ANCHOR OF ECONOMIC

AND FINANCIAL STABILITY

THE ECONOMY
PRIVATE DEMAND SUPPORTED GROWTH IN THE G3

Growth in the US economy slowed to 1.9% in 2013, from 2.8% in 2012, as the fiscal drag and heightened uncertainty over future economic policies worsened investor sentiment. In FY2013, fiscal tightening amounted to an estimated 2.9% of GDP, mainly due to the budget sequester that came into effect in March 2013. Expectations of an early QE tapering in May 2013 triggered a rise in mortgage rates, dampening the recovery in the housing market, while the partial government shutdown in October 2013 weighed further on business sentiment. Nonetheless, household confidence remained resilient and private consumption spending stayed firm throughout the year, on the back of steady employment gains. Policy uncertainty was significantly lifted towards the end of the year when the US Congress agreed on a budget that would keep the federal government funded for the next two fiscal years. In Q1 2014, however, an unusually cold winter led to a contraction in US GDP, although the economy has since picked up.

Economic conditions in the Euro zone improved progressively in 2013. The region exited from recession in Q2 and continued to expand at a modest pace in the two subsequent quarters. Private investment led the recovery, as borrowing costs fell and corporate profitability improved. The recovery broadened to the periphery in H2 2013, with Spain and Italy returning to positive growth in Q3 and Q4, respectively, after being mired in recession for two years. However, private consumption remained sluggish and government spending in the highly indebted economies was cut back to meet deficit targets. As a result, the pace of recovery was insufficient to prevent an overall contraction in GDP of 0.4% for the whole of 2013, after a 0.6% decline in 2012. Nevertheless, the Euro zone economy continued to expand in Q1 2014, registering GDP growth of 0.7% on a q-o-q seasonally adjusted annualised rate (SAAR) basis.

Japan’s GDP growth picked up to 1.5%, from 1.4% in the previous year, as large-scale monetary easing and fiscal expansion were rolled out in the first half of the year. The effects of the stimulus measures waned towards the end of the year and flagging exports weighed on growth. Nonetheless, economic activity in Q4 2013 was supported by the frontloading of household expenditure in anticipation of the scheduled rise in the consumption tax from 5% to 8% in April 2014. In the first three months of 2014, GDP growth accelerated to 6.7% q-o-q SAAR, as discretionary spending peaked ahead of the tax hike.