Euro-area monetary policy and growth
In a widely anticipated announcement last week the ECB’s Governing Council took the first tentative step towards unwinding its easy monetary policy stance. The central bank announced that, starting in January 2018, monthly net purchases under the asset purchase programme (APP) would be reduced from a monthly pace of €60bn to €30bn until September 2018 or beyond if necessary. All key interest rates were left unchanged.ECB Governor Mario Draghi was at pains to reassure markets that tapering would be gradual and that if the growth outlook became less favourable or if financial conditions became inconsistent with further progress towards 2% inflation, the Governing Council stood ready to both expand and extend the APP again. In the meantime principal payments from maturing securities purchased under APP would continue to be re-invested for an extended period of time after the end of tapering. In other words, monetary conditions will remain easy and liquidity plentiful for the foreseeable future.
Tapering has been long overdue, and with the euro-area’s business cycle in firm upswing, there is no better time than the present to normalise monetary conditions. We would even go so far as to suggest that the central bank should be bolder. Figure 1 is illustrative. Its shows that real lending rates remain well within our normal plus/minus 2% range i.e. there is few risks of the recovery being compromised. If anything real lending rates are likely to ease further as nominal GDP growth picks up.
Asianomics, founded by Dr Jim Walker in 2007 and based in Hong Kong, specialises in economic analysis research, cross-referencing their work with credit cycles, profit cycles and cash flows. Asianomics focus is on developments in the Asia-Pacific region, and they also cover developed markets like the US and Europe.
The Austrian Economics model provides a framework for the economic research. The basis of the School of Austrian Economics is that economies work more efficiently and effectively when companies and individuals are free from excessive interference by government and special interest groups. The Asianomics economic research team includes Deputy Chief Economist Sharmila Whelan who is recognised for non-consensus thinking and her depth and quality of primary research, and Chief Economist Dr. Jim Walker.
Asianomics’ subscribers have access to regular economic commentary, stand-alone Country Reports, Special Reports and Investment Strategy Reports. Dr. Jim Walker also provides weekly webcasts.
Dr. Jim Walker is regarded as one of Asia’s leading economists. Prior to setting up Asianomics, he was the Chief Economist at CLSA Asia-Pacific Markets, where he worked for more than 16 years. He has achieved numerous ‘Best Economist’ rankings in the Asiamoney, Institutional Investor and Greenwich surveys of fund managers.
Previous successful calls include:
- In 1995 Dr. Jim Walker wrote about the prospect of Asia being forced off its de facto dollar peg “within the next two-three years”. The Asian Crisis, precipitated by the Thai baht devaluation, began in July 1997.
- Forecasted the US 2007 downturn and financial sector meltdown in series of ‘Apocalypse’ reports.
- Called early the upswing in the Indian stock market in the final quarter of 2013.
Recent Recommendations:
- Overweight China - We are overweight Chinese equities with momentum improvement in the economy.
- Short Sterling, Long Renminbi - China’s currency offers good upside with a positive carry.
- Short European Financials, Long Indian Financials - This is the simplest pair trade to play superior demographics and growth in Asia relative to the region with the biggest problems.
- Long EM Asia, Short Developed countries - South and SE Asia, and direct investors from North Asia, are ‘buy and hold’ investment bets.
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