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An economic update from Stephen Halmarick Head of Economic and Market Research, Colonial First State.
The big three – What have been the major economic events of the past few months?
1 – Cyprus Bailout
On March 25th, details were announced on a second and final bailout for Cyprus. Details included a restructure of its financial sector. Under the final bailout conditions, deposits under €100,000 are safeguarded inline with EU principles and deposit insurance levels. However the restructure of the financial sector has required the shutdown of the second largest bank in Cyprus – Laiki (Cyprus Popular Bank). Laiki will be split into a ‘good’ bank and ‘bad’ bank, with the bad bank to be run down over time. The good bank will be folded into Cyprus’ largest bank – Bank of Cyprus.
The likely impact on the Cypriot economy is expected to be harsh, given its heavy reliance on tourism and the financial sector. Cyprus is the third smallest economy in the 17-nation euro area.
2 – In Japan
Japanese equity markets continued their strong performance. This reflected growing expectations that new Bank of Japan Governor, Haruhiko Kuroda, would soon enact aggressive monetary policy easing to stave off deflation and consequently depreciate the yen. This has since been followed in April with the announcement of aggressive policy measures. As a result, the yen has depreciated 17.8% against the US$ and 18.6% against the AU$ from end of October till end of March. The Nikkei is now up 38.9% since the end of October 2012 till end of March, just before Prime Minister Abe was elected.
3 – In the US
Economic data continued to improve. Q1 2013 GDP forecasts have been upgraded to 2.1% on a seasonally adjusted annualised rate. US employment numbers were strong for February but then disappointed in March. The unemployment rate is now 7.6% in the US, although part of this fall has been due to people stopping looking for work.
The sequester budget cuts commenced and are worth US$1.2 trillion over 10 years, including US$85 billion between March and October of this year. These cuts are split between defence and non-defence discretionary spending. The start of the sequester impacted on consumer confidence readings over the month of March. The University of Michigan Consumer Confidence Index fell to 71.8 from 77.6, before rising to 78.6 at month end. While the ISM Manufacturing Index also softened, falling to 51.3 from 54.2 in March. Some companies appear to be deferring investment activity while they assess the impact of the sequester.
The Reserve Bank of Australia (RBA) left the official cash rate unchanged in March and April at 3.0%, highlighting signs that previous interest rate cuts were beginning to have an expansionary impact on the economy. Positive signs are being seen in the Westpac Consumer Confidence Index, and retail sales.
Auction clearance rates in Sydney and Melbourne have also strengthened, as have house prices. However concerns remain around the strength of the Australian dollar. The currency reached a 28 year high against the Trade Weighted Index over March. Q4 2012 GDP data was also released and showed that the Australian economy grew by 0.6% per quarter and 3.1% per year.
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