An economic update from the Economic and Market Research team at Colonial First State Global Asset Management.
The big three
What have been the major economic events of the past few months?
1. United States
The Federal Open Market Committee of the US Federal Reserve (the Fed) completed the ‘tapering’ of its Quantitative Easing (QE3) bond purchase program at its 28–29 October 2014 meeting. The Fed tapered by a final $US15 billion, completing the tapering which started at $US85 billion in December 2013. As a result, the QE3 program has come to an end.
The Fed noted that since the QE3 program started in September 2012, there has been “substantial improvement in the outlook for the labor market” and that there is “sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in the context of price stability.” The Fed also highlighted some improved confidence in the US economic recovery with the economy “expanding at a moderate pace”.
The US labour market also continues to improve with 214,000 jobs added in October and the unemployment rate falling to 5.8%, the lowest since July 2008.
2. United Kingdom and Europe
The European Central Bank left its key interest rates unchanged at 0.05% at its 2 October 2014 meeting and the inflation estimate for October was recorded at 0.4% per year, compared to 0.3% per year in September, which was a five-year low.
In the UK, the Bank of England (BoE) left policy unchanged
at 0.5% at its 9 October 2014 meeting, as expected. However, it was highlighted that the majority of the Board were concerned over a premature tightening to the Bank Rate given low inflation and wages and possible shocks to the UK economy. As a result, the timing of the first rate hike has been pushed further out by financial markets. It remains a possibility that the BoE could lift the official cash rate in March or April 2015, dependent on the data and ahead of the general election in May.
3. Asia
In China, GDP growth of 7.3% was recorded for the 12 months to 30 September 2014, which was slightly stronger than expected. Meanwhile in Japan, the Bank of Japan’s (BoJ) policy board convened on 31 October 2014 and decided to expand its qualitative and quantitative easing program. The BoJ will now expand its monetary base at
an annual rate of Y80 trillion, which is an increase of about Y10–20 trillion on the previous target.
Australia
The Reserve Bank of Australia (RBA) again held the cash rate steady at 2.5% at its 7 October 2014 meeting. The RBA has now left interest rates on hold at 2.5% since August 2013 and most commentators are expecting this figure to remain unchanged until the second-half of 2015.
The headline rate of inflation rose by 0.5% per quarter, taking the annual pace from 3.0% for the 12 months to 30 June 2014 to 2.3% for the 12 months to September 2014. Inflation, therefore, remains well within the RBA’s 2% to 3% target range. Also, the unemployment rate rose to 6.2% from 6.1% for October 2014, which is the highest unemployment rate since March 2003.
Australian shares performed well in October, with the S&P/ASX 200 Accumulation Index adding 4.4% during the month. The sharemarket was led higher by financial stocks, while the health care and telecom sectors also performed relatively well. Finally, despite some volatility in October, the Australian dollar rose 0.6% to finish the month at $US0.8798.