Equity Prices Rebound as Concerns over China’s Growth Ease
International equity prices rebounded strongly during the month of October as fears about a further growth slowdown in China faded and the U.S. Federal Reserve appeared willing to delay its rate hike until early next year. While exports from the country remain weak, domestic demand in China has so far remained resilient. Speculation about further devaluation of the Chinese currency has also reduced as the Chinese government and central bank continue their efforts at strengthening the domestic economy. Markets were encouraged by the lower possibility of a rate hike by the Federal Reserve this year as U.S. economic growth for the third quarter was weaker than anticipated. The European Central Bank’s (ECB) statement that it is willing to consider additional monetary measures if growth and inflation remain below expectations also helped lift investor sentiment during the month. Germany and Japan outperformed during the month among the developed markets while Indonesia, Korea and China advanced the most among the large emerging markets.
Global manufacturing growth during the month of October showed moderate improvement over the previous month, helped by healthy gains in the large developed economies. Factory output growth in the U.K increased at the fastest pace in more than a year while in the U.S, the expansion was stronger than recent months. The Euro-zone and Japan also reported gains during the month. Manufacturing output declined further in most emerging markets including China, Indonesia, Korea and Malaysia. On the positive side, India and select Eastern European countries reported expansions in factory output. The healthy pace of new order flows suggest that global manufacturing activity could see further gains in the coming months. Global services activity growth in October was marginally higher than in the previous month, helped by faster expansion in major countries including the U.S., China, Germany, Japan and India.
Near-Term Outlook
While the sharply lower energy and commodity prices as well as weaker global trade flows continue to restrict economic growth in many parts of the world, the outlook for most developed economies has brightened recently. The relatively subdued third quarter U.S. economic expansion was mostly the result of lower than expected inventory buildup. Consumer spending in the U.S. was higher than expected during the third quarter and this trend is expected to continue in the near future as consumer sentiment remains optimistic. The strong job additions for the month of October and low fuel prices are expected to sustain the current growth pace in U.S. consumer spending.
The Euro-zone economy is likely to expand at the current moderate pace, helped by domestic demand. The ECB announced that it will consider additional quantitative measures in December. The Organization of Economic Cooperation and Development (OECD) now expects the Euro-zone economy to expand 1.5 percent this year and 1.8 percent in 2016. In Japan, economic growth during the third monetary measures by the Bank of Japan should help prevent further deterioration in aggregate growth.
Even as most of the resource exporting countries continue to struggle with weak economic trends, the outlook for other emerging markets appears healthier. In China, rate cuts by the central bank and fiscal incentives such as lower taxes on some cars continue to sustain domestic demand. However, weak export demand has restricted industrial output growth in China and a recovery is not expected until global demand turns more robust. India’s economy is expected to grow faster in 2016 as increased government spending and lower interest rates boost domestic demand. Among the weaker emerging economies, both Brazil and Russia are likely to face recessionary conditions through most of 2016.
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