Is This The End? ….of quantitative easing01/03/18
Publications Officer Heath Gabbett discusses how the central banks are falling out of love with quantitative easing and what affect this may have on global ‘bubbles’ in this week’s edition of The Take:
Several global markets have reached their highest points since the Global Financial Crisis. The ASX 200 is at a 10-year high, reaching over 6000, whilst American stocks also reached a record high of over 2800. Japan’s Nikkei Index similarly reached a 26-year high in late January, and the MSCI World Index, a broad indicator of over 1500 global companies, is at its highest levels post-GFC. Interestingly, global stocks as measured by the MSCI Global Index have risen in 15 consecutive months – a record. The continuous growth in global stocks, paired with the record highs of many markets has caused several commentators to question whether global stocks are entering a bubble. Economists have cited the cyclically adjusted price-to-earnings ratio of the Australian and American stock markets to suggest both of these have entered bubble territory.
However, it is not only the share markets which are showing signs of a bubble. Real estate markets around the world have also begun to show signs of a bubble. Several key examples include Amsterdam, which has seen housing prices increase over 30% since 2015; Hong Kong, in which real estate prices have tripled since 2003; London, where despite a reduction in real income house prices have soared post-GFC; and of course Sydney where real estate prices are up 60% from 2012. Many economists argue that these prices are in need of a correction.
A common explanation for the surge in global asset prices is the trend in monetary policy since the GFC towards Quantitative Easing (QE). Put simply, QE is characterised by a country’s Central Bank purchasing government securities from the market in order to lower interest rates and increase the money supply. This policy encourages investment due to lower interest rates, increasing the capital available for investment in stocks, real estate and other assets, and hence increases the price of these assets.
As Central Banks move to ease back on Quantitative Easing, these bubbles may begin to burst. The OECD highlighted that while the global economy was growing, most of this growth was due to Central Banks’ Quantitative Easing policy, and a reduction in that policy would result in a significant slowdown in growth. Many of the world’s largest banks have begun to cut back on their expansionary policy, so 2018 may be the year the OECD’s prediction gets tested. In November 2017 the Bank of England raised its target interest rate, the US Federal Reserve raised its rate 3 times in 2017, whilst the European Central Bank stated it would raise interest rates in early 2018 and there is an early indication that the Bank of Japan will do the same.
With asset prices at their highest points in decades and Central Banks beginning to cut back on expansionary monetary policy, 2018 may prove to be challenging for global asset markets.