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Rising capital expenditure bodes well for future growth

Companies are more confident of the economic outlook for good reason.

Companies are more confident of the economic outlook for good reason.

Across the world, business activity increased at solid rates in response to higher volumes of sales.

Firms continued to hire more staff and business sentiment remained buoyant.

The latest Purchasing Managers’ Index (PMI) survey data showed robust rates of economic growth across emerging markets and the developed world. That put the global economy on course for a solid second quarter.

There are clear signs that capital expenditure has picked up.

Companies have been stepping up their investment in machinery and technology equipment in recent months. Growth remained especially solid in the technology sector.

Employment is also rising alongside the upturn in investment. Overall jobs growth, as measured by the PMI, is rising at one of the fastest rates seen in two years.

This week sees major central banks decide on monetary policy and interest rates, where the outcomes will likely have an impact on global currencies.

The financial markets are keenly watching the United States Federal Reserve’s decision, which takes place amid rising expectations for another hike in interest rates.

Further growth in the US economy, solid hiring and a rise in prices have bolstered the argument for higher interest rates.

Another key event of the week is the Bank of England’s monetary policy meeting, which comes on the heels of the United Kingdom’s general election. With the election outcome having led to heightened political uncertainty, a cautious approach to policy is the most likely course of action from the central bank.

The Bank of Japan (BOJ) also decides on interest rates, though no changes to policy settings are expected. Solid economic growth and rising prices have raised expectations that the BOJ could soon signal its intention to start withdrawing its monetary stimulus. But such talks appear premature.

BOJ governor Haruhiko Kuroda said recently that now is not the time to announce an exit strategy to its stimulus programme, as stronger signs of inflation are yet to be seen.

Analysts will also look to key data highlights from China this week.

Data on investment, retail sales and credit will be scrutinised amid widespread expectations of softer second-quarter GDP growth.

Notably, the Caixin manufacturing PMI fell below 50, showing a decline for the first time in nearly a year.

ABOUT THE AUTHOR: Bernard Aw is an economist at IHS Markit

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