Liquidity growth still supporting markets

The recovery in the global economy continues to underwhelm. Nonetheless, the positive factors supporting the global recovery remain in place. 

15th June 2015

While the prospect of US tightening has unsettled markets, global monetary conditions will remain extremely supportive for some time to come.  Nearly a dozen countries have cut interest rates in 2015, including key global players such as the eurozone, China, and Australia.

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

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The outlook for the Spanish economy has continued to strengthen but Spain will face headwinds following the latest regional elections that saw anti-austerity parties make material gains across the board. What are the risks and real estate implications? Click here to read more.

Following a strong 2014, the US had a slow start to the year.  Several key activity indicators have consistently missed analysts’ forecasts.  The main exception has been the robust employment data, with the unemployment rate at its lowest level in seven years.  Furthermore, strong May retail sales figures could indicate a sharp turnaround from recent data disappointments.  Although the stronger US dollar has dented US corporate earnings, we continue to expect the Federal Reserve to raise interest rates in the second half of 2015.

In the UK, growth was slightly softer in Q1 but the economy continued to grow at a healthy pace, with real GDP expanding by 2.4% y-o-y.  Behind these strong figures, however, is worryingly weak productivity growth.  The recently elected Conservative majority government has made it a priority to address the UK’s productivity problem.  While clarity on the post-election UK government has been a positive for markets, investors are now focussing on the EU referendum vote to be held before 2017.

In Europe, structural reforms and continued ECB support are translating into a solid eurozone recovery.  Loan growth to eurozone residents in 2015 turned positive for the first time since 2012.  Q1 2015 GDP growth was a modest 1% y-o-y, but nevertheless represents a steady improvement over 2014.  The main wildcard in Europe is the ongoing drama over Greek bailout conditions.  European countries are less exposed to Greek institutions than they were in 2010, but a Greek default or a Grexit would almost certainly be a major short-term headwind for the eurozone recovery.

Japan surprised markets with a 1% q-o-q increase in real GDP in Q1.  This was a substantial upgrade from initial estimates, primarily driven by strong investment growth.  Private consumption was marginally better, reflecting a tight labour market, rising wage expectations, and a fading of the impact April 2014’s consumption tax rise.  Japan continues to run a strong current account surplus, the result of a persistently weak yen and the sharp drop in oil prices.

Chinese GDP growth came in at 7% y-o-y in Q1 2015, exactly in line with Chinese authorities’ full year 2015 growth target.  Chinese authorities may struggle to hit that target for the full year.  The Chinese central bank has tried to encourage banks to lend by lowering interest rates and reserve requirement ratios.  While looser monetary policy could support the economy over the near-term, such a policy risks inflating asset price bubbles and increasing leverage across the economy.

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