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Prospects Daily: S&P cuts EU credit rating, U.S. GDP growth at 2-year high, India’s leading economic index falls

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Financial Markets… Rating agency Standard & Poor’s cut its triple A credit rating of the European Union by one level on Friday, citing the deteriorating overall creditworthiness of the bloc’s 28 member nations.  S&P also said in a statement that disagreements among EU member leaders over the common budget process weighed on the downgrade.  The downgrade came after the agency stripped its AAA rating on the Netherlands last month, and today’s rating action leave just six EU member countries with a top credit rating, including Germany, Luxembourg, and Finland. Meanwhile, the rating firm raised Mexico’s credit rating by one notch to ‘BBB+’ from ‘BBB’ after the country approved constitutional changes to allow private investment in  the state-run energy sector for the first time in 75 years in a bid to boost growth over time.

China’s benchmark money-market rates surged and stocks extended their longest losing run since 1994 as an emergency money injection by the Chinese central bank failed to ease the worst cash crunch since June.  The seven-day repurchase rate, a gauge of funding availability in the banking system, jumped 100 basis points (bps) to a six-month high of 7.6% on Friday.  The rate has increased 328 bps this week, the biggest rise since January 2011, even after the People’s Bank of China conducted more than 300 billion yuan ($49 billion) of short-term liquidity operations over three days.  The benchmark Shanghai Composite stock index fell 2% in a ninth consecutive day of losses, posting its longest losing streak in nearly two decades.

The Turkish lira tumbled to a record versus the dollar and the euro amid growing political turmoil.  The lira depreciated as much as 1.2% to 2.098 per dollar, the weakest level since 1998, before recovering slightly later.  Turkey’s currency also dropped to a record low of 2.864 per euro.  The lira’s decline was the biggest across developing-country currencies, and it came even after the country’s central bank announced it  could increase the amount of dollar it sells for lira by up to 10 times the usual minimum of $50 million.

High Income Economies…With consumer spending and non-residential fixed investment rising more than initially estimated, U.S. GDP growth for Q3 was upwardly revised to 4.1% (q/q saar), following a Q2 growth rate of 2.5%.  The latest increase is the quickest pace since 2011 Q4.  Consumer spending increased by 2.0% reflecting an acceleration from the 1.8% growth seen in Q2.  Non-residential fixed investment grew an upwardly revised 4.8%, compared with the 4.7% increase seen in Q2.  Meanwhile, residential fixed investment grew at a downwardly revised rate of 10.3%.

At the same time, suggesting gradually strengthening economic conditions, the Conference Board’s U.S. leading economic index rose by 0.8% (m/m) in November after edging up by 0.1% in October and jumping by 1.0% in September.  The latest increase was driven by improving labor markets and new orders in manufacturing, combined with strong financial indicators.

With all three major industry groups – services, production and construction - making positive contributions, U.K. Q3 GDP growth was confirmed at 0.8% (q/q sa) unchanged from the upward revised rate in Q2.  On an annualized basis, GDP increased at 3.1% (q/q saar) in Q3, compared to Q2’s 3.2%.

At same time, the U.K. current account deficit jumped much-more-than-expected to £20.7bn in Q3, from £6.2bn in Q2.  At current market prices as a share of GDP, the deficit increased from 1.5% in Q2, to 5.1% in Q3, the largest since 1989.

Developing Economies…Latin America and the Caribbean: Brazil’s consumer confidence fell in December, dropping to 111.5 from 112.8 in November.  At the same time the current situation index, which measures consumers’ sentiment about current economic conditions and their own financial situation, fell to 119.2 in December from 120.8 in November; while the expectations index declined to 108.6 from 109.0 in November.

South Asia: India’s leading economic index, which signals turning points in the business cycle, fell 1.2% in November following a 1.1% increase in October.  Meanwhile, the coincident index, a gauge of current economic activity, rose 0.9% in November, rebounding moderately from a 1.3% decrease in October.

Sub-Saharan Africa: Standards & Poor’s affirmed South Africa’s credit rating, keeping it at ‘BBB’ but retained a negative outlook on debt.  The agency raised concerns that South Africa’s large current account deficit, noting that it leaves the country vulnerable to capital outflows and warned that a deterioration of the current deficit could prompt a downgrade.  The current account deficit widened to 6.8% of GDP in 2013 Q3, up from 5.9% in Q2.