There is more than a hint of possible policy co-ordination in the air.
Countries very rarely act in concert when it comes to major policy changes, but
last Friday saw some good clues that global policymakers are coming together to
help repair the global economy.
The Eurozone threw its doors wide open to new
monetary policy initiatives, Japan called snap elections to get a fresh mandate
for more policy stimulus and China cheered the markets with a surprise rate
cut. The fact that it all happened on the same day suggests something more than
serendipity is at play.
Fear can sometimes be a very powerful motivator and the
dread of another global downturn has probably spurred world policymakers into
action to boost recovery. Global economic summits generally tend to be long on
promises and short on delivery, but the spectre of another world recession
might have been enough to tip the balance at the recent Brisbane G20 world
leaders’ summit. Their pledge to boost global output by an extra $2 trillion over
the next four years, combined with last Friday’s events, suggests a new
watershed in policy efforts to get the world economy working faster again. Global
markets could have something really tangible to cheer about.
The Eurozone has given markets plenty to worry about in
recent years as one of the weakest links in the global recovery chain. But that
may be changing very soon. On Friday, European Central Bank President Mario
Draghi ramped up the rhetoric that unless the Eurozone economy improves soon,
the bank must do everything in its power to raise inflation and inflation
expectations and quickly. In other words, Draghi is giving his blessing for
full-blown quantitative easing (QE) – by buying bonds and printing money to
fast-track the Eurozone economy into much better health, stronger growth and
fuller employment. It marks a major sea-change for the ECB and boosted investor
hopes for a potentially happy ending. The markets loved it with the benchmark
German DAX share index ending Friday’s session up a massive 2.6%.
Japan is also picking up the baton for change after the
economy slipped back into a shock recession in the third quarter. Japan’s Prime
Minister Shinzo Abe dissolved parliament’s lower house last Friday for a snap election
in December. The markets see this as good news as it should pave the way for extra
stimulus measures to boost the chances of faster Japanese growth ahead. Critically,
the second leg of an unpopular sales tax, which has clobbered consumer spending
in the last two quarters, has been put on hold. The Bank of Japan will continue
to bear the brunt of recovery efforts through hyper-easy monetary policy and the
next government will need to conjure up more fiscal stimulus to pump up demand.
As long as a return to faster growth remains the over-riding priority it should
be good news for Japanese stocks.
China joined in Friday’s day of action too, surprising the
markets with a cut in interest rates to boost the economy as it struggles to
overcome its slowest expansion in a quarter of a century. The interest rate cut
followed disappointing purchasing mangers’ data which showed manufacturing
activity stalling and getting dangerously close to contraction. Slower growth, lacklustre
domestic credit expansion and the cooling property market mean that this rate
cut is unlikely to be an isolated incident. The case for further rate cuts
extending into next year will continue to build. The pressure on the Chinese
authorities to deliver more growth and jobs is not going to go away any time
soon.
Meanwhile, in the background, the US and UK are doing their
bit for global reflation efforts – by doing nothing on normalising super-easy
monetary policy just yet. While the rapid pick-up in growth and employment prospects
in both economies would normally dictate quicker policy reversals, the US
Federal Reserve and the Bank of England both seem reasonably content to delay
tightening for now to allow conditions for sustainable recovery to consolidate
longer term. And while the Fed and the BOE continue to hold fire on higher
rates, it is reassuring for global equity markets to know that the US and UK
are keeping a mindful eye on the bigger picture and helping to propping up
global GDP in the process.
The global recovery may seem on tenterhooks right now but
there is no reason for markets to lose heart. If global policymakers are
starting to pull together and stepping up efforts to boost world growth in a
more co-ordinated way, the chances of securing a recovery capable of enduring a
lot longer should improve dramatically.
It would be a watershed that could extend the five year old
rally in global stocks for a few more years to come.
Reprinted by courtesy of South China Morning Post - 24 November 2014
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