Monday, May 2, 2011

Economic Perspectives: Bin Laden, ISM Index, EU Central Banks, Syria, Israel and P.A.

By Grant de Graf

Osama bin Laden is dead, after a U.S. military operation in Pakistan located his hideout and killed all inhabitants. The impact of his death is likely to be broad-reaching. Firstly, the assistance which Pakistani officials afforded U.S. operatives in the initiative, is likely to tentatively repair, the strained relationship that exists between the two countries. Secondly, U.S. officials are on high alert, as world wide reprisals are expected from al Qaeda.

The U.S. manufacturing sector posted its 21th consecutive month of expansion in April, according to the closely followed ISM index. The index dipped to 60.4% last month from 61.2% in March, the Institute for Supply Management said Monday. Any reading over 50 indicates that more manufacturers are expanding instead of shrinking. Economists had forecast the index to dip to 59.7%. The dollar's weakness will continue to act as a stimulus to the economy, and if this trend continues (barring the market's reaction to bin Laden's demise) a devalued dollar may well move trade accounts in the U.S. and China towards equilibrium. Thank you Adam Smith. Thank you invisible hand.

The European Central Bank has opted to increase interest rates in line with the respective increase in inflation, while the Bank of England has chosen to maintain interest rates at current levels. This reflects a divergence in the two central banks approach to deal with inflation. Most certainly the EU decision to increase interest rates, may further constrain economic growth to a level that is already anemic. Additionally, the strengthening of the Euro, which is a result of higher interest rates, may further limit the EU's level of competitiveness as an exporter of goods to global markets.

Syria battles to contain national protests calling for changes towards a democratic government. This Middle Eastern country is a major strategic partner to Iran, who sees Syria as a geographically suitable conduit for expending its export of arms to Hezbollah in Lebanon, and a launch pad for insurgents into Iraq.

Israel expresses concern over the opening of the Gaza-Egyptian border, which Israel contests will become  a funnel for arms export to Hamas, in Gaza. Additionally, Israel has frozen $88 million of payments that it was scheduled to be made to the Palestinian Authority, as a result of the a new power sharing agreement between Hamas and the P.A. Israel claims that the funds will be used to fund Hamas' war against Israel and has called upon the P.A. to prove otherwise.

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