The embers of the crisis are still smoking on the global economy but the time has come to repackage, in small steps, the enormous support granted by central banks since the start of the pandemic.
“The withdrawal of monetary and budgetary support measures is inevitable. The only question to be asked is that of the timetable,” comments Eva Sun-Wai, co-manager for the investment company M&G.
The US Fed has raised the possibility of launching the movement by the end of the year, but so far maintains the suspense on the calendar. The ECB has postponed the discussion on its own until December.
And central bankers are competing in expressions to suggest the tightening will be slow. Most recent, the boss of the ECB, Christine Lagarde, took on Thatcherian accents according to observers to assert at the beginning of September: “the lady is not tapering”, or “the lady does not tighten”.
Why this very progressive pace?
The period is sensitive: the exit from the tunnel of the health crisis is slow and the economic indicators still erratic, in particular in the United States and in China, engine of the world economy.
Subject to rising inflation, several emerging countries, such as Brazil, Russia, Mexico, the Czech Republic and South Korea, have already raised their interest rates. Rises which increase the cost of credit, thus avoiding an overheating of the economy, but can also hamper a fragile recovery.
The biggest central banks, such as the Fed, the ECB and the Bank of England, consider that the rise in inflation is temporary, which does not encourage vigorous action. As for Japan, inflation is still far from the targets.
“We are still a long way from a general tightening,” said Andrew Kenningham, chief economist for Europe at the consultancy firm Capital Economics.
A good record?
“We have learned a lot from previous crises and the management of that of Covid-19 has been from an economic point of view almost perfect,” said Vincent Juvyns, at the investment company JP Morgan AM. “The rebound is frank and massive and we have not experienced mass unemployment and a wave of bankruptcies.”
Popularized in 2012 by former ECB President Mario Draghi during the euro zone crisis, the expression “whatever it takes”, or “whatever it costs”, took a new step during the pandemic .
European, American, Japanese and British central banks have bought hundreds of billions of dollars in government and corporate debt.
They have thus avoided a surge in borrowing rates, allowing States, businesses and households to obtain money easily.
Other tools used: the drastic drop in interest rates, long-term loans granted at preferential rates to banks, easier access to the dollar by the Fed …
With free rein in the face of market pressures, governments were able to spend lavishly, with stimulus plans that totaled 16,000 billion dollars, according to the IMF, on a global scale.
“Both the fall in financing costs and state aid have been very effective in getting companies to approach the monetary shift in good conditions,” notes Vincent Juvyns.
For the moment, at least in Europe, the default rate should decline in the near future, anticipates the rating agency S&P Global, especially “if the withdrawal of accommodative policies is done in an orderly manner”.
What perverse effects?
One of the main criticisms leveled at these so-called “unconventional” monetary policies is the widening of inequalities through the inflation of the price of financial assets under the effect of a search for yield, and the increase in the price of the real estate market.
Regularly singled out, the ECB defends itself through studies by affiliated researchers by asserting that its policy had the merit of lowering the unemployment rate, which benefited low-income households and also enabled them to access the property thanks to the low rates.
In a September study, however, the OECD is worried about “negative side effects of an extension of the easing measures, such as a price dynamic of financial and real estate assets which could prove to be untenable over time”.
“These central bank interventions only make sense if they avoid a recession,” says Nicolas Véron, an economist at the Peterson Institute and the Bruegel Institute. “If they are no longer necessary to avoid a recession, they have much more perverse effects than positive effects.”
ats, awp, afp