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When Europe sneezes…

June 12, 2012

Theres a new disease going around the world this summer – the European Financial Bug. Having left half of Europe paralysed and perplexed, the deadly virus is fast spreading East, affecting the otherwise strong and financially resilient economies of China and India.

While several credit rating agencies have once again threatened to downgrade the otherwise stalwart Eastern economies, vital signs too prove to a faltering financial fiasco. The composite index of leading indicators, a strong guide to coming economic performance, continues “to point to divergence between economies” worldwide, the Organisation for Economic Cooperation and Development said. “The assessment for China and India has changed significantly since last month,” the OECD added, with the indicators pointing towards activity below long-term trend.

Both nations have major investments in Europe, have parked a majority of their foreign assets in the cooler climes north of the Mediterranean and are feeling the early jitters of a damp economy. China’s commerce minister recently said that the country faces a “severe” trade situation this year, as the Asian powerhouse continues to feel the pinch of global economic woes. “Foreign trade still faces quite a severe situation going forward,” Chen Deming said.

 Official data released on Sunday showed exports rose 15.3 percent year-on-year in May to US$181.1billion and imports grew 12.7 percent to US$162.4bn, slightly widening the trade surplus for the third consecutive month to US$18.7billion. However, the better-than-expected trade figures failed to downplay concerns that the world’s second largest economy is slowing, after China put in a poor economic performance in May.

Chinese Premier Wen Jiabao last month said greater priority should be given to growth, which slowed to 8.1 percent in the first quarter of 2012 year-on-year – its slowest pace in nearly three years. In order to ease spending, and rejuvenate the economy, Chinese banks have increased the amount banks lend out and dropped interest rates by 25 basis points.

Similarly in India, government data showed that output rose just 0.1 percent in April, lower than expectations in a Reuters poll for a 1.7 percent increase. Output fell in March from a year earlier by 3.5 percent. “The data clearly points to industrial growth being extremely weak,” said Abheek Barua, chief economist at HDFC Bank in New Delhi. “It is in clear need of monetary as well as fiscal support.”

High inflation and interest rates, a lack of government initiative and the euro area debt crisis have weighed on Asia’s third-biggest economy for more than a year. Annual GDP growth hit its weakest pace in nine years in the first three months of calendar 2012.

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