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MONTHLY ECONOMIC UPDATE - AUGUST 2019

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3 KEY INSIGHTS

  • CBSL Cuts Policy Rates for the second time in 2019; Lending Caps proposed if rates do not decline within a specified timeline.

  • Trade Deficit Narrows by USD 2.1Bn during 1H- 2019 driven by a 16% slump in imports.

  • US Yield Curve inverts for the first time since the Global Financial Crisis; Leading indicator in predicting a recession.

 

Sri Lankan Economy

External Sector Strengthens during 1H-2019: In the first half of 2019, exports grew by 4.7% while imports declined by 16.1% resulting in a 37% slump in the trade deficit. The overall Balance of Payment was a surplus of USD 1.8 billion driven by the decline in the trade deficit and inflows from the International Sovereign Bonds.. 

Low imports result in a Widened Budget Deficit: During 1H - 2019, the budget deficit widened to 3.4% of GDP by June as government revenue fell by 3.6% due to the reduction in imports.

Policy Rates Cut Again: CBSL cut its policy rates by 50 basis points citing the need to revive the economy and the need for a steady reduction in market lending rates. The CBSL would impose market lending rate caps if the reduction of rates is not within the specified timelines..

FDI Inflows fall during Q1-2019: Inflows of FDI dropped by 53% on a Y-o-Y basis. This negative growth has been driven by the reduction in investments in telecommunication and port container terminals.

 

 

Global Economy

Warning of a Recession: The US yield curve inverted (the spread between the 10-year and 2-year bond going negative) for the first time since the global financial crisis causing concern of another recession in the US. The last five times the yield on 10 year Treasuries dropped below those on two-year securities, a contraction followed..

Trade War Continues: China puts USD 75 Bn of Tariffs on US Goods as retaliatory tariffs, putting up to 10% on top of existing rates. This came on the back of the US applying additional tariffs on USD 300 Bn of Chinese goods into two stages during September.

US Growth Slowed to 2.1 in Q2-2019: The US economy slowed sharply during the Q2-2019, growing at 2.1% which is a slowdown from the 3.1% gain in Q1-2019.

IMF Cuts Global Growth: IMF has recently revised their expectation on global growth downwards to 3.2% considering the continuing uncertainty due to trade tensions.

Stronger Trade Growth is not yet in Sight: The Goods Trade barometer of WTO suggests that below-trend expansion in merchandise trade will persist in the coming months.

 

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The Ceylon Chamber of Commerce

Economic Intelligence Unit

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