Weekly Economic Briefing

Greece is the word

30 June 2015

Global Overview

  • The Greek debacle is coming to a head; a referendum has been called for the electorate to decide on creditors' bail-out proposals. The Greek people face more pain regardless of the outcome; for the Eurozone, stronger policy and institutional fortifications mean that the Greek crisis may just be a blip.
  • Looking through the volatility caused by Greek events, wealth effects on consumption will play an important role in determining the trajectory of global growth. Although pre-crisis wealth effects were very strong in the US, the relationship between household net worth and consumption appears to have broken down in recent years.
  • Wealth effects have also weakened in the UK, though they remain positive. In the Eurozone and Japan, wealth effects are limited by the small share of equities in total wealth and more binding housing credit constraints. This is dampening the benefits of quantitative easing.
  • Consumption appears to react more to negative wealth shocks than positive wealth shocks in many emerging markets. There is little evidence that the surge in Chinese equities over the past year, like the boom in house prices before it, has fed through into consumer spending.
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US

Wealth effects on consumption growth appear to have declined since the crisis. This is another factor weighing on the recovery, although it may also lengthen the business cycle.

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UK

Rising household wealth supported consumption prior to the crisis. After a period of high precautionary savings, these wealth effects appear to be feeding through to
spending again.

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Europe

The Eurozone has a number of firewalls to prevent contagion spreading from Greece. First and foremost is the ECB which has recently been granted more discretion on its policy operations.

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Japan

Rising stock prices have failed to underpin higher consumption. The composition of household wealth and credit access may still be hindering the wealth effect.

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Emerging Markets

Consumption is falling across most emerging markets led by weak investment and deteriorating labour market conditions. Corporate profits and equity prices may hurt household spending in China.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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