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Summary of FLASH MARKETS ECONOMIC RESEARCH (No. 680, September 11, 2014)

Core Content

This document discusses the dynamics of global liquidity and its implications for global monetary base and nominal GDP growth. It evaluates the factors that are contributing to the growth or contraction of global liquidity and presents a worst-case scenario for its future trajectory.

Main Points

Global Liquidity Growth Drivers

• Expansionary monetary policies in OECD countries (United States, United Kingdom, euro zone, Japan) are a major source of liquidity.
• Accumulation of foreign exchange reserves in emerging and oil-exporting countries (excluding Russia) also contributes to liquidity growth.

Factors Contributing to Monetary Contraction

• End of quantitative easing in the U.S. and U.K. due to improved economic conditions.
• Increased flexibility in China's exchange-rate regime, leading to RMB appreciation and reduced reserve accumulation.
• Weakening of emerging countries' exchange rates (excluding China and Russia) due to economic slowdowns and reduced external surpluses, decreasing the need to accumulate reserves.
• Capital outflows in Russia, which have reduced its foreign exchange reserves.

Factors Contributing to Monetary Expansion

• Need for more expansionary monetary policy in Japan, driven by weak economic performance and deflationary pressures.
• Euro zone's expansionary monetary policy to address weak growth and inflation expectations.
• Persistent external surpluses in OPEC countries, supported by high oil prices and Saudi Arabia's supply control, leading to continued foreign exchange reserve accumulation.

Key Information

Current Liquidity Trends

• Global liquidity is still growing, though at a slower pace than previously.
• The global monetary base is growing faster than global GDP, supporting lower long-term interest rates and higher asset prices.

Worst-Case Scenario for Global Liquidity

• Monetary base growth would stabilize in the U.S. and U.K.
• Foreign exchange reserves would remain stable in China, emerging countries, and Russia.
• Japan's monetary base would grow by approximately USD 800 billion per year.
• Euro zone's monetary base would grow by EUR 500 billion per year.
• OPEC's foreign exchange reserves would increase by USD 100 billion per year.
• Total global monetary base growth would be USD 1,550 billion per year, equivalent to 8% annual growth.
• Nominal global GDP growth is expected to be 5.5% per year, meaning the monetary base-to-GDP ratio would still increase.

Implications

• Even in the worst-case scenario, global liquidity remains abundant relative to GDP, suggesting that global financial conditions are unlikely to tighten significantly.
• The fall in long-term interest rates and increase in asset prices are attributed to the current level of liquidity.
• The shift in monetary policy in major economies and the evolution of exchange rates in emerging markets will continue to influence global liquidity dynamics.

Conclusion

The document concludes that while there are signs of slowing liquidity growth, the global monetary base is still expected to grow at a moderate rate. This implies that global liquidity remains abundant and that the impact on financial markets is likely to be limited in the short to medium term, despite the end of some expansionary policies.

Disclaimer

• The document is confidential and intended for exclusive use by the addressees.
• It does not constitute an independent investment research report.
• No liability is accepted by Natixis or its affiliates for any financial loss or decisions made based on the information in this document.
• The information is based on public data and not subject to updates after the initial date.
• The document is not a recommendation but rather informational in nature.
• Legal and compliance restrictions apply depending on the jurisdiction.