Governments have power to create fairer division of wealth
There was some good news last week, but unfortunately not for world stock markets. European and US markets experienced losses of around 4% to 5%, with China and Japan keeping losses to below 2%. More evidence in the markets of Scrooge than Santa Claus.
The continued slide in oil prices, and the imminent decision on interest rates in the US, kept the markets nervous. Hints from the Chinese Central Bank that it may weaken the link between the Renminbi and the US dollar added to the uncertainty.
One of the sources of investor unease may soon be gone. The two-day meeting of the great and the good in America’s Federal Reserve system starts today, with the decision on rates due tomorrow. We will finally know if US interest rates are going to be increased this year or not, the first increase in nearly a decade. There should also be clues about the probable path for rates next year.
Most analysts are still predicting a rise in rates, although the behaviour of stock and commodity prices will have given policymakers some pause for thought.
Last week interest rates were also on the agenda closer to home. As expected, the Bank of England’s Monetary Policy Committee (MPC) kept the Bank Rate and stocks of purchased assets unchanged, at 0.5% and £375bn respectively. The recent drop in oil prices means that the inflation outlook is now lower than previously estimated, implying that the Bank can be more patient about raising rates. After the MPC meeting in November it was clear that the strength of sterling had become a concern, so the first increase in UK rates has probably been pushed further into 2016. Also last week, the Irish economy surprised analysts on the upside, with strong evidence of growth.
The third quarter results brought the average year to date GDP growth rate to 7%. This has presented export opportunities to a number of Northern Ireland businesses. Looking towards next year, the European Commission is once again forecasting that Irish growth will be the highest among European countries. If this materialises, it will be for the third year in a row, continuing to point to a healthy market on our doorstep.
What would also help is a favourable realignment between sterling and the euro and the cautious Bank of England stance on interest rates may yet work to the advantage of local exporters.
The potentially good news, at a global level, came from the Paris Climate Change Conference. If present and future governments actually implement the agreement, economic growth should become more balanced and sustainable without ‘costing the earth’.
As we approach Christmas, maybe we should reflect on the need to moderate our own economic expectations, in the interests of a more equitable division of global wealth. Perhaps we can also begin to look further afield, for long term investment opportunities, to reflect the probable changes in the world economic order.
- Jeremy Stewart is head of wealth management and private banking at Danske Bank