In general this year, global equity markets have moved upward, despite a spate of poor economic and trade data, disappointing corporate earnings, lingering US-China trade tensions and heightened uncertainty over Brexit. Market sentiment seems out of step with the real world, casting doubt on bullish investors and any conviction that the outlook will last.
In part, the trend has been upheld by market expectations that the world’s two largest economies will soon resolve their trade spat, but the cautious monetary policies of the major central banks, amid a sharp slowdown in manufacturing activity and sluggish GDP growth, have also been lending support to equities.
The US Federal Reserve’s monetary policy in the past few weeks has become more dovish than several months ago, as the 35-day partial government shutdown — the longest in US history — hit consumer confidence. Signs of a cooling economy and benign inflationary pressure are likely to pressure the Fed to hold interest rates steady.
Germany just avoided a technical recession after reporting zero GDP growth in the final quarter of last year, after a 0.2 percent decrease in the previous quarter, while the European Central Bank (ECB) has warned of rising downside risk to the euro-area outlook. As the European Commission has cut forecasts for economic growth in the eurozone for this year and next, the ECB’s interest rates are likely to remain low.
To boost a slowing economy, India’s central bank on Feb. 7 unexpectedly cut interest rates and shifted its stance to “neutral,” while the Reserve Bank of Australia has adopted a dovish stance amid China concerns and housing market uncertainty.
Japan last week reported that economic growth there returned to positive territory in the last quarter, but the nation’s growth momentum remains weak due to the effects of softening external demand. To keep credit flowing and fight deflation, the Bank of Japan is likely to continue an accommodative monetary policy.
Not having hiked policy rates since September 2016, Taiwan’s central bank is maintaining a dovish stance toward monetary policy. Minutes of the bank’s December meeting showed that board members saw no reason to raise rates when softer global demand is dragging down external trade.
Confirming the central bank’s stance, last week’s export data showed that total outbound shipments declined 0.3 percent annually for a third consecutive month, while the government’s statistics agency and some private think tanks revised GDP growth forecasts for this year downward.
Central banks worldwide are following the Fed in reining in plans to tighten monetary policy, and some governments have launched incentive-based measures to boost private consumption, but increased domestic investment, in the form of private investments or public infrastructure projects, is needed to help arrest potential slowdowns in employment and wage growth.
So far, in an effort to avoid being battered by the trade war, nine Taiwanese companies operating overseas have gained the government’s green light to take part in a Ministry of Economic Affairs program to invest at home, which could create 3,700 jobs — a NT$25.6 billion (US$829.82 million) investment.
However, that is unlikely to be enough. The government must expand infrastructure spending, provide relief measures for small and medium-sized businesses and assist local companies in marketing products overseas.
After all, the government must remember that stable policies matter most to investing businesses, but stability requires consistency and predictability, whether the central bank is dovish or hawkish.
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