Improved U.S. Data Allay Growth Fears
International equity prices saw large price swings during the month of October as fears about slower global growth led to an appreciable decline during the first two weeks. Equity prices recovered subsequently as better than expected U.S. economic data helped allay global growth fears. The U.S. Federal Reserve’s statement after the policy meeting during the last week of October was mostly on anticipated lines and did not change current market expectations that the first rate hike will likely occur by the middle of 2015. Economic data from the Euro-zone remained subdued, led by the region’s major economies such as Germany and France. Geopolitical risks appear to have stabilized in Eastern Europe as the ceasefire between Ukraine and Crimean rebels supported by Russia remains in place. Emerging markets outpaced the developed markets during the month on expectations of a stabilizing growth outlook and policy reforms in select countries.
Global factory output continued to expand in October at the same pace as the previous month. The momentum was supported by further gains in the U.S., the U.K., Canada, and Japan, while output in the Euro-zone saw only marginal growth. Among the major emerging economies, only Mexico and Turkey saw gains in factory output while the pace of growth dropped in China and Russia. Manufacturing output remained weak in Korea and Indonesia. Global services activity growth moderated in October, as gains in the U.S. and the U.K. were mostly offset by softer trends in Germany, China, and Japan. The steep fall in oil prices has lifted consumer sentiment across most major economies, though the energy exporters are likely to see lower growth.
Near-Term Outlook
The International Monetary Fund has marginally lowered its global growth forecasts for the current year as well as 2015, mostly due to the weakness in the Euro-zone. The European Commission has also cut its growth expectations for the region’s major economies, including Germany and France. The subdued global demand restricted Europe’s export gains in recent quarters, while the euro was relatively stronger until September when the currency started declining. These headwinds have eased noticeably as stronger U.S. growth and stable Chinese expansion should help demand for European exports. The euro’s meaningful decline should make exports from the region more competitive. However, domestic demand in the region is unlikely to see a robust rebound until the labor markets improve further and banks are more eager to lend.
The Bank of Japan has surprised the markets by significantly expanding its asset purchase program. Growth and inflation trends have fallen short of the central bank’s earlier forecasts and expectations of further aggressive policy actions have been waning. The expanded monetary easing is to be accompanied by a marked shift in the Japanese pension fund’s investment portfolio towards equities. These steps, which appear coordinated, have lifted equity prices and should have a positive effect on consumer sentiment. However, further fiscal and monetary measures may be required to sustain consumer spending growth in Japan next year, especially if the government decides to increase consumption taxes further.
In contrast, despite even worse growth and deflation risks, the European Central Bank did not make any policy or interest rate decisions at its most recent meeting. The ECB has indicated unanimous support for increasing the size of its bond portfolio to the 2012 level, which may involve bond purchases worth nearly €1 billion. However, no specific schedule for additional bond purchases has been announced, though the process is widely expected to start before the end of this year.
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