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A Look At The Week’s Global Economic Events

Let’s take a look at two global economic updates or interesting key developments that happened in the past week. First up, we see how global stock markets’ rallied with the U.S. recovery in the cards. Next, we’ll zoom in to the Japan’s economy and how its government is tackling the record budget deficit.

U.S. GDP increased to 4.1% in 3rd quarter

While many observers believe that any form of Fed’s tapering may lead to a tumble in the stock markets, things actually turned out otherwise. The S&P 500 gained a surprise 1.84% in the last few hours on 18 Dec, right after U.S. Federal Reserve announced that it will reduce monthly purchases to $75 billion in January due to considerable improvement in the American economy.

True enough, just days after the announcement to cut stimulus, the U.S. stocks and Treasury bonds rose again thanks to a report showing that the economy climbed 4.1% in the third quarter, the strongest since the final three months of 2011 and up from a previous estimate of 3.6%.

“This revised GDP number was really positive,” Colleen Supran, a principal at San Francisco-based Bingham, Osborn & Scarborough, which manages about $3 billion, said in a phone interview. “It helps complete the story on what the Fed did this week and that is, the Fed has some belief that the economy is getting close to being able to stand on its own.”

Three rounds of central-bank bond purchases (known as the QE1 – 3) have helped propelled the equity benchmark 169% higher from a 12-year low in 2009. The S&P 500 has gained 2.4% this week to a record 1,818.32, posting its biggest advance since October as investors are confident that the recovery in the world’s largest economy is on course. Similarly, Asia markets have also risen in tandem on the upbeat news, with the Singapore Strait Times Index (SGX: ^STI) gaining 1.43% this week.

While the Standard & Poor’s 500 Index (SPX) has been extending its gains for the past year, Gold has gone on the flip-side. With the SPDR Gold Shares (SGX: O87) tumbling 29% so far in 2013, Goldman Sachs Group Inc. added that the bullion’s decline isn’t over as it heads for the biggest annual drop since 1981.

Bank of Japan (BOJ) to push for 2% Inflation

Some observers may be puzzled about the whole story of how Japan is turning around its country; but in fact, the economic policies of Japan are quite clear-cut. Governor Haruhiko Kuroda’s board kept its pledge to maintain its record easing by an annual 60 trillion to 70 trillion yen (US$ 670 billion) even after the U.S. Fed decision to taper policy helped weaken the yen to a five-year low against the dollar.

Through the quantitative easing, BOJ is trying to steer Japan on the route to recovery of 2% inflation rate, even with an increase in sales tax come next April. The reflationary policies have seemed to be working well; with acceleration in corporate growth and profits as well as positive sentiment among economic players.

While Governor Haruhiko Kuroda’s board said that BOJ isn’t explicitly trying to influence the foreign exchange rates, the yen’s 17 percent slide against the dollar this year is fuelling consumer price gains and boosting profits, aiding Prime Minister Shinzo Abe’s bid to end 15 years of deflation.

With the revitalisation of the economy, higher corporate profits will result in a lift in the tax payments (revenue) to the government. In addition, the increase in sales tax from the current 5% to 8% from April 1 will further boost revenue, enabling the government to check bond issuance.

Japan’s primary balance deficit will improve by 5.2 trillion yen next year, Aso said, with tax revenue estimated to rise to 50 trillion yen. This compares with 43 trillion yen estimated for this year’s initial budget.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo does not own shares in any companies mentioned.