This article is part of Morningstar's "Perspectives" series, written by third-party contributors.
Now that we have had a little more time to digest the measures implemented by both the European Central Bank and People’s Bank of China, we have a clearer insight into the likely implications ahead. Generally, it’s good news. Expect a modest increase in European GDP as the targeted polices feed through to easier credit conditions. In China, the policy measures are expected to stop the deterioration in GDP growth.
Global Overview
With the likely divergence between central bank tighteners; Bank of England and the Federal Reserve, and looseners; Bank of Japan and European Central Bank, our overall expectations are for above trend growth and steady inflation. The US economy should continue to strengthen and China should benefit from improved exports to a euro area with better prospects.
US
The US economy now looks strong after a weak first quarter revision. Should economic strength prevail, it’s likely to trigger a change in the Federal Reserve rhetoric this autumn. As unemployment levels have fallen and core inflation has picked up, the risk remains that the Fed may leave a rate hike too late, resulting in a much steeper rate incline than markets expect.
Eurozone
Having analysed the ECB’s latest stimulus package, we have revised up our European economic growth expectations. Although an improvement is expected across the entire euro area, Germany and Spain are the expected forerunners with the former benefitting from already low unemployment and a solid banking system and Spain set to benefit from a good deal of pent-up demand.
UK
As economic growth in the UK continues to strengthen, we are pleased by the latest Monetary Policy Committee commentary and that the Bank of England are at least considering increasing rates this year - ahead of previous indications. Below target inflation does not represent an automatic barrier to rate increases - indeed, rates have been hiked during falling inflation environments in the past.
Furthermore, Carney specifically referred to wage and price indicators as ‘coincident’, implying they are secondary to more hawkish forward-looking indicators.
Emerging Markets
The combination of policy easing, better external demand expectations from the euro area and greater infrastructure investment has led to a brighter outlook for Chinese economic growth. The ‘stealth easing’ by the People’s Bank of China since April is roughly equivalent to a 1% cut in the reserve requirement ratio. Chinese growth had previously been expected to continue on a steady downward trajectory, but we now expect a stabilisation in growth near current levels.
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