But on the negative side, severe weather created havoc in the east of the US, causing economic activity to slow sharply and resulting in a disappointingly low rate of GDP growth in Q1.
In spite of this, the Federal Reserve, now under the chairmanship of Janet Yellen, has continued to taper its monthly purchases of bonds and market-backed securities, and appears to be on course to reach the end of this process later this year. But, although economic growth now appears sustainable, it is still relatively muted and it is expected the Federal Reserve will act cautiously, pausing and fully assessing the situation before raising interest rates.
In China, risks have increased in recent months, particularly surrounding its housing market and the recent surge in shadow banking. House price declines have become more prevalent across China, increasing the risk of a crash unless policymakers take appropriate action in the coming months – possibly by easing regional mortgage restrictions, boosting liquidity available to developers or turning excess property supply into social housing.
But we expect policymakers to remain alert to potential defaults in shadow banking products. Selective, and relatively small, defaults could successfully signal that these products are not risk-free, but policymakers may prevent any large-scale defaults which could hit China’s financial system or its broader economy. In spite of this, the longer-term outlook for China still looks attractive.
Elsewhere in Asia, interest remains in Japan and particularly its experiment with ‘Abenomics’, a policy built on the three ‘arrows’ of monetary, fiscal and structural policy. The monetary boost has been relatively successful, at least in terms of reducing the value of the yen and increasing confidence among Japanese exporters and investors.
But the need to repair Japan’s fiscal situation forced policymakers to raise the consumption tax from 5 per cent to 8 per cent in April, and the early signs are that consumption has declined. We should be able to assess over the coming months whether this is a short-term reaction or the start of a longer-term trend. But we now need to see policy announcements on structural reform – the most important of the three arrows, given that Japan faces an ongoing battle against its ageing society.
Europe has been displaying some similarities with Japan’s previous experience, in particular an emerging trend of disinflation.
Some peripheral economies, notably Ireland and Spain, have cut unit labour costs severely, boosting their international competitiveness, but the unwelcome consequence of this has been wage cuts and high unemployment, resulting in weak domestic economies, low demand and falling prices.
Inflation rates across Europe are generally below the ECB’s target level, and this was a key reason for its recent cut in interest rates. European banks now face a negative rate of interest on any deposits held with the ECB. This is an unprecedented situation and the next few months will show whether it is successful in encouraging lending to small and medium-sized businesses, a necessary condition for any sustainable recovery.
In contrast, the situation in the UK is much more positive, as confidence and activity have increased sharply since the middle of 2013. Unemployment has fallen, and the housing market has strengthened, particularly in London, increasing speculation that the Bank of England may increase interest rates sooner rather than later.
There are some doubts as to whether an early rate rise is appropriate, given the risk it could dent confidence and hinder growth. In addition, inflation remains relatively low and there is also some political uncertainty over the next few months, with the Scottish referendum scheduled for September and a general election in May 2015.
Five years into this recovery it is clear progress is being made, but the pace of growth in the global economy is still moderate. Each economy is facing its own particular problems, and heightened geopolitical challenges increase the risk of a higher oil price.
Taking all of this into account, global economic growth is expected to remain at a satisfactory but moderate level until the end of the year.
Shona Dobbie is head of the Economic Research Centre at Alliance Trust
