QE to boost confidence?

Increasingly businessmen and politicians cite confidence as the critical factor in getting growth moving.

Recent results from Tesco and Sainsbury’s and the announcement of a 1.7% fall in consumer spending in Q2 year-on-year highlight the lack of discretionary income consumers have to spend. Shoppers have for some time been cutting out credit card impulse spending with the Prime Minister rightly retracting his credit card spending exhortation from his conference speech.

The plunge in confidence during the summer has led JGFR to believe that new stimulus measures needed to be taken.

Yesterday’s announcement of a £75 million increase in the BOE’s asset purchase facility – known as quantitative easing (QE)- will help – with investor confidence boosted as all the major FTSE indices closed higher on the day. Its success will depend on how much flows into the general economy and is not hoarded by the banks.

The £200 billion initial amount of QE helped to boost the issue of corporate bonds, equities and increase asset prices while enabling corporates to reduce bank debt and helped the banks to improve their capital and funding positions

To further boost activity the Chancellor has announced a policy of credit easing – the purchase of non-government debt assets such as corporate bonds and securitised loans to small and medium sized businesses by The Treasury – in the coming months.

Today’s credit downgrade of a number of UK banks and building societies will force them to focus on capital retention and cash hoarding rather than lending – making the increased amount of QE and of the Chancellor’s credit easing announcement this week very timely.

More than in 2008 this is a European debt crisis and events in Europe will have a much greater impact on the depth of recession that appears increasingly inevitable in the coming months.

Will the increase in QE boost consumer confidence? – possibly in the short term, but much will depend on events in Europe – especially in Germany.