U.S. Sequester and Italian Political Stalemate Distract Investor Sentiment
Global economic trends largely remained positive during February, though the stalemate after the Italian elections and the failure by policymakers to reach a deal to avoid the U.S. sequester heightened the political and policy risks. The U.S. GDP figure for the last quarter of 2012 was revised higher, showing the world’s largest economy managed to avoid a decline. Consumer sentiment in the U.S. has turned more optimistic, a good sign for exporters in the rest of the world, helped by further improvement in the housing and labor markets. The Euro-zone economy contracted as expected during the last three months of 2012, but business sentiment continues to turn more optimistic in major economies in the region such as Germany. In Japan, where the government and the central bank are moving ahead with aggressive fiscal and monetary support measures, the economy declined unexpectedly in the most recent quarter as exports were weaker than earlier forecast. Among the emerging economies, India and Brazil reported fourth quarter economic growth that was below expectations.
Equity prices across the globe gave up a small part of their gains from previous months on increased concerns about a worsening European fiscal crisis and the potential negative impact of the U.S. spending cuts on global economic growth. Helped by faster expansion in the U.S., India, Brazil, and Mexico, output growth in the global manufacturing sector continued in February. Global services activity growth was healthier in February and appears more sustainable as new order flows also showed improvement from the previous month. The moderate correction in oil prices towards the end of February should also help consumer spending in major economies.
Global Industry Spotlight for the Month: Banking
The global banking industry continues to face starkly divergent economic environments and business outlook across regions. The challenges are the most acute in Europe, where economic activity continues to stagnate. It is not yet clear if the recent improvement in business sentiment is sustainable enough to translate to higher credit demand, while consumer credit demand continues to stagnate as high unemployment levels have negatively affected average incomes. Mortgage demand also remains weak as the housing and commercial property segments are yet to see a revival in buying interest, except in select cities such as London where the luxury housing market has been fairly strong. Nevertheless, balance sheet risks have declined appreciably after the extraordinary credit support offered by the European Central Bank (ECB) last year. Banks in the region have repaid more of their borrowings from the ECB than expected, suggesting the industry is less fearful of liquidity tightening.
Banks in the U.S. and Canada currently enjoy better business outlook and have stronger balance sheets than their European counterparts. Annual earnings for the U.S. banking industry increased nearly 20 percent last year to the second highest level in history, according to data from the Federal Deposit Insurance Corporation (FDIC). Higher non-interest income helped boost industry earnings for the last quarter of 2012 by more than 35 percent, while loan losses declined over 27 percent from a year ago. Data from the Federal Reserve have shown sustained credit expansion for the last several quarters, though the net interest margins have contracted even as mortgage rates have picked up in recent months.
Credit demand continues to see a healthy revival across major emerging economies, helped by the cuts in benchmark interest rates over the last year, lifting the outlook for banks in those countries. Central banks in most emerging economies are expected to bring down interest rates further this year. Lower reserve requirements have also expanded credit availability while more prudent lending standards since the global crisis have led to an improvement in asset quality for banks in most major emerging countries.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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