The possibility that the US Federal Reserve Bank will begin to taper its quantitative easing (QE) programme has understandably been the focus of much global debate and speculation in recent months.
While there’s no denying the potentially negative impacts that the start of such a QE tapering process could have on many of the world’s markets, there are a number of reasons why the fears of a resultant global economic decline, as expressed by many commentators, are actually unlikely to materialise in the foreseeable future.
In the first place, the actual likelihood of any significant QE tapering by the US in the near future is slim at best. The pace and composition of US economic growth remains too tepid and mixed to warrant the withdrawal of some of the economic stimuli from the system at this point. Against this backdrop, if the US chooses to go ahead with such QE tapering, this would almost certainly expose some of the lingering vulnerabilities in both the US economic recovery, but also that of the rest of the world.
Of course, despite the potentially negative repercussions of QE tapering, there’s no certainty that this will stop the Fed from going ahead with its proposed stimulus reduction early in 2014, albeit with the likelihood of a commitment to flat policy rates for an extended period of time. However, even in the unlikely event that the Fed does take its foot off the gas slightly, it’s important to remember that there is far more to the global economy than just the US.
While the Fed is arguably the central bank that is closest to beginning to slow down the pace of its economic stimulus, there are a number of other economies – many of which are of greater direct importance to South Africa – that have yet to reach this point in their economic recovery processes.
The European Central Bank (ECB) is a case in point. Given the still very weak position of the eurozone’s macroeconomic indicators and the obviously pedestrian pace of the region’s overall economic recovery, it’s highly likely that the ECB will continue, and even increase its efforts, to simulate economic recovery for some time to come. The recent rate cut from the ECB is unlikely to have a material and sustainable impact on turning around the regional economy. As such, the possibility of further stimulus – maybe even including the formalisation of QE or asset purchases in some form or another – will not only offset any gradual QE tapering that takes place in the US, but will undoubtedly also serve as a catalyst for continued global economic recovery, albeit at a gradual pace.
The joker in the pack, however, remains the Bank of Japan (BoJ), which has long been a driver of the global carry trade (where investors borrow money cheaply in the developed world and invest in higher yielding climes). Given the disproportionate focus on the Fed, the importance of the BoJ is being overlooked and could well serve to mitigate the negative impact of any QE tapering that occurs in the US.
A year ago, when the BoJ first announced that it would be implementing economic stimulus initiatives – including the effective doubling of the monetary base – the immediate result was a significant weakening of the yen from around ¥70 to the US dollar to close to ¥100 to the US dollar. This 33% devaluation in the Japanese currency proved beneficial for South African markets in that it spurred risk appetite, thereby supporting emerging market assets, and helped to slow the weakening of the rand. The rand weakness would have been even more pronounced in the absence of these measures and any further economic stimulus introduced by the Japanese will likely have a positive effect on the South African economy and markets.
Given this combination of a strong possibility of continued economic stimuli from a number of key central banks around the world with the fact that any tapering in US QE should be marginal for at least the first half of next year, it’s likely that the result could be the resumption of positive tailwinds to capital flows providing support to our country’s bond market and, by extension, support for the rand as well.
So, while it is unlikely that South Africa’s path to economic recovery in 2014 will be boosted by any significant improvement in domestic fundamentals, the potential certainly exists that the local economy could derive significant benefit from a global ‘reorganisation’ of economic stimulus focus. Particularly as the developed world grapples with the proverbial Hydra of unprecedented monetary policy, which will be hard to unwind.
Obviously, it would be foolish to underestimate the influence that any decision made by the Fed could have on the rest of the world’s markets. But it is equally naïve to become so fixated on what is happening within US economic policy that we lose sight of the importance, and potential benefits to our local economy, of aggressive stimulus actions that are likely to be taken by the world’s other leading economies and central banks.
The difficulty of weaning global markets off the central bank teat will prove supportive of the South African economy, even if only in the short term. So, if these additional stimuli occur, as expected, in 2014, South Africa’s economic recovery could very well circumvent any fallout resulting from QE tapering by the Fed and resultant sell-off, and instead enjoy the reprieve that it so desperately needs.
Mohammed Nalla is head of strategic research for Nedbank Capital Global Markets.