The international environment

• Events this quarter have been dominated by financial market turbulence, following a debt moratorium in Russia and risks of contagion affecting Latin America. Global equity prices have fallen, and credit spreads on emerging market debt have widened.
• Underlying activity in the major industrial economies(2) except Japan remained firm in the second quarter. But subsequent falls in both business and consumer confidence pose risks for the deteriorating global outlook and growth in 1999.
• The Japanese economy fell further into recession, with its weakest growth since 1955. Confidence indicators remained low, and there were as yet few signs of the fiscal stimulus contributing to activity.
• Inflationary pressures were extremely weak in the major industrial economies, largely reflecting falls in commodity prices.
• The United States and Japan eased monetary policy in 1998 Q3. The prospective euro area also experienced a monetary easing, as countries with higher official interest rates reduced them. Bond yields fell in the major markets, partly reflecting a flight to quality. The Japanese benchmark bond yield fell to record low levels.

The international environment