TalkingEconomics: QE to exacerbate asset shortage, hitting savers

While the European Central Bank’s (ECB) quantitative easing (QE) programme will benefit the eurozone economy, it will also create shortages of low risk assets in the region and increase the burden on savers through its effect on interest rates. Markets are gloomy about global growth but we believe the benefits from lower energy prices and inflation (via real incomes and consumer spending) will offset the negative effect on the energy sector.


Keith Wade

Keith Wade

Chief Economist & Strategist

Careful what you wish for…
Investors have welcomed the ECB’s plan to launch QE. While we see this benefiting the eurozone economy, primarily through a weaker euro, there are a number of other effects to be aware of. Firstly, QE will exacerbate a shortage of low risk assets in the region as the ECB buys up all the stable, well-rated debt, creating a spill-over effect in international bond markets as yield-seeking investors are forced to look outside the region for investment opportunities. On the positive side, asset-starved investors may be more willing to fund public-private projects across Europe, which could be positive for growth. However, until then, the main effect of QE is likely to be to further increase the burden on savers as interest rates are likely to stay below inflation. Investors should be careful what they wish for. 

Low inflation is only half the story
The new year saw the International Monetary Fund (IMF) downgrade its 2015 global growth forecast to 3.5%, from 3.8% in October. Our own forecasts will be updated next month, but we are likely to take a more optimistic view, with a strong possibility of an upgrade to our growth projections, driven by the benefits we see accruing from the fall in the oil price. Economists have been quick to assess the effect of lower oil prices on inflation, but so far have failed to recognise the benefits to growth.  Although the energy sector will be hit by lower capital expenditure and employment, it is important to remember that the role of the sector in the global recovery has been modest, for example, the energy sector has added 270k jobs since the economy turned in 2009 compared with a 9.15 million total. Consequently, we expect these adverse effects to be offset by the benefits to the non-energy sector of lower energy costs and higher consumer spending. This should result in stronger global growth and lower inflation.