US Fed worries that it is overdoing the stimulus
THE threat posed by a premature cessation of quantitative easing by the US Federal Reserve has played itself out quite a few times on markets this year.
Panic sell-offs have been cooled only by reassuring words from the Fed’s chairman, Ben Bernanke, that the bond-purchasing programme will continue until unemployment is in check.
The threat fades into the background, but doesn’t quite disappear. According to minutes released by the federal open market committee yesterday, several of its members at last month’s meeting saw the bond-purchasing programme coming to an end by the end of this year.
In efforts to boost US growth and reduce unemployment, the Fed is buying bonds to the tune of $85bn a month until the jobless rate falls within its target.
The Fed’s target for unemploy- ment is under 6.5%. Last week, the figure came in at 7.6%.
Bullish about prospects for the US economy, members of the federal open market committee are of the view that the jobs target is likely to be met by the end of the year. While the poor jobless numbers out of the US last Friday may have deflated that optimism, the key thing to learn from the minutes is that there is growing discomfort with the levels of stimulus the Fed has pumped into the economy.
But as long as Mr Bernanke remains in office, cheap money remains the central thrust of the Fed’s policy.
His term ends at the end of January next year, and reports are that he is not keen on being reappointed. It will be interesting to hear the thoughts of a new incumbent, if there is one.
WOBBLES in the US economy have been the main focus of markets this month because of bad jobs numbers and other not too promising data releases from the world’s biggest economy. But we should also be concerned by China, which for so long has been the supporting pillar of the global economy.
Prospects aren’t looking too good. To a large extent, Beijing has managed Chinese economic growth lower over the past year because of inflationary pressures. Inflation may seem under control, but the Communist Party’s ability to stimulate growth has now been compromised by the indebtedness of consumers.
Earlier this week, China was downgraded for the first time since 1999 by one of the big three ratings agencies, Fitch Ratings, because of concerns that debt problems may require a government bail-out.
In response to the global recession in 2009, Chinese state-owned banks issued loans to help cushion the slowdown, keeping growth on track. But what the loose extension of credit did was to boost house prices to ridiculous levels, and to leave local municipalities with enormous debts.
“A push by government to increase lending to propel economic activity may prove very dan- gerous,” Xhanti Payi, emerging market economist at Stanlib, said.
China has done well in lowering expectations of its growth over the coming years, putting to bed any hopes of double-digit expansion as its partners struggle, including the US and Europe. The new normal is annual growth of 7.5%, not too shabby when you consider growth in SA and the rest of the world. (South African gross domestic product is expected to grow 2.8% this year from 2.5% last year.)
The figure of 7.5% for China was challenged by BHP Billiton yesterday. The world’s biggest miner, which counts China as its biggest customer of raw materials such as copper and iron ore, expects annual growth to moderate towards 6%. It highlights that slowdown as its main business risk.
If it’s the biggest risk before the dual-listed miner, one has to ask just how much more of a risk is it to SA, which counts China as its largest trading partner.
The Chinese economy grew 7.9% last year, the slowest since 2008. That slowdown had a significant effect on SA’s economic performance last year, notwithstanding wildcat strikes.
Chinese growth has to moderate given the global environment and the complications of that economy, Mr Payi said.
Bloomberg reports China’s exports rose less than forecast for the first time in four months, leaving the world’s second-largest economy with weaker global demand to support its recovery. Complicating things is the little room afforded to the Chinese government to stimulate the economy given debt concerns. It sounds familiar.
China’s slowing economy is a risk for shareholders in Billiton but it’s a much bigger risk to SA Inc.
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