the so called ‘shadow banking’ sector.

The relatively subdued economic conditions in other emerging countries such as India, Indonesia, Brazil, and Turkey have slowed credit demand in recent years. Interest rate hikes by central banks to stabilize falling currencies have also restricted credit growth. However, the currencies of these countries have stabilized and the central banks are likely to hold interest rates steady. There are expectations that some of these economies could see a growth revival if the new governments are able to improve business confidence through policy initiatives and higher investments. If that happens, the banking industry in these countries could benefit from the potential improvement in credit demand.


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