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Monday, 03 September 2012 06:22
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QE3 matters less than the fiscal cliff and EU standoff

With the US economy continuing to be somewhat listless even though Q2 growth has been revised upwards to 1.7% from the earlier 1.5%, it’s not surprising Fed chairman Ben Bernanke signalled he was not averse to a QE3 if the situation warranted it—US GDP grew 4.1% in Q4 2011 and this slowed to 2% in Q1 2012, before slowing even further in Q2. Indeed, if global markets have been rising despite this, it is in anticipation of QE3 kicking in sooner rather than later. Markets also rose in anticipation things are looking closer to a solution in Europe and, at home, FIIs are back with the return of ‘risk on’ behaviour, though the flip side of this is a rise in global crude prices.

While there are many who argue the impact of a QE3 will be less than in its previous avatars—others argue it will only stoke inflationary expectations—but the larger question is different. The biggest danger in the US right now is the impact of the fiscal cliff which will cut government expenditure by 4% of GDP, leading to a possible lowering of US 2013 growth to just 1%, and there’s little that a QE3 can do in the face of that. Indeed, given how the Republicans are asking Bernanke not to do anything till a new government comes in—and to replace him if he does!—the chances of a fall off the cliff look very real right now. The other issue worth keeping in mind is that despite getting interest rates very low, investment spending just isn’t taking place in the US. Private investment growth halved to 3% in Q2 and in terms of the contribution to GDP growth, this fell from 3.72% in Q4 2011 to 0.78% in Q1 2012 and to just 0.40% in Q2. In many ways, this is akin to what is happening in India—a rate cut by RBI may have some psychological and other impact, but the real change can come only when the government gets its act together.

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Last Updated ( Monday, 03 September 2012 06:23 )

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