Global monetary policy starts to diverge

7th August 2015

Recent data have broadly confirmed our expectation of a slow but steady recovery in the global economy, thanks largely to continued unprecedented levels of monetary easing. Nonetheless, we expect monetary policies to begin to diverge more noticeably over the coming year; with the US and the UK likely to tighten policy within the next six months, while the Eurozone and Japan look set to keep policy loose for at least the next twelve to 18 months. 

Continue to the other two articles in this edition of the Global Outlook...

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Economic activity in Sweden is improving but do some risks remain?

The Swedish economy recorded solid growth in Q2 2015. What is driving this growth and are there any risks to the outlook? How is the real estate market responding?  In this month’s “Questions & Answers”, Dr BĂ©atrice Guedj, Head of Research, Grosvenor Fund Management Europe, provides her insight . Click here to read more.

In Europe, the turmoil in Greece has not had a material impact on Eurozone economic performance. Indeed, the Eurozone has continued to strengthen over 2015, led by Southern Europe. The ECB’s decision to intensify its balance sheet expansion from March this year has led to a noticeable depreciation of the euro. In addition private credit is now expanding again after a sharp downturn.

In Japan, loose monetary policy is also having a positive effect on the outlook for growth, although the results have not been as strong as in the Eurozone. While GDP and wage growth have continued to expand at a modest pace, the weaker currency has done little to boost exports. As a result, the Bank of Japan recently lowered its fiscal year 2015 GDP growth expectations from 2.0% p.a. to 1.7% p.a.

In China, while recent stock market volatility is unlikely to have a material impact on economic growth, the real economy continues to show signs of deterioration. In addition to weak trade performance the Caixin manufacturing PMI is languishing at its lowest level since August 2012. Against this backdrop the government is likely to ensure that it continues to support growth; the Bank of China has already cut interest rates this year, and we would not be surprised to see further easing in pursuit of its 7% p.a. 2015 GDP target.

Meanwhile, the US is widely expected to increase interest rates at least once in 2015. This expectation has been reinforced by a string of positive data releases over Q2 and a bullish revision of Q1 GDP (from -0.2% to 0.6% q-o-q). Equally, the UK has enjoyed strong numbers in the second quarter, culminating in a preliminary Q2 GDP growth estimate of 2.6% y-o-y. Our base case scenario is for a single interest rate increase in the US in September and an increase in the UK in late 2015 or very early in 2016.

Despite the compelling case to begin raising interest rates in the US and the UK, the pace of tightening in both these markets will be constrained by potential currency effects. With global interest rates near zero, the exchange rate will bear the brunt of any widening in global interest rate differentials. Indeed, both Sterling and the US dollar have increased around 15% and 17%, respectively, over the past two years. This has dented corporate profits and weakened net exports. Unilaterally raising interest rates, without considering the policy positions of other central banks, would eventually put the US and UK recoveries at risk if taken too far. With this in mind, we foresee that policy rates will rise at a slow, measured pace until the recoveries in Europe and Japan are more advanced.

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