What eurozone’s QE means for SA economy
Markets have rallied on Europe’s quantitative easing but in SA it’s business as usual
WHAT IT MEANS
QE IS NOT A STRATEGY FOR GROWTH
NO SA RATE CUTS NOW ON THE CARDS
Optimism that the €1,1 trillion quantitative easing (QE) programme announced for the eurozone last week will revitalise Europe’s economy and lift SA’s exports to the region is misplaced. But fears of dire negative spin-offs for emerging markets seem equally overdone.
There are several reasons to believe that European Central Bank (ECB) asset purchases, even at a whopping €60bn/month, are unlikely to unleash destabilising capital inflows to emerging economies, as happened when the US embarked on similar policies during the global financial crisis.
“When the dust settles, our sense is that ECB quantitative easing is unlikely to have much impact on emerging markets, either for good or for bad,” says Neil Shearing, chief emerging markets economist at Londonbased Capital Economics.
Just try telling that to the markets. Within hours, the rand had strengthened to R11,40/US$, nearly back to the range where it traded last year before the December sell-off. It also broke through R13,00/€ for the first time since September 2013, as the euro took a hammering against the dollar.
But even though QE will put more downward pressure on the euro, several SA economists say it won’t do much for long-term growth in the eurozone, given the many structural and regulatory obstacles to growth that remain unaddressed. Therefore SA shouldn’t be heralding QE as a boost to its export prospects to Europe.
“It’s very clear that the ECB’s key objective in introducing QE is to raise inflation expectations, which have turned negative, rather than to make the economy bounce and grow,” says Sanlam Investment Management economist Arthur Kamp.
Inflation in the eurozone is in decline, so income growth is very weak, which makes life uncomfortable for countries with high debt levels, he explains. By lowering credit spreads and interest rates, QE is supposed to lead to greater borrowing, which should stimulate asset prices and raise demand and investment and, eventually, inflation.
“In the US, QE did cause lower longerterm borrowing rates and a slight rise in credit extension, but in the eurozone, where overall debt levels are high, the inclination is to deleverage and save, not to borrow and spend. Whether it will work is debatable,” says Kamp.
Bond yields have already fallen a long way in Europe, while interest rates are lower than before the crisis; but this hasn’t done much for growth. It points to the reality that Europe’s banking system remains stressed, arguably a lot more so than that of the US.
This, and the fact that the eurozone does most of its financing through the banking system while the US economy relies heavily on the capital markets to drive economic activity, suggests to Stanlib chief economist Kevin Lings that the ECB’s QE initiative will be less effective than QE was in the US.
In the absence of a trade response, financial markets remain the main channel through which QE could affect SA. The fear is that by encouraging an ongoing search for yield, it could unleash large capital flows into emerging economies, causing their currencies to appreciate and hurting their exports — a phenomenon which affected SA when the US adopted QE. Shearing says that while inflows to emerging economies picked up in all three phases of QE in the US (see graph), their pattern and size cannot be fully explained by US monetary policy alone. He feels that fears about the destabilising effects of the ECB’s programme on emerging economies are overdone.
Other economists say the disappointing growth outlook and potential of key emerging economies in recent years suggest that foreign investors may be more discriminating about where they put their cash this time round.
The net effect will be further complicated by expectations that the