Finance 101: What exactly is “Quantitative Easing (QE)”? And does the end of QE mean trouble for our economy?

We follow the news and the outlook for the economy seems to be increasingly negative. The words “Quantitative Easing (QE)”, “balance of payments”, “the Rand falling” and “strikes” are often bandied about.Where does South Africa stand economically? It is important to all of us as the economy has a fundamental impact on business – and on our savingsWhat is QE? Oiling America’s economy – how it helped us When the global financial crisis hit markets in 2008, the US Federal Reserve Governor, Bernanke, was particularly worried about the collapse in liquidity. When money stops circulating, activity in the economy drastically reduces and without working capital many businesses cease trading. The economy goes into a downward spiral. The problem facing Bernanke was interest rates were too low to effectively use as a monetary policy tool. So he committed the Federal Reserve to buy medium to longer term commercial assets. The purchase of these assets injected money into the banks. Substantial assets were (and continue to be) purchased and this “oiled” the economy as massive amounts of liquidity stimulated the US and global economies. This oversupply of dollars started circulating globally to find the best return. At that time, the best performing economies were emerging markets and they became the beneficiaries of this liquidity. South Africa, as an emerging economy, experienced massive off-shore purchases of its bonds and shares. This supported our currency as it covered our trade deficit. It also stimulated economic activity as is evidenced by the record index on the Johannesburg Stock Exchange. Where does that leave South Africa?  The pincer threat in the wings The first problem is that QE is clearly a short-term strategy – once the US economy resumes normal growth and unemployment drops to below 7%, then QE will be “tapered off” until it stops. For the past year, there has been increasing speculation that the Federal Reserve will “taper off” its asset purchases. This has led to worries about the Rand and it has dropped by 30%. The weakness due to worries over QE has been exacerbated by our trade deficit continuing to widen. For the first eight months of the year it has come to R107 billion or 6.5% of gross domestic product. It is 54% up on last year. Thus, we face a potential pincer threat to our economy – the easing of QE will reduce the appetite of foreigners to finance the trade deficit combined with the on-going deterioration in our trade deficit. The impact of this may lead to further Rand deterioration, rising inflation and a reduction in economic growth. What can we do about it? There are two things we can do:

  1. Raise interest rates – this will support the Rand but will reduce growth in the economy

  3. Grow exports to reduce the trade deficit. Exports to Africa are rapidly expanding which is partially off-setting weaknesses in the Euro zone (this is our largest export market). Ending industrial action will also spur export growth.

YOUR TAX DEADLINES FOR NOVEMBER As noted above, non-provisional eFiling taxpayers must submit their income tax return by 22 November.    © DotNews, 2005-2013. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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