Flood of Central Bank Moves Can't Lift World Out of Rut

OECD's Gurria: Fed Will Hold Position
  • Global growth this year seen as about the same as last year
  • Returns to monetary stimulus `diminishing,' Pimco adviser says

Central bankers have managed to steer the world economy clear of a recession while leaving it stuck in the same rut that led to its troubles in the first place.

A torrent of monetary stimulus in recent weeks helped spark a turnaround in financial markets by assuaging investors’ fears of an impending global downturn. Yet it did little to lift hopes among economists of a stronger pickup that would put growth on a more solid footing.

“The global economy will continue to muddle along,” said Charles Collyns, chief economist for the Institute of International Finance in Washington and a former U.S. Treasury official. He sees growth this year of about 2.5 percent -- the same as in 2015 and well short of the 3.7 percent average over the five years leading up to the global financial crisis.

The concern is that policy makers are mainly putting off the pain for now while adding to the difficulties they’ll face later. What’s more, the meager growth they’ve generated means a downside shock still threatens to sink the world into recession, with central bankers already pressing against the limits of their powers.

“The returns to monetary easing are still positive, but they’re diminishing,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.

Washington Meetings

The lackluster world economy is expected to top the agenda when central bankers and finance ministers gather in Washington next month for the spring meetings of the International Monetary Fund and World Bank, with Group of 20 officials also holding talks. IMF officials have said they expect to downgrade their assessment of this year’s outlook and have urged policy makers to do whatever they can to spur growth.

Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said “easy fixes” are no longer an option, and governments need to focus on boosting demand to better address global worries about deflation. “Investment is about half the speed it should be growing,” Gurria said Tuesday on Bloomberg Television.

Still, muddling through looks pretty good compared with the nasty combination of events that investors dreaded was in store earlier this year: A Chinese hard landing and steep currency devaluation, a U.S. recession and a global downturn comparable to 2008 and 2009.

‘Crazy Stuff’

While many economists thought such fears wildly exaggerated -- “all that was crazy stuff,” former IMF chief economist Olivier Blanchard said -- they were worried that the pessimism could feed back into the economy by turning consumers and companies more cautious with their cash.

Central bankers have managed to short-circuit that feedback loop, at least for now.

China denied it planned a big yuan devaluation and pledged to do more to boost its economy. European Central Bank President Mario Draghi rolled out a multi-pronged stimulus package that helped restore some investor faith in policy makers’ powers after a botched attempt by Bank of Japan Governor Haruhiko Kuroda called them into question.

And Federal Reserve Chair Janet Yellen and her colleagues did their part by scaling back the number of rate increases they expect to carry out this year, pointing to the risks posed by “global economic and financial developments.” The commodity markets also cooperated, as a rebound in oil prices helped allay concerns that world demand for crude -- and for everything else -- was collapsing.

“We are at an inflection point on inflation,” said Allen Sinai, chief executive officer of Decision Economics Inc. in New York. “The risks are shifting from downside surprises on inflation to watching out for upside surprises.”

He sees the U.S., particularly American consumers, leading the way for an eventual improvement in global growth. U.S. households are benefiting from a tightening jobs market that is starting to push up wages of some workers.

Risks remain, though -- some of officials’ own making.

China has been propping up a yuan that IHS Inc. chief economist Nariman Behravesh estimates is 15 to 20 percent overvalued, meaning that dangers of a devaluation haven’t disappeared.

The country’s short-term efforts are contributing little to tackling its long-run problem of too much leverage. Moody’s Investors Service highlighted China’s surging debt burden in lowering the nation’s credit-rating outlook to negative from stable earlier this month.

Fed Tightening

In the U.S., the Fed’s move to roll back its planned rate increases could mean that it will have to speed them up later if inflation picks up faster than the central bank expects, said Peter Hooper, chief economist for Deutsche Bank Securities in New York.

That risks sparking renewed turmoil in financial markets by highlighting the Fed’s policy divergence with the ultra-easy stances of the ECB and Bank of Japan.

Investors got a taste of that in recent days after a series of Fed presidents stressed the need for the central bank to press ahead with interest-rate increases, knocking stock prices off their highs for the year in the process. Yellen said in a speech Tuesday that it’s appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.

History Repeated

“What happened in the first quarter is essentially a microcosm of what we expect to play out in markets over the next six to nine months,” said Ajay Rajadhyaksha, head of macro research in New York for Barclays Plc’s investment-banking unit, referring to the wild price swings in the early months of 2015.

He sees markets caught in a tug-of-war between slow growth and high valuations on one side and central bank stimulus on the other.

Japan isn’t rushing toward more fiscal stimulus. The best way to boost the economy is to quickly implement the existing budget for the next fiscal year, Prime Minister Shinzo Abe said Tuesday, rejecting speculation he would announce a supplementary spending package. Abe reiterated that Japan will go ahead with a plan to increase the sales tax next year, barring a major economic shock.

Political risks also loom large, including the current leadership turmoil in Brazil, the U.K.’s June vote over its membership in the European Union and the U.S. presidential election in November.

Pimco’s Fels summed up the outlook for this year: “We’ll continue to muddle through but the going gets tougher.”

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