The US economy is still the strongest in the world today. This situation has arisen from the applica...
The US economy is still the strongest in the world today. This situation has arisen from the application of sound monetary policy over the last two decades. The pace of improvement has been on a rising trend, and although there are still improvements, they are not likely to come through any faster from here on.
The monetary background is not as good as it was, with the recent increases in interest rates by the Federal Reserve Board being a negative.
The purpose of a central bank is to maintain price stability, but these rate rises appear to be an attempt to manage growth instead. Despite this, the economy is still in good shape. Interestingly, the effect of the rises so far has been to exacerbate the two tier stock market, with value shares doing very badly, and growth shares doing particularly well.
On the fiscal side, the level of personal taxation continues to be relatively low. However, we are in a Presidential election year, and that the outcome of the election may have a significant effect in this area.
The trade and regulatory framework in the US continues to be positive, with a free market economy leading the way.
Japan saw strong performance from its stock market in 1999, but a weaker start to 2000, with some sectors doing notably better than others.
Monetary policy within Japan is good, which is not unusual, Japan being a country where inflation has not been a problem during post-war years.
Fiscal policy, however, has often been the Achilles heel but the future looks brighter.
The cut in personal taxation in the second quarter of 1999, which gave more money to the Japanese consumer, should help economic growth, however, it must be said that the recent figures have not been encouraging on this score.
Another area of concern has always been the regulatory side of Japan, with foreign firms finding it very difficult to break into the domestic market.
Flexibility is however creeping in, and the recent Big Bang in the securities markets is both an example of this and a significant positive. Turning to Pan-Europe, the UK has had good monetary policy until recently, however the recent rate rises (now four in total) are unnecessary, with the comments made earlier about the Federal Reserve also being applicable here. The Bank of England seems to have forgotten that its remit is to keep inflation within a band.
Monetary policy across Continental Europe had been more accommodating, and the single rate rise, if that is all there is to be, was not unexpected.
On the fiscal side, the prospect of a reduction in capital gains tax for corporations in Germany is encouraging, heralding faster corporate change. Incomes in Europe are recovering, and there is more restructuring to be carried out within European industry, which the Euro is imperceptibly hastening. This will be a significant motor for European stock markets for the next few years, and is one key reason for optimism in this area.
John Chatfeild-Roberts is director at Lazard Asset Management
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