When the European Central Bank announced that it was launching a bond purchasing program on January 22, the world stock markets took off. Indices across the globe shot higher as the ECB entered its own version of Quantitative Easing, much like the one used by the U.S. Federal Reserve from 2008 through 2014.
Before investors celebrate too much and think this is the end of any possible recession in Europe, they should look at the recent QE1, QE2 and QE3 that the Fed implemented. Without looking at stats or a chart, most analysts would say that the QE program was successful. When the first round of stimulus was announced in the fourth quarter of 2008, the GDP Growth Rate in the U.S. was -8.2%. One year later, in the fourth quarter of 2009, the growth rate was at +3.9%. Most people would consider that a success.
After a successful turnaround and with the GDP growth rate changing so drastically in one year, the growth stalled. From Q4 2009 to Q4 2010, the growth rate went sideways and ended up at 2.5% in Q4 2010. During the fourth quarter that year, the Fed announced a second round of quantitative easing (QE2). At the end of one year of QE2, the GDP growth rate was up to 4.6% in Q4 2011. Once again the stimulus was successful for a year.
Moving ahead to 2012, the economy was once again stalling. The growth rate dipped to 0.1% in Q4 2012, but that is when the Fed stepped in again and launched QE3 on September 13, 2012. Not quite during the fourth quarter, but close enough. Once again it was successful for about a year as the GDP growth rate hit 4.5% in Q3 2013 and came in at 3.5% in Q4.
In June 2o13, the Fed announced a tapering off of some of its bond purchases. That did not go over well as the GDP growth rate dropped and for the first quarter of 2014, the growth rate fell to -2.1%.
So what can the ECB learn from all of this? First, each round of stimulus only seemed to be good for about a year. Secondly, they better be very tactical about how they taper their purchases as well as how they announce the tapering. Any surprises could strike fear in investors and send the stock markets tumbling.
One other thing to consider here is that the ECB covers a collection of countries, each with their own economy and each with their own financial authorities. Just look at what the Swiss National Bank did recently if you need to know how one differing opinion can impact a policy. When the U.S. Federal Reserve used quantitative easing, it did so with complete control over the banking system and they did it with economy to focus on.
The point being that the ECB’s quantitative easing plan may not be as successful as the one’s in the U.S.
Rick Pendergraft
Investment Analyst
HedgeCoVest
