For all of the monetary policy easing that has been implemented in recent years it is merely rotating growth, rather than accelerating it, from a global perspective.
That’s the view of CIBC’s Andrew Grantham who, in a research note released over the weekend, suggests recent improvements in Eurozone and Japanese economic data has been as a result of massive currency depreciations that have actually detracted from potential growth elsewhere.
“First quarter GDP figures are in the books for most major economies now. And it is becoming more evident that the Eurozone and Japanese economies are benefiting from the huge stimulus measures introduced there. Eurozone growth has been steadily accelerating, reaching a respectable 0.4% pace (not annualized) in Q1. Meanwhile Japanese GDP growth earlier handily beat expectations, posting a 2.4% annualized pace.
But that growth is being aided by massive currency depreciations, and as such appears to have come at the expense of others. GDP growth figures in the US and the UK — two areas that have seen appreciations in their trade-weighted currencies — have recently disappointed. Even though the US’ small proportion of exports relative to GDP and likely weather distortions in Q1 make us more optimistic than most for the quarter ahead, averaging out the first half of the year would show a deceleration.”
Grantham offers this chart to demonstrate his point. As is clear to see, as prospects for growth in the Eurozone and Japan have improved in recent months, that for the US and UK have diminished over the same period.
“Along with creating rotational growth rather than unilateral growth globally, Grantham also suggests recent central bank policy easing is now less effective in boosting economic activity than what was the case in the period immediately following the global financial crisis.
Initial rounds of asset-buying, during and just after the Great Recession, appeared to aid acceleration in industrial production growth in both advanced and emerging markets. But more recent stimulus has failed to lift all boats.
While global production accelerated in the quarters after the Fed’s QE3 announcement, the lift was very modest and it did little for growth in emerging markets. Since mid-2014 (when the BoJ ramped up stimulus and the ECB started hinting at QE to come), the results have been even less decisive.
The stimulus measures undertaken in the EZ and Japan haven’t done ”absolutely nothing”. It’s just so far we are seeing a redistribution of growth globally rather than an acceleration.”
Based on the evidence presented by Grantham, this appears to be the case. While quantitative easing from the Eurozone and Japan has helped boost industrial production in advanced economies, production growth globally has slowed and has actually contracted in emerging nations.
With the ECB and Bank of Japan both likely to keep ultra-easy monetary policy in place for at least the next year, the question now is what impact it will have on the world’s largest economies – the US and China.
Given both recorded some fairly average economic readings in the first quarter of 2015, many will be hoping that growth will accelerate strongly in the second half of the year.
If it does, it will bode well for global growth heading into 2016. However, if that doesn’t eventuate, the cycle of rotational growth based on currency fluctuations will persist, and the prospects for a global economic recovery will be pushed back even further.