ECB Stimulus Expectations and Improved U.S. Economic Data Boost Equity Prices
International equity prices saw modest gains during the month of November, helped by hopes of additional quantitative stimulus measures from the European Central Bank (ECB) as well as more robust U.S. economic data. The ECB eventually did not announce any major measures after its policy meeting during the last week of the month. However, markets were not unduly discouraged after reports suggested that the ECB is preparing the groundwork for a major program to be announced early next year. During the third quarter of this year, the U.S. economy expanded at a faster pace than the earlier estimate. This has strengthened expectations of further export gains for other major economies, including China and the Euro-zone. In contrast, the decline in Japanese economic output for the third quarter was worse than the initial reading.
Emerging markets underperformed during the month as gains in select Asian markets such as China and India were offset by significant declines in Latin America and Europe. Cheaper oil and other industrial commodities have weakened the economic growth outlook for some of these countries. Global factory output growth moderated in November to the most subdued pace this year. Manufacturing activity continued to expand strongly in the U.S., though the pace was slightly lower when compared to October. In Europe, output in some of the larger Euro-zone economies including Germany was nearly stagnant while the U.K. remained a bright spot with faster growth. Among the emerging markets, output gains moderated in China and Indonesia while Korea reported a decline. India and Mexico reported gains in manufacturing activity during November.
Near-Term Outlook
Cheaper fuel could be a significant driver of global growth next year, if prices stabilize below $70 per barrel for the Brent benchmark. Consumer sentiment in the U.S. has improved appreciably recently and could turn brighter in the coming months as lower pump prices ease household spending. Consumers in other developed markets could also become more optimistic as the decline in oil prices starts reflecting in industrial and consumer goods. The large oil importing countries such as Japan and Germany could gain a percentage point in aggregate growth next year due to lower oil prices, according to the International Monetary Fund. Similarly, growth in the U.S. could be higher by 0.5% if oil remains cheap through next year and consumers respond positively.
The large emerging countries could also benefit appreciably from cheaper oil by supporting domestic consumption growth that had moderated earlier this year in the absence of sizeable stimulus measures. The large energy importers among emerging countries should see a large improvement in their trade balances. Governments in countries that subsidize retail fuel prices could see lower fiscal deficits, which would improve their ability to increase spending in more productive areas such as infrastructure. Central banks would also be in a position to consider interest rate cuts as inflation pressures subside. China has already lowered its benchmark rate in November while the central bank in India has said it may do so early next year.
At the same time, lower oil prices further weakens the outlook for some countries that have been facing slower growth since last year. Russia, where growth has slipped on economic sanctions against the country, is likely to be the worst hit. Falling oil revenues should force the oil exporters in the Middle East to reduce investments in construction. In Latin America, Mexico and Brazil are may see slower economic activity. The currencies of these countries have weakened and their central banks are likely to hike interest rates, or hold them steady, to reduce inflation risks.
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