February 2016 Calmer markets, concerns persist |
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Overview Markets have been calmer lately following the turmoil that characterised the opening weeks of 2016. Stocks have rebounded from the lows of early February, helped by some stability in oil prices, albeit they are still down year to date, while bond yields have risen although they too are a good deal lower than where they ended 2015. However, there are still concerns about the potential impact of recent financial market developments on the main economies. The ECB has warned of ‘increased downside risks’ to the Euro area economy since the start of the year and so looks set to take further policy action at next month’s Governing Council meeting. The Fed has also said it is ‘closely monitoring...developments’, but believes it is too early to conclude that they have significantly altered the outlook for the US economy. The market has made up its mind, though, and expects the Fed to be pretty much on the sidelines in 2016 (it now sees about a 50% chance of a 25bps increase in interest rates towards the end of the year). Nonetheless, the latest US data shows continuing job gains, a fall in the unemployment rate (to below 5%), a pick up in wage growth, and a further rise in both headline and core inflation. Moreover, it seems as if growth has rebounded after a ‘soft patch’ at the end of last year. The Fed may proceed cautiously but 'gradual increases' in interest rates still seem likely this year. |
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Euro area growth still moderate |
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The economy expanded by 0.3% q-o-q in the final quarter of 2015 and by 1.5% year-on-year. For 2015 as a whole, GDP growth averaged 1.5%, up from 0.9% in 2014. Purchasing Managers data for the first two months of 2016 point to some slight easing in the pace of growth – the composite PMI averaged 53.2 in January-February compared to 54.1 in Q4. The IMF has raised its forecast for growth in 2016 a touch to 1.7%, while the OECD expects the economy to expand by 1.4%. The gradual improvement in the labour market is continuing with the unemployment falling to 10.4% in December, 1 percentage point lower than in December 2014. Both headline and core inflation nudged up in January, to 0.4% and 1.0% respectively, but remain below target. The minutes of the ECB's January meeting noted that ‘inflation dynamics had continued to be weaker than expected', and reiterated that the Governing Council is prepared to use all available instruments to achieve its inflation objective. Further policy action is likely at next month's meeting, which may see the euro lose ground against the dollar. |
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UK economy growing steadily |
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GDP rose by 0.5% q-o-q in Q4 2015 and by 1.9% year-on-year. For 2015 as a whole, the economy expanded by 2.2%. We expect steady growth to continue, and our latest Outlook forecasts an increase in GDP of 2.3% in 2016 and in 2017 (to view click here). The Bank of England’s MPC kept interest rates at 0.5% in February. It sees inflation remaining low near-term before picking up later this year and accelerating towards 2% during 2017. Hence it says it 'will need to increase' interest rates, while also indicating there is no urgency to do so yet. The market has pushed out the expected timing of an increase in rates to late 2018, and indeed is pricing in some chance of a cut over the next few months. As things stand, we don’t expect the MPC to lower rates and see a first hike occurring towards the end of this year. This should be accompanied by a strengthening of sterling, though uncertainty ahead of the EU referendum on June 23 could weigh on the currency in the meantime. |
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GDP rose by 0.2% q-o-q in Q4 2015 after increasing by 0.5% in Q3. Falling exports weighed on growth, and the pace of consumer spending moderated. High frequency data (e.g. retail sales and industrial production) point to a rebound in Q1 2016 however – the consensus expects GDP to increase by 0.6% – albeit there are concerns about the outlook given recent volatility in financial markets. The IMF and OECD have lowered their forecasts for growth, but both still see annual GDP expanding by more than 2% on average in 2016-2017. The unemployment rate has fallen to just 4.9% and earnings growth is picking up, while headline and core inflation have risen in recent months. The Fed left interest rates on hold in January and acknowledged that recent financial market developments could impact on the economy. This may mean it proceeds cautiously in raising interest rates but further increases are still likely this year. |
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This document has been prepared by the Economic Research Unit at The Governor and Company of the Bank of Ireland (“BOI”) for information purposes only and BOI is not soliciting any action based upon it. BOI believes the information contained herein to be accurate but does not warrant its accuracy nor accepts or assumes any responsibility or liability for such information other than any responsibility it may owe to any party under the European Communities (Markets in Financial Instruments) Regulations 2007 as may be amended from time to time, and under the Financial Conduct Authority rules (where the client is resident in the UK), for any loss or damage caused by any act or omission taken as a result of the information contained in this document. Any decision made by a party after reading this document shall be on the basis of its own research and not be influenced or based on any view or opinion expressed by BOI either in this document or otherwise. This document does not address all risks and cannot be relied on for any investment contract or decision. A party should obtain independent professional advice before making any investment decision. Expressions of opinion contained in this document reflect current opinion as at 24th February 2016 and is based on information available to BOI before that date. This document is the property of BOI and its contents may not be reproduced, either in whole or in part, without the express written consent of a suitably authorised member of BOI. |
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