Aggressive Policy to Boost Growth?
Global economic growth continues to make slow progress, but diverging growth paths and the consequent different policy reactions have become more apparent in Q4 2014. The US, the UK and a number of smaller economies such as Ireland, Malaysia, New Zealand and Vietnam are seeing stronger growth. However, many countries are facing a period of slower growth, with the result that November witnessed a number of aggressive policy adjustments in attempt to boost growth. In China, a benchmark one-year rate was cut by 0.4 percentage points (pp) to 5.6%, the first cut in two years, while in Japan the second stage of the sales tax hike due in Q1 2015 was delayed, with the Bank of Japan having expanded its stimulus programme the previous month. In Europe the ECB signalled that it was prepared to undertake further stimulus.
Meanwhile, downside risks continue to outweigh the positive benefits expected from the sharp drop in oil prices. In particular, monetary policy is not a silver bullet, while market uncertainty over the timing and size of the inevitable US interest rate rises, the strengthening of the US dollar, and the reduction in global liquidity, acts as a headwind, as does the prospect of deflation in Europe.