from the Dallas Fed
Global growth in the second quarter picked up in the emerging economies but slumped in the advanced countries. Growth in the emerging economies was mainly driven by a 2.73 percent year-over-year boost in Mexican GDP. The Organization for Economic Cooperation and Development revised down its euro-area GDP growth outlook from 1.2 percent in May to 0.8 percent in September and suggested urgent and ambitious reform in the region. The outlook for the global economy remains cloudy, and three risks loom: weak growth in the euro area, the emerging effects of the Russian sanctions and growing concerns about rising Chinese debt.
ECB Next to Implement Quantitative Easing
The European Central Bank (ECB) is about to start the next round of monetary policy easing. In addition to lowering the deposit and refinancing rates to historic lows of –0.2 percent and 0.05 percent, respectively, ECB President Mario Draghi announced at the ECB’s meeting in September that the ECB will partake in a form of quantitative easing that includes purchasing asset-backed securities and covered bonds. These policy actions are targeted at alleviating the euro-area crisis that has been a growing burden since 2011. Inflation rates in the euro area are at a five-year low of 0.4 percent year over year (Chart 1). Unemployment is in the double digits in France, Greece, Italy, Spain, Portugal, Latvia and Ireland. The efficacy of these changes in monetary policy remains unclear, however. If the quantitative easing that Draghi is attempting fails, the euro area may have to look to fiscal policy changes to strengthen the region’s economy. Furthermore, sanctions imposed against Russia may be impacting growth in the euro area, which may further hamper the region’s economy.
Sanctions Are Slow to Show Effects
The sanctions imposed against Russia are slow to show an effect on the Russian economy, while indications that the sanctions are impacting the euro area are becoming more apparent. Russia runs a trade surplus, meaning it exports more than it imports; therefore, it is better able to sustain itself than other economies that rely more on other countries to fulfill their demand. Russia also has a large amount of assets in foreign banks, which exposes these countries to Russia. The manufacturing Purchasing Managers Index (PMI) indicates that Russian output has been improving despite sanctions being imposed in March 2014 (Chart 2). In addition to its trade (oil and gas) surplus, perhaps another reason why Russia has been seemingly immune to the sanctions is the recent greater sense of Russian nationalism. Russian businesses are hiring more workers, and more domestic goods are being purchased.
