What have a trillion euros done for the economic outlook? Not much yet
The trillion euro sugar rush that made Q1 the best start to the year for global stocks in more than a decade has already worn off, but what is most striking is not how quickly it ended. It’s how little the economic outlook has changed.
Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters, who generally are the most bullish of the lot with or without wads of cheap money.
An analysis of Reuters Polls over the past three months, starting just before the European Central Bank made the first of two gargantuan injections of cheap three-year money into the banking system, reveals what many have fretted might happen.
Derived from professional market forecasters and economists, they showed that the cash would probably do a lot to push up asset prices in the short term but do little to help a stalled euro zone economy with rising unemployment.
The consensus for Q1 euro zone GDP has stagnated at a quarterly contraction of 0.2 percent in the past three monthly Reuters polls, starting from the December poll, taken before the ECB’s first of two long-term refinancing operations (LTROs).
Over the same period, the outlook for 2012 growth as a whole deteriorated from none at all to a mild 0.3 percent contraction.
Frankfurt’s DAX had its best Q1 since 1998, up a staggering 18 percent. European shares more broadly rose 7 percent – still, the kind of return an investor might hope to get during a good year, not three months.
So it’s no surprise that the Reuters Poll consensus for how the DAX will close the year rose sharply over that time, to 7,250, up from 6,500 predicted before the first LTRO.
Meanwhile, the German economy at best stagnated and Greece sank further into a depression.
The outlook for the U.S., which was slowly pulling ahead of the rest of the developed world, hasn’t changed much over the last three months either. GDP growth is set to average 2.2 percent this year, up from 2.1 percent in the December poll.
Of course, forecasts for the S&P 500 were jacked up mightily to 1,427 from 1,340. It rose 12 percent in Q1, also the best start to the year since boom times in 1998.
If those forecasts are even close to being right – and they have been fairly accurate lately – that means this stock market rally is pretty much over.
And we’ve been here before.
Turn the clock back to Federal Reserve Chairman Ben Bernanke’s famous Jackson Hole speech in August 2010, when he telegraphed to the markets his intention to do a second round of massive government bond purchases, known as QE2, sending asset prices to the moon.
Over the next three months, forecasters downgraded their average U.S. GDP forecasts for the following year to 2.3 percent from 2.7 percent. But they projected a 100 point gain in the S&P 500 in the final six months of 2011 to end the year at 1,325.
Flooding the financial markets with cash raises asset price expectations along with asset prices themselves but hasn’t done anything to convince forecasters we poll that the economy will also do better. So far, the data are proving them right.
With the stock market rally petering out and disappointing employment growth, can it be any surprise that Wall Street is gunning for another round of QE?
(With reporting and analysis by Sumanta Dey in Bangalore)