US economic conditions continuing to improve

The outperformer on the global stage has been the US economy, where economic conditions have continued to improve. This has been seen most clearly in the labour market, with non-farm employment growth averaging a robust 221,000 jobs in recent months, and the unemployment rate pushing down to 5.3%. This improvement in the labour market has been accompanied by increases in household spending, as well as a strengthening in the housing market. The recovery in the industrial sector has been more gradual, with the appreciation in the US dollar resulting in some headwinds. Nevertheless, the US economy is expected to continue expanding at a steady pace over the coming year.

With the US still the major consumer in the global economy, its continuing recovery bodes favourably for the longer-term global economic outlook. At the same time, the ongoing recovery in the US also means that we are moving closer to the point when the Federal Reserve will start to increase the Federal Funds Rate from its current extremely low level. This is expected to begin in September.

There are concerns that the eventual increase in the Fed Funds Rate will prompt increased volatility in financial markets and asset prices, similar to 2013's 'taper tantrum'. This time around a less vigorous reaction is expected from the financial markets. The lift in the Fed Funds Rate has been well signalled, and the pace of tightening is expected to be measured. In addition, the tightening in rates will only occur if the Federal Reserve is convinced that it won't derail the recovery.