Lower Growth Forecasts, Weakness in Europe Keep International Equity Prices Subdued
International equity prices were mostly unchanged during January as gains in both developed and emerging Asian markets were offset by weakness in Canada and select markets in Europe. Investors turned more cautious after the International Monetary Fund and the World Bank lowered their global growth forecasts for the current year, contrary to expectations. The European Central Bank (ECB) finally announced its much anticipated quantitative easing measures, and helped erase some of the growth concerns. Investors in Asia were encouraged by relatively more positive economic data from China, as well as expectations of faster growth in Japan this year. Policy initiatives such as the Chinese central bank’s decision to lower bank reserve ratios have also lifted sentiment recently.
Emerging markets outperformed during the month, helped by gains in select Asian markets such as China and India as well as South Africa. However, emerging markets in Latin America and Europe slipped further as commodity prices remained weak. Oil prices have seen a rebound recently, but remain well below last year’s levels. Global manufacturing output saw modest gains in January, compared to the previous month. Output growth improved in the U.S., the Euro-zone, the U.K. and Japan. Among the emerging economies, India, Korea and Brazil saw gains in factory output when compared to December. Output growth in China was unchanged while Russia and Indonesia saw declines. New order growth for the global manufacturing sector also showed improvement while lower oil prices have led to a sharp decline in input costs. Global services growth also improved during January, helped by gains across most major developed economies.
Near-Term Outlook
The bond purchase program announced by the ECB in January exceeded expectations, both in scale and the likely time period. In addition, ECB officials have commented that the central bank could extend the program even longer if the desired outcomes are not achieved. Though the scale of the ECB’s purchases is unlikely to match the past efforts of the U.S. Federal Reserve and the Bank of Japan’s ongoing program, considering the political difficulties facing policymakers in Europe, it is still credible enough. The ECB measure is unlikely to significantly lift credit demand, but the positive impact on consumer and business sentiment should help the region. Lower oil prices have already started lifting consumer spending in Europe, as seen in retail sales data for the last quarter of 2014, and should lift aggregate growth in the coming quarters. However, for the Euro-zone to see a more robust growth rebound, the ECB’s monetary measures should be complimented with structural reforms and fiscal policy initiatives.
After the worse than expected decline during the second and third quarters of 2014, the Japanese economy is also seeing healthier trends. As the country imports almost all of its energy requirements, several industrial sectors are expected to see significant improvements in operating margins in the coming quarters. Lower fuel prices are likely to result in deflation in the coming months, and force the central bank to maintain its aggressive quantitative easing. The cheaper yen and improving global demand, especially in the U.S., should help Japanese exports. Trade data for December suggests that shipments from Japan have started growing at a faster pace. If these trends are sustained, the economy is likely to grow quicker than the IMF’s 0.6 percent forecast for the current year.
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