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Is monetary expansion fuelled by Quantitative Easing boosting the construction sector in the United Kingdom?
The Bank of England has flooded commercial banks with money in the aftermath of the financial crisis. The aim of its policy has been to inject money into the economic system and consequently increase investment and consumer spending. How does monetary expansion work?
Since March 2009, the bank has bought government debt from pension funds, commercial banks, insurance companies and non-financial firms. Commercial banks selling their government debt to the central bank in exchange for cash should be depositing more money into their own reserves. This extra capital should then be used to finance economic activity such as lending to small- and medium-sized enterprises (SMEs). So far, the Bank of England has electronically created or printed £375bn ($594.2bn) by increasing its liabilities.
QE may be lubricating the financial sector but the recovery of the construction sector, which is crucial for overall economic recovery, remains fitful and fragile. According to the Office for National Statistics (ONS), the value of construction output in Great Britain contracted with a compound annual rate of change (CARC) of -0.6% since the start of the QE program in March 2009. The lagged effect of QE for the construction sector is disappointing. An excessive focus on providing liquidity to the financial sector has not served the construction sector as was initially planned. Clearly, monetary expansion is not doing the job.
For more information, please check out the MarketLine Construction Materials Industry.