After an incredibly difficult start to the year, global equity market performance picked up substantially during March.
As we reach the end of the first quarter all of the key equity market indices are still in negative territory, but the numbers are a lot less negative than they were towards the end of February. Year to date, the US S&P 500 is down just 3.3%; the German Dax is down 6.9%; the UK FTSE is down 7.8%; and the Iseq has shed 6.8%.
This represents a good performance given the intense uncertainty that has prevailed in relation to China and the emerging markets in particular, but also in relation to the moribund eurozone economy.
What changed during March? In some ways not a lot, but in other ways the markets received a bit more clarity on the policy environment. In early March the European Central Bank (ECB) shaved interest rates to bizarre levels and increased the monthly level of bond buying, or quantitative easing, by €20bn.
This sent out a further strong signal that the ECB remains committed to doing whatever it needs to, in order to drag the eurozone out of its low growth, deflationary spiral.
While the markets are somewhat more relaxed, the reality, of course, is that the eurozone is still lacking any real economic momentum, and with inflation in February at a negative 0.2%, the ECB is still totally failing in its mandate to achieve an inflation rate of 2% or slightly lower.
In the US, policy has also become a bit clearer, although there are still conflicting signals emerging. When the Federal Reserve moved away from its prolonged zero interest rate policy last December, it suggested that rates would be increased four times during 2016 by a total of 1%.
The rate increase, itself, seemed a tad curious when it was delivered in December given the intense global uncertainties that were rapidly emerging, most notably China. The 1% guidance for 2016 was even more curious.
However, this week the head of the Federal Reserve, Janet Yellen, dampened rate expectations by suggesting that the global economic outlook is now a source of concern for US policy makers, as well it should.
The view now is that rates will rise by no more than 0.5% during 2016. This change in tone has pushed the dollar lower against the euro in recent days, and indeed the euro is also pushing higher against sterling.
Not helpful to Ireland’s cause, but there is not a lot that we can do about that. Brexit is becoming an increasing source of concern for the UK currency.
We are living in a strange world where the boundaries of monetary policy are being pushed to the limit through zero or near-zero interest rates and massive quantitative easing programmes in a number of countries.
However, this monetary policy approach is not proving particularly effective, most especially in the eurozone. It is akin to pushing a piece of string.
Of course, the question is how much worse the situation would be if these unorthodox monetary policies were not being pursued. I suspect considerably worse.
In short, the current monetary policy approach could be described as a necessary, but not sufficient, policy approach. The reality, of course, is that way too much emphasis is being placed on monetary policy and the potential effectiveness of fiscal policy is being largely ignored.
In fact, most governments in the developed world are still obsessed with deficit reduction and contractionary fiscal policy.
This approach is not helping growth; it is keeping unemployment high in many countries, and is arguably making a significant contribution to inequality.
The most negative aspect is that this fiscal policy approach is having significant political effects, with the rise of left and right wing radicals in the US and across many European countries.
The recent failure of the Irish government to get re-elected is a case in point. Policy makers will have to persist with very expansionary monetary policies, but inevitably governments will have to start considering expansionary fiscal policy, particularly big capital spending programmes.
This reality will have to be faced sooner rather than later, before too much damage is done.
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