Tension rises as us plans to withdraw QE
During a press conference in Washington DC in June, United States Federal Reserve Chairman, Ben Bernanke, implied that central bankers might slow the pace of the quantitative easing (QE) programme by the end of 2013, with the aim to stop it completely by mid-2014.
This made the US and other global markets nervous, because after a period of approximately five years, they have become quite used to this particular hand-holding policy of the Federal Reserve.
Naturally, everyone is debating how they are going to survive the ultimate withdrawal of QE, and how the overall phasing-out process will eventually work.
Will the withdrawal of QE effect South Africa at all?
"Of course it will,” says Kevin Lings, chief economist at STANLIB. "When America sniffs the rest of the world fears catching a cold, and in smaller and more vulnerable markets like ours, this quickly turns to concerns of a full-scale bout of the flu. Whether we like it or not, SA needs to pay attention to QE and Bernanke's pronouncements on its future.”
The Federal Reserve's withdrawal of QE comes at the same time that economists and investors are revising their once-bullish views of emerging market economies in general. "This is unfortunate seeing that these markets have been seen as a kind of golden boy for years. Some of the BRICS economies were even forecast to achieve growth rates of 6%. As such it seemed to many that an unstoppable success story was unfolding.”
In the last three to six months however, the above-mentioned vision has been questioned as emerging markets and performance have slowed. "We saw the rand drop to more than R10 to the dollar, but were not alone as Indonesia, Turkey, Brazil, Russia and India all dipped in similar fashion.”
Lings notes that SA is now experiencing a significant bout of currency weakness, which is a risk because the country's inflation rate could potentially rise. "It also means that, as a nation, we need to relook our economic parameters and the strategies we require to grow our economy.”
He highlights uncertainty as to the fate of QE in the United States as the root cause. "Once Bernanke provides clarity and a firm timetable for reducing or stopping QE, we can expect further global market uncertainty. However, as the US economy proves that it can stay upright without the support of QE, we can expect a return to confidence at the end of 2014.”
At that stage, Lings says, we should hope that Europe is doing better, Japan had improved, and that the world economy picked up as a whole, as this should lift SA's growth rate from the very mediocre 2% it currently is.
What QE has achieved to date
Simply put:
- It has created more money in the US system. (Since inception in 2008, QE has added $2.7-trillion to the US economy, and at the moment, it is adding $85-billion of additional money every month).
- It has helped to reduce the cost of mortgages and resuscitate the housing market in the US, which brought buyers back into the market. (House prices are up 12% year-on-year and new homes are being built).
- Because the problems in the banking and housing sectors are being addressed, businesses and consumers have started to regain confidence in the US market. (Recovery has broadened into almost every aspect of the US economy).
- A total of 6.7-million of the 8.7-million jobs lost in the BREAK US during the recession have been regained.
- The US stock market has reached an all-time high.
- US company profits have gone up.
- US vehicle sales have almost fully recovered.
"It was inevitable that the QE strategy would need to be slowed and eventually stopped so as to avoid possible longer-term distortions to the economy and unintended consequences like the hyperinflation we saw in Zimbabwe, or erosion in the value of the currency caused by an oversupply.”
"It is however important to note that the Federal Reserve's approach to QE has been more sophisticated than Zimbabwe's, and that there has been no sign of a problem thus far. As such, it seems that Bernanke's intention is to get the market used to the idea, and then implement the reduction of QE in a planned manner. It does not look as if he is expecting the US economy to go cold turkey,” concludes Lings.
Editor's Thoughts:
Whether the US economy is stable and robust enough to withstand the withdrawal of Quantitative Easing remains to be seen. It is nevertheless a reality that the US and other global markets, including South Africa and the other BRIC nations, have to deal with as it is bound to happen soon. Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].
*BRICS NATIONS - Brazil, Russia, India, China and South Africa
