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GLOBAL ECONOMY

CRISIL Insights
December 2021

Déjà vu
The CRISIL Insights — Global economy continues to face risks from Covid-19 variants; the pandemic’s
economic impact has diminished, though
Global Economy
— The United States (US) Fed accelerates tapering of asset purchases
series represents — International oil prices decline on-month on concerns over omicron, disrupting
global demand
our outlook on the
Though the world is in a state of suspended animation with the omicron taking the
financial scenario center stage, it seems to be less severe than delta variant. But what is certain is the
uncertainty, and more studies are ongoing to establish its severity. Despite this, the
across the world economic impact of Covid-19 has weakened, as governments now have a higher degree
of tolerance for infections, and processes and protocols are in place. Even with
and provides a sporadic surges in Covid-19 cases, economies can be seen rebounding from the
pandemic. Performance, though, has been uneven across advanced and emerging
perspective into market economies, determined also in part by the fiscal support and pace of
vaccination.
how it will shape up
The focus has now shifted towards the surge in inflation across advanced economies in
in the near future. the West, and likely actions by major central banks. Inflation has already persisted for
longer than expected, in sharp contrast to the ‘transitory’ nature attributed to it till
mid-2021. The response of central banks to inflation has varied. The US Fed has taken
a more decisive stance on speeding up tapering of asset purchases, while the Bank of
England (BoE), after being warned against inflation inaction by the International
Monetary Fund (IMF), raised interest rates in December. A few emerging-market central
banks have already raised interest rates as part of their policy normalization efforts.
However, the actions of major central banks will set the tone for monetary policy and
global liquidity conditions in the new year. As will the progress of the pandemic.

GDP heat map

GDP growth (q-o-q SA annualized %)
Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21

US -31.4 33.1 4.3 6.3 6.7 2.0

#
UK -19.5 16.9 1.3 -1.6 5.5 1.3
#
EA -11.8 12.5 -0.7 -0.3 2.1 2.2
Japan -28.5 22.1 9.6 -2.9 2.0 -3.6
China* 3.2 4.9 6.5 18.3 7.9 4.9
#
Note: q-o-q, not annualised * y-o-y
Source: Statistical bureau, respective countries
Improvement Decline Unchanged
Global Research
& Risk Solutions

US Economy Euro Zone Economy

CPI inflation continues its ascent Unemployment rate trudging downwards

US Fed doubles tapering pace

The US Fed, in its December meeting, announced doubling its pace of tapering asset purchases. This implies
it will end its asset purchase program by the first quarter of 2022. The central bank’s projections also
signaled a rate hike in 2022 itself. In November, Consumer Price Index (CPI)-linked inflation accelerated 6.8%
US Economy

on-year, the fastest pace since 1982. Core inflation, too, jumped 4.9% on-year, compared with 4.6% in
October. The unbridled rise in prices for much of the year has finally led the Fed to retire the use of the term
‘transitory’ for inflation, with Chairman Jerome Powell stating inflation has persisted longer and stayed
higher than expected. Employment gains in the US continue to be hit and miss: non-farm payroll increased by
2.1 lakh in November, lower than the 5.7 lakh jobs added in October and 3.1 lakh in September. Going by the
trend, it seems the demand-supply mismatch in the labor market persists in the US, as job openings
outnumber hires. Trade deficit narrowed to $67.1 billion in October, from $81.4 billion in September, as
exports grew faster than imports. than imports.

Services drive monthly GDP increase in the UK

The United Kingdom (UK) gross domestic product (GDP) is estimated to have grown 0.1% on-month in
UK Economy

October, led by the services sector. CPI inflation jumped 5.1% on-year in November, from 4.2% in October;
transportation and housing services were the largest contributors. The BoE, in its December meeting, raised
the bank rate, by 0.15pp to 0.25%. This comes after the IMF warned the central bank to avoid an inaction
bias, stating demand was strong and inflation would rise more than 5% by next year. The BoE stated that “the
omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand
and supply, and hence on medium-term global inflationary pressures, is unclear.” In raising the interest
rates, the BoE noted that the Monetary Policy Committee’s remit is clear that the inflation target applies at
all times, reflecting the primacy of price stability in the UK monetary policy framework.

