Steepest Global Slide Since Recession Pushes Rate Cuts
Monetary-policy makers from around the world are being pressed into action to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009.
On the heels of a June 5 interest-rate cut by Australia, China yesterday unveiled its first reduction in borrowing costs in more than three years to counter what Premier Wen Jiabao has called increasing downward economic pressure.
European Central Bank President Mario Draghi left the door open at a June 6 press conference to a rate cut, while highlighting the limitations of the ECB’s tools in countering the region’s financial turmoil.
And Federal Reserve Chairman Ben S. Bernanke told a Congressional committee yesterday that policy makers will discuss later this month whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.”
“Across the board, we’re seeing the central banks being galvanized into action by weak growth around the world,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, at IHS Inc.
The global economy will grow 1.7 percent this quarter and 2 percent next, after expanding at an annual pace of 2.5 percent in the final quarter of 2011, economists at JPMorgan Chase & Co. in New York said in a June 1 report. The result is “an extended soft patch as weak as anything experienced in the past two decades outside the Great Recession,” they wrote.
Economists have trimmed their forecasts for global growth for this year and next. They now see the world economy expanding by 3.2 percent in 2012 and 3.7 percent in 2013, down from 3.4 percent and 3.9 percent in May, according to the median forecast of more than 25 economists surveyed from June 1 to June 5.
U.S. stock markets pared gains yesterday after Bernanke refrained from explicitly pledging further steps in testimony before the Joint Economic Committee in Washington.
European stocks retreated today, with the Stoxx Europe 600 Index (SXXP) sliding 0.7 percent to 240.96 at 2:28 p.m. in London, after German exports slumped more than forecast and Fitch Ratings cut Spain’s credit rating.
The Standard & Poor’s 500 Index (SPX) fell 2.39 points to 1,312.6 at 10:30 a.m. in New York, still higher than its 1,278.04 finish a week ago on June 1.
David Hensley, director of global economics at JPMorgan in New York, looks for a “loosely coordinated round of global policy easing,” with the Fed moving at its June 19-20 meeting, followed by an ECB rate cut in July and further steps by the Bank of Japan and the Bank of England to boost growth.
He predicts the Fed will extend its pledge to keep its benchmark rate at “exceptionally low levels” into 2015 and will continue its Operation Twist program to bring down long- term rates beyond the scheduled completion this month.
European Central Bank Governing Council member Ewald Nowotny said today that while the ECB still has tools to help Europe’s economy withstand the crisis it won’t act in isolation from other European institutions.
“Rate policy and liquidity must be seen in connection with measures of European financial policy,” Nowotny said.
The Fed has held the target for the federal funds rate at a record low between zero and 0.25 percent since December 2008. The ECB returned its benchmark rate to a record low in December.
Emerging markets probably will join in, with both Brazil and India reducing rates further in the coming months, according to Behravesh. Brazil has cut borrowing costs by four percentage points to a record low 8.5 percent since August. India’s monetary authority reduced its repurchase rate by 50 basis points to 8 percent in April and has trimmed its reserve ratio by 125 basis points this year to 4.75 percent.
China coupled its rate cut -- it lowered the benchmark one- year lending rate to 6.31 percent from 6.56 percent -- with moves to give banks extra freedom to set the amounts they pay on deposits and charge for loans.
“This is a very positive pro-market move that is quite bullish,” Donald Straszheim, senior managing director of New York-based ISI Group, said in a note to clients.
Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. who has worked for the ECB, said China’s move is “the beginning of a rate-cut cycle” and predicted “at least one more reduction this year.
Wen called for steps to stabilize growth and offset downward pressure on the economy in a speech last month in the southern Chinese province of Hunan, according to the Hunan Daily newspaper.
Industrial output in China, the world’s biggest producer of steel and cement, probably rose 9.8 percent last month from a year earlier, close to the slowest pace in three years, according to the median estimate in a Bloomberg News survey of 27 economists ahead of a report due June 9.
Fixed-asset investment may have grown at a slower pace in the first five months, with Caterpillar Inc. (CAT), the world’s largest maker of construction and mining equipment, among companies reporting a slowdown in sales.
In spite of decelerating growth, China had held off from cutting rates because it was worried that such steps would push inflation back up and reflate a housing bubble, Hensley said.
South Korea today kept its benchmark unchanged, citing elevated inflation expectations even while flagging that risks to growth are increasing. Bank of Korea Governor Kim Choong Soo told reporters in Seoul that China’s move will have an ‘‘indirect” impact on his nation’s economy, Asia’s fourth largest.
The ECB also has been reticent about taking further action to tackle a spreading recession and financial-market instability in the 17-nation euro area. Having already cut its benchmark rate to 1 percent and injected more than 1 trillion euros ($1.3 trillion) of three-year loans into the banking system, the ECB is reluctant to do more heavy lifting as governments procrastinate over the reforms it deems necessary to put the monetary union on a sustainable footing.
Draghi said the ECB stands “ready to act” should the sovereign-debt crisis damp the euro-area economy further, and “a few” Governing Council members pushed for a rate reduction at the June 6 policy meeting.
Still, “we have to be aware that the context is one where you have liquidity constraints and tensions in financial markets,” he said after keeping rates on hold. “Price signals in this situation have a relatively limited immediate effect.”
Draghi also cast doubt on the impact of further longer-term refinancing operations, or LTROs, saying the full effects of previous loans have yet to be felt.
Former U.S. Treasury Secretary Lawrence Summers said the ECB and the region’s governments must do more to restore confidence amid the euro-area debt crisis.
“A central bank wants to bend over backwards to be reassuring, to reassure people that liquidity is there,” the Harvard University professor told Bloomberg Television on June 6. “The overwhelming imperative of the situation is to instill more confidence than there is today.”
While the euro area narrowly avoided falling into a recession in the first quarter, unemployment was a record 11 percent in March and April and economic confidence is at the lowest since 2009. Behravesh said the mounting gloom will push the ECB into cutting interest rates next month.
Debate at Fed
In the U.S., Fed officials are divided over whether the central bank should take additional steps to support an economy that is being buffeted by the financial strains coming out of Europe. The next meeting of the policy-making Federal Open Market Committee will come just days after Greece holds elections on June 17. The results could hand power to parties that oppose the terms of the nation’s rescue package, precipitating its exit from the monetary union.
More easing isn’t necessary, regional Fed Presidents Richard Fisher in Dallas and James Bullard in St. Louis said in separate speeches June 5. Additional stimulus would be “pushing on a string,” Fisher said, while Bullard said there’s time to assess the economy and no need to change policy now. Neither is currently a voting member of the FOMC.
Three of their colleagues, led by Fed Vice Chairman Janet Yellen, suggested on June 6 that conditions may warrant some action.
“Scope remains for the FOMC to provide further policy accommodation,” Yellen said in a Boston speech. “It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.”
Bernanke, for his part, didn’t tip his hand during his testimony yesterday. Instead, he outlined the course of discussion he foresees at the next meeting of the FOMC.
“The main question we have to address has to do with the likely strength of the economy,” Bernanke said. “Will there be enough growth going forward to make material progress on the unemployment rate?”
U.S. employers added 69,000 workers last month, the fewest in a year, while the jobless rate rose to 8.2 percent from 8.1 percent in April.
AT&T Inc. (T) Chief Executive Officer Randall Stephenson said June 1 that smaller companies have reduced hiring as business conditions get “tighter and tighter,” cutting demand for the largest U.S. phone company’s services.
With growth slowing around the world, “the central banks are in motion,” Hensley said. “Some of the motion is action. Some of it is rhetoric.”
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