Analysis Of The Macroeconomic Environment
The following factors will be considered under this section.
We will consider the global economy as a whole, the domestic macro economy, demand and supply shocks, government policy and business cycles. Having said this, the study will now consider each of these factors more closely. Bodie et al (2002) states that the international economic environment might affect a firm’s export prospects, the price competition it faces from competitors, or the profits it makes on investments abroad. Although economies are linked to each other in a global macro economy, there exist considerable differences in the economic performance across countries.(Bodie et al, 2002).
It is therefore necessary for an investment or security analyst to consider these differences before providing investment advice. According to the IMF World Economic Outlook (2007), The global economy remains on track for continued robust growth in 2007 and 2007 although only at a moderate rate than in 2006 as can be seen from figure 1. 1 below. The 2007 outlook also reports that downside risk to the outlook seems less threathening that at the time of the September 2006 outlook.This is because oil price declines since last august and generally benign global financial conditions have helped to limit spillovers from the corrections in the US housing market and to contain inflation pressures. (IMF World Economic Outlook, 2007).
There was a vigorous expansion in the global economy in 2006, with a growth rate of 5. 4% implying a ? percentage increase in growth rate than anticipated. Activity in the United States faced strong headwinds from a sharp downturn in the housing market, while corporate investment in plant and equipment has also softened.(IMF World Economic Outlook, 2007). Consumption in the US was sustained by continuous growth in employment (especially in the services sector.
In the euro area, there was an acceleration of growth to its fastest pace in six years following a boost in domestic demand by increase in business confidence and am improvement in the labour market. ( IMF World Economic Outlook, 2007). Another important factor that contributed to this growth acceleration was the FIFA soccer world cup held in June 2006. ( IMF World Economic Outlook, 2007).Japan witnessed a slowdown in economic activity by the mid-2006 but it however, regained its track toward the end of the year 2006. ( IMF World Economic Outlook, 2007).
In the case of emerging markets and developing countries, China and India took the lead. China witnessed a growth rate of 10. 75% in 2006 as a result of growth in investment and exports notwithstanding an easing in the second half as policy tightening helped to cool the pace of fixed asset investment. (IMF World Economic Outlook, 2007). India registered a growth rate of 9.25% following an increase in expansion momentum in the course of the year.
(IMF World Economic Outlook, 2007). In the rest of the world, growth was sustained at robust rates, as a result of high commodity prices and favourable financial conditions. In the advanced economies, following a drop in fuel costs the inflation rates as measured by the consumer price index (CPI) dropped quite sharply after the summer. (World Economic Outlook, 2007). Core inflation in the United States in the US fell sharply although prices for food and energy remained high. (World Economic Outlook, 2007).
However, the rate remained higher above the comfort zone of the Federal Reserve. (World Economic Outlook, 2007). The oil price declines from August largely reflected some easing of security tensions in the Middle East, improved supply-demand balance in oil markets, and favourable weather conditions in the second half of 2006. (World Economic Outlook, 2007).
The US dollar continued depreciating against the pound and the euro. The yen on its part also loose value against many currencies because prospects for continued low interest rates have encouraged capital outflows.(IMF World Economic Outlook, 2007). The Chinese renminbi despite appreciation against the dollar has depreciated in real effective terms. (IMF World Economic Outlook, 2007). The US current account deficit continues to rise recording 6.
25% of GDP in 2006. (IMF World Economic Outlook, 2007). However, the non-oil trade deficit declined as a percentage of GDP as exports accelerated. Japan, China and the Middle Eastern oil-exporting countries witnessed increased surpluses in their current accounts. (IMF World Economic Outlook, 2007).
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