Economy Alerts

Global economy braves trade protectionism

The second quarter (Q2) GDP growth of most economies signal a revival, amidst a risk to growth from the ongoing trade wars. Among the major economies, the US, Japan and China saw their growth rates lift in Q2. The US economy posted a solid 4.1 per cent on-quarter growth , driven by private and government spending. Japan’s Q2 GDP growth picked up to 1.9 per cent on-quarter, after contracting 0.6 per cent in Q1, supported by private consumption and private non-residential investment. China’s Q2 GDP growth was marginally lower at 6.7 per cent compared with 6.8% in Q1.

Core and food inflation numbers cool in July

Consumer price index (CPI)-based inflation fell to 4.2 per cent in July from 4.9 per cent in June. Despite a jump in fuel inflation, lower food and core inflation (inflation excluding volatile food and fuel indices) brought about a fall in the headline number. Lower core inflation — at 5.5 per cent from 5.9 per cent in June – is along expected lines because of a high-base effect. Since July 2017, there has been a one-time bump-up in the prices of paan, tobacco, intoxicants and some services, probably because of higher GST incidence, which was reflected in the rising core inflation. This has now faded.

Trade deficit widens for 5th consecutive month

In July, growth in exports of goods decelerated while imports accelerated, widening the trade deficit for the fifth consecutive month to $18 billion. Growth in exports slowed to 14.3 per cent on-year from 18 per cent in June, while imports grew 28.8 per cent compared with 19.5 per cent. The deceleration was due to slower growth in petroleum products, engineering goods and chemicals. High oil prices is the prime driver of import growth, but strong recovery in gold imports is also putting pressure. Core imports (imports excluding oil and gold) also picked up.

Industrial activity rebounds in June

The Index of Industrial Production see-sawed in the first quarter of this fiscal. The index rose 4.8 per cent on-year in April, dipped to 3.9 per cent in May and rebounded to 7 per cent in June, riding on broad gains and a low-base effect. The primary drivers in June were the manufacturing and electricity sectors. Production of consumer durables also saw a steep rise, while that of primary goods and non-consumer durables rose, but at a slower pace. The core infrastructure index (coal, crude oil, natural gas, refinery products, fertilisers, steel and cement) also staged a pick-up in June.

Rupee still on a slippery slope

The rupee weakened against the US dollar to average 69.0 so far in August, depreciating 0.4 per cent on-month relative to the average value in July. The fall in rupee this year is attributed to a sharp increase in trade deficit and a stronger dollar. The steep drop is August is a result of investors scurrying to invest in safe havens following the Turkish crisis. The rupee is likely to continue facing pressure as the current account deficit widens. Also global uncertainty resulting from divergence in monetary policies in advanced economies and escalation in geopolitical risks can cause capital volatility.

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