17 Dec 2014
Domestic and External Environment
Uneven economic growth and diverging monetary policy paths in the major economies are posing considerable uncertainties to the global economic outlook. In the US, continued solid growth and labour market improvement point to underlying strength in the recovery and shrinking economic and labour market slack. By contrast, risk of deflation in the euro area has prompted the European Central Bank to introduce further monetary easing measures. Similarly in Japan, as the economy contracted and inflation continued to slow, the Bank of Japan unexpectedly expanded the size of the quantitative and qualitative monetary easing programme and the Japanese government postponed its second consumption tax hike. In East Asia, growth momentum has generally moderated, with GDP growth in Mainland China easing in the third quarter on weakened domestic demand amid a downturn in the property market. In Hong Kong, notwithstanding the recent protests, the local banking system and financial markets continued to function normally without disorderly adjustments. Real economic activities picked up in the third quarter, driven by improving external trade performance and stronger private consumption. Nevertheless, weaker business sentiment points to a moderate economic growth path ahead.
Global economic growth continued to diverge, with recoveries in the US and the UK continuing to show good underlying strength while economic momentum weakening further in Europe and Japan. The US Federal Reserve is set to normalise its monetary policy but the pace remains uncertain. This, together with further monetary easing in Europe and Japan, is set to complicate the outlook for global monetary conditions. In the US, real GDP grew strongly by 3.9% quarter on quarter (annualised) in the third quarter, following the impressive 4.6% in the previous quarter. The solid momentum looked to have carried over into the fourth quarter with employment posting its tenth consecutive month of above-200,000 job gains in November, its longest run since 1995. As such, labour market slack continued to diminish with the unemployment rate falling to 5.8%, edging closer to the Fed’s estimated long-run equilibrium rate of 5.2%-5.5%. Similarly in the UK, the recovery continued with real GDP growing at a solid pace of 0.7% quarter on quarter in the third quarter following the strong 0.9% growth in the previous quarter. In contrast, recovery in the euro area remained weak with real GDP growing slowly at 0.2% quarter on quarter in the third quarter, following a weak 0.1% in the second quarter. The ongoing deleveraging process across the region continues to exert strong disinflationary pressure, which has suppressed inflation well below the European Central Bank’s (ECB) 2% target for almost two years and heightens the risk of the region falling into deflation. In Japan, the economy fell into recession with real GDP contracting unexpectedly by 0.5% quarter on quarter in the third quarter, after falling by 1.9% in the previous quarter. Meanwhile, inflation also appears to be slowing with the annual inflation rate (excluding tax increase effects) falling to 0.9% in October from the recent peak of 1.5% in April.
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