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Prospects daily: EU and IMF endorse unprecedented $146 billion rescue package for Greece

Global Macroeconomics Team's picture

Important developments today:

1. Greece and EU/IMF agree to financial package

2. U.S. consumer spending up 5.2% in the first quarter (saar)

3. Manufacturing sector activity accelerates in U.S. and Euro Zone

 

 

Greece reaches agreement on EU/IMF deal, but markets remain wary. The European Union and International Monetary Fund on Sunday endorsed an unprecedented €110 billion ($146 billion) rescue package for Greece. The agreement is aimed at preventing Greece from defaulting on its debts and stopping the Greek debt crisis from spreading through other indebted countries of the euro bloc. The aid package include a €10 billion fund set aside for Greece’s banking industry, as commercial banks may face rising bad loans amid major economic contraction.

Under the plan, Greece’s 15 euro-zone partners will provide €80 billion loans at a rate of around 5% for three years, and the IMF will contribute €30 billion. The first installment of the package will be made before Greece’s next bond redemption on May 19th, with the rest spread over three years on condition that the country implements budget cuts and tax increases. In return for the aid package, Greece agreed to push through a further €30 billion ($40 billion) of austerity measures, aiming to bring a deficit of 13.6% of GDP within the EU limit of 3% by 2014.

Market reaction to the Greek agreement has been muted, as investors remained worried that the package won’t dispel longer-term concerns over worsening debt problems of other euro nations. Indeed, many analysts speculate that Portugal and Spain might require similar aid packages in near future. Some have also raised doubts about whether the Greek government will be able to implement the austerity program it has promised, given growing opposition on the street and a severe recession likely to be caused by measures. Even after Greece received financial aid, consequently, world stock markets turned lower on Monday, with European shares dropping in afternoon trades.

The euro also declined against 13 of its 16 most-traded counterparts, snapping three days of gains. Meanwhile, the credit default swap spread on Greek government bonds narrowed to 633 basis points (bps) today down from 720bps on Friday; Portugal’s CDS spreads tightened 29bps to 260bps, and Spain’s fell by 13bps to 155bps.
 

 

Source: Department of Commerce

 

U.S. consumer spending up 5.2% in first quarter (saar). Today’s Commerce Department report on personal income and spending featured two more upbeat developments. Spending increased by the most in five months during March (0.6% m/m), after rising 0.5% during February, despite the less than opportune weather conditions on the Atlantic Coast in the prior month. And incomes increased for the first time in 2010, moving 0.3% higher on the back of increased wages.

The saving rate has borne the brunt of these more upbeat indicators, falling to 2.7% of disposable income in March from 3% in February¯but further still from 6.4% near the trough of the U.S. recession in May 2009. Today’s figures serve to underscore that household buying appears to be more firmly grounded in more positive fundamentals, less so in government incentives—a positive development looking forward.


U.S. manufacturing sector expands at an increasing pace. Activity in the manufacturing sector gained for the ninth consecutive month, according to the most recent report from the Institute for Supply Management (ISM). Indeed the increases in the sector have been accelerating recently, with the 60.4 survey reading in April the fastest since June 2004 (any index over 50 separates contraction from expansion in activity). Positive activity was reported in 17 of the 18 industries surveyed, signaling that manufacturing will continue to contribute to growth well into 2010.


In Europe, factory activity picking up sharply as well. The Euro Zone manufacturing sector expanded at the fastest pace since June 2006, according to readings from Markit Economics’ Purchasing Managers Index (PMI) in April. The PMI increased to 57.4 from 56.6 in March, slightly higher than the preliminary estimate, and posted a seventh straight month of expansion. The PMI numbers indicate that Euro Zone manufacturing is gathering steam in 2010, underpinned by demand for exports particularly from Germany, where the current PMI of 61.5 is the highest on record. However, in Greece, the manufacturing sector continued to contract in April, with a reading of 43.6, while the gap between the PMIs in Greece and Germany, Europe’s strongest economy, grew to the widest on record.


Among emerging markets:

In East Asia and the Pacific, Thailand’s consumer price inflation slowed to 3% in April (y/y) after climbing to 3.4% in March, the Commerce Ministry said.


In South Asia, India’s manufacturing output expanded for a 13th consecutive month in April, as indicated by the PMI which registered 57.2 for the month, down marginally from 57.8 in March, as higher incomes boosted demand for cars, motorbikes and cement.


In Latin America and the Caribbean, Brazil’s
economy is expected to grow 6.1% in 2010, according to the latest survey conducted by the central bank. This marks the fastest expansion in a quarter of a century. Meanwhile consumer price inflation is expected to pick-up to 5.4% this year.


In Central and Eastern Europe, the Czech Republic’s manufacturing sector expanded at the fastest pace in 25 months during April, as indicated by the HSBC Czech Republic Manufacturing PMI, which increased to 57.3 from 56.8 in March.


In Sub-Saharan Africa, Kenya’s annual inflation rate eased to 3.7% in April from 4% in March, on lower cost of food, the Kenya National Bureau of Statistics said.

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