Consumer price inflation (y-o-y %) Policy interest rate (end of month %)

Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21

US 5.4 5.4 5.3 5.4 6.2 6.8 US 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

UK 2.5 2.0 3.2 3.1 4.2 5.1 UK 0.10 0.10 0.10 0.10 0.10 0.10

EA 1.9 2.2 3.0 3.4 4.1 4.9 EA 0.0 0.0 0.0 0.0 0.0 0.0

Japan 0.2 -0.3 -0.4 0.2 0.1 0.6 Japan -0.1 -0.1 -0.1 -0.1 -0.1 -0.1

China 1.1 1.0 0.8 0.7 1.5 2.3 China 3.85 3.85 3.85 3.85 3.85 3.85
Euro Zone Economy

Source: Statistical bureau, respective countries Source: Central bank, respective countries

Europe battles another wave of Covid-19 infections

Surge in Covid-19 cases during the festive season has dampened economic activity centered on contact-
based services, such as travel and entertainment. However, the surge is not related to omicron, yet. Inflation
in the euro area (EA) jumped to 4.9% in November, from 4.1% in October. Energy prices continued to grow in
double digits—up 23.7% on-year, compared with 23.5% in October—and were the largest contributor to
headline inflation. Services was the second-largest contributor, at 2.7% vs 2.1%. Inflation in food, alcohol
and tobacco, too, inched up to 2.2% (from 1.9%). Europe’s unemployment rate continued to trudge
downwards—7.3% in October vs 7.4% in the previous month.
 Japan Economy China Economy

Exports to major trading partners grow in Inflation rose 2.3% on-year in November
double digits

Japan’s economy continues to show weakness

Japan’s GDP contracted 3.6% on-quarter in the third quarter, as Covid-19 resurgence and resultant
emergency lockdowns hit private consumption and investment. In its November economic report, the
statistical bureau stated the Japanese economy continues to show weakness in picking up since, along
with tepid consumption, exports remain flat and industrial production appears to be pausing.
Trade surplus widened to ¥954 billion in November from ¥325.9 billion in the year-ago period. Exports grew
20.5% on-year and imports 43.8%. Growth in imports continued to outpace that in exports for the fourth
straight month. Exports to major trading partners, including the US, China and ASEAN countries, grew in
double digits on-year; however, this was on a low base of 2020. The weakness is evident from sector-wise
exports—transportation equipment (cars etc), Japan’s largest export item, grew a mere 4.3% on-year.
Among imports, mineral fuels drove growth, partly attributable to rising crude oil prices.
CPI inflation rose 0.1% on-year in October, moderating from 0.2% in the previous month. The increase in
prices was largely led by an acceleration in fuel (6.4% in October vs 4.4% in September) and culture and
recreation (4.3% vs 3.3%) prices. Food inflation, which has the highest weight in overall inflation,

Asian Economy
decelerated to 0.7% from 0.9%. Core inflation remained in the negative zone, at -0.7%.

Manufacturing activity shows signs of improvement in China

Manufacturing in China showed signs of expansion in November after two consecutive months of
contraction, as indicated by the Purchasing Managers’ Index. The index rose to 50.1 in November, from
49.2 in October, above the expansion threshold of 50. Sub-indices of output and buying levels increased,
while those of new orders, export sales and employment fell at slower rates (remained below 50).
Inflation in China continued to accelerate in November, jumping 2.3% on-year, compared with 1.5% in
October. Food prices rose for the first time in six months (1.6% vs -2.4% in October). Non-food inflation
edged up to 2.5% from 2.4% percent, with prices rising for all components.
Trade surplus narrowed to $71.7 billion in November from $74.3 billion in the same month a year ago, as
imports grew faster than exports—exports rose 22% on-year, while imports grew 31.7%. Sequentially, too,
import growth outpaced that of exports.

Omicron scare causes a slump in oil prices

Crude oil prices declined on-month in November, as the emergence of omicron variant brought on
lockdown concerns and resultant demand worries. In fact, the one-day fall in Brent crude price on
November 26, when the World Health Organization designated omicron as a ‘variant of concern’, was the
largest since April 2020. Brent crude averaged $80.8 per barrel in November, down 3.4% from $83.7/barrel
in October.
Prices of non-energy commodities barely moved on-month, going down a minor 0.2%, with the fall in base
metal prices starker (down 6.1%).
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