wants evidence that recovery is sustainable before tapering begins, so 85 billion US dollars of securities continue to be bought each month. The Fed‘s decision led to a decline in US bond yields, a weaker dollar and new highs on US stock exchanges.
The fact is that the US economy is already on the road to recovery. A falling unemployment rate and further improvement in real estate markets have fuelled an uptick in private consumption in recent quarters. Looking ahead, the US economy should receive an additional boost from higher private investment. This could lead to an acceleration of real growth from 1.8 percent today to three percent over the next year. We expect the Fed to start slimming down its asset purchases in December.
Turnaround in Europe
There is cause for optimism in the eurozone, too, with hopes rising of an end to the crisis. One reason for this is that government budget cuts are being phased out, which should stimulate the region‘s economies. In addition, reductions in
peripheral current account deficits indicate that companies in Spain, Portugal, Ireland and Greece have become more competitive.
On the other hand, businesses in the periphery continue to struggle to access loans and they are paying much higher borrowing rates than their counterparts in core Europe. The ECB should aim to eliminate this regional differential over
the coming quarters. One idea to get credit flowing being debated is for the ECB to let banks use loans to small to medium-sized companies as collateral for securitized issuance. Despite the credit squeeze, sentiment indicators point
to a more positive mood in France, Italy, Spain and Greece. In these countries, gross national product should grow in real terms: overall, we expect economic expansion of 0.7 percent in the eurozone in the coming year.
Weak yen favoring exports
In Japan, Shinzo Abe‘s government is continuing to fight deflation and recession with a mixture of psychology, monetary policy and structural reforms. The Bank of Japan‘s expansive monetary policy has proven particularly effective thus far. The resultant depreciation of the yen has led to revenue and profit growth for export-oriented companies and increased their propensity to invest. However, consumption is surprisingly weak. Low wage growth is being blamed for this, but not everyone is enthusiastic about hiking salaries: companies are reluctant to raise base wages, while Japan‘s private households fear their purchasing power will diminish if inflation rises.
A sales tax increase from five percent to eight percent, planned for April 2014, will be an additional burden for the Japanese economy, though the Tokyo government intends to reduce corporate tax at the same time and implement structural reforms. However, these measures will only be effective in stabilizing the economy over the long term. Therefore, next year we expect real growth of 1.5 percent in Japan, 0.2 percentage points lower than this year.
Speculation about the end of quantitative easing has led to capital flows from emerging markets to the US over the past quarter. Consequently, the Fed‘s decision to delay tapering was met with relief in the emerging world. But since tapering has only been postponed and not cancelled, investors should focus on emerging countries with current account surpluses and stable economic data. Overall, the investment case for emerging markets continues to be supported by the fact that growth rates in the country group remain higher than in developed markets.
Source:DWS – CIO (October)
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