An economic update from Colonial First State Global Asset Management.
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 Board (the Fed) met on 27–28 January 2015 and maintained steady policy guidance. They also highlighted the growing strengths of the US economy and described the pace of economic growth as ‘solid’, rather than ‘moderate’.
On the US labour market, the Fed also upgraded its view, stating the labour market is now ‘strong’, as opposed to its previous description of ‘solid’. Labour market data also shows the improvement. Over 2014, 2.952 million jobs were added, which is the highest annual increase since 1999. As at January 2015 the unemployment rate was 5.7%.
2. United Kingdom and Europe
The Bank of England (BoE) left policy unchanged at its 8 January 2015 meeting, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375 billion. The BoE is concerned for the outlook given recent falls in inflation, with the headline inflation rising at 0.5% for the 12 months to December 2014, down from 1% in November 2014. In particular the Bank is concerned this low inflation rate will find itself entrenched in wages and the economy.
In Europe, the European Central Bank (ECB) meeting on 22 January 2015 announced an expanded asset purchase program as widely expected. This expanded asset purchase program will encompass the existing purchase programs for asset-backed securities and covered bonds. Under this expanded program, the combined monthly purchases of public and private sector securities will amount to €60 billion, in terms of new money it should include around €50 billion of sovereign bond purchases each month.
Three days after the ECB announcement, Greece elected a new government led by the far-left Syriza party, who won 149 seats out of a 300 seat Parliament, just falling short of an outright majority. Leader Alex Tsipras formed a coalition with the Independent Greek party to form government, with Tsipras sworn in as Prime Minister.
The new Greek government is currently attempting to renegotiate its bailout program and seek debt relief in an attempt to improve both its budget and economic outlook. Volatility in financial markets, particularly European markets will increase during this negotiation process.
3. Japan and China
In Japan, the Bank of Japan’s policy board convened on 21 January 2015 and left its qualitative and quantitative easing program at an annual increase of ¥80 trillion to its monetary base.
Meanwhile in China, quarter four 2014 GDP data showed a growth of 1.5% in the three months to 31 December 2014 and 7.3% over the 12 months to December 2014 and continues to indicate a controlled slowdown of growth. The ongoing property downturn is being offset by an improvement in the services sector, particularly financial services.
4. Australia
On the home front, the Australian dollar continued its weakness in January 2015, falling to US$0.7766, from US$0.8172 in December 2014. This is a fall of 5.0%, its lowest level since May 2009. Expectations of a rate cut by the Reserve Bank of Australia (RBA) accelerated in January and this was validated in early February. The Australian dollar has now fallen 11.3% over 12 months. Over the month of January 2015, the Australian dollar rose against the Euro (+1.9%), fell against the sterling (-1.7%) and yen (-6.8%).
Commodity prices fell sharply again in December 2014, with the oil price, again, leading the falls. However, the gold price continued to rise, up 8.3% to US$1284 an ounce. Finally, Australian shares performed well in January 2015, with the S&P/ASX 200 Accumulation Index adding 3.3%.