Central banks’ influence finds its limit
Eight years after recession, consumers still not spending
WASHINGTON— The world’s key central banks have worked themselves into contortions to try to rev up economic growth, raise inflation and coax consumers and businesses to borrow and spend more.
They’ve pumped trillions into financial systems and driven interest rates about as low as they can go — even below zero in Europe and Japan. Yet after several years, the results are . . . meh.
As central bankers, including Bank of Canada governor Stephen Poloz, meet for an annual conference in Jackson Hole, Wyo., the global landscape remains bleak. Growth is sluggish. Inflation barely registers. Businesses won’t invest. And consumers remain mostly hunkered down eight years after a financial crisis that jolted central banks to take radical steps in the first place.
Far from stepping up spending, many people and businesses have instead been saving money despite essentially zero interest.
“It’s pushing on a string if you’re trying to get people who are already living in a borderline recession economy, who are already up to their eyeballs in debt, to borrow more,” says Mark Blyth, a professor of international political economy at Brown University.
The central banks’ extraordinary efforts were designed to restore confidence in a banking system that was teetering in 2008, and to counter the deepest recession since the 1930s.
By all accounts, they managed to ease panic and rescue the world’s advanced economies. But the United States, and especially Europe and Japan, haven’t been able to ignite borrowing and spending and restore their economies to full health.
The International Monetary Fund foresees sluggish growth in each economy this year: 2.2 per cent in America, 0.3 per cent in Japan and a collective 1.6 per cent in the 19 coun- tries that use the euro currency.
Consider inflation: The Federal Reserve, the European Central Bank and the Bank of Japan are all aiming at the same target: 2-per-cent inflation. They keep missing. Prices are barely rising in Europe and America.
They’re falling in Japan. Rising prices are important because they get people to spend to avoid having to pay higher prices later and thereby fuel economic growth.
But consumers and businesses aren’t acting as if they expect prices to rise. They’re acting as if hard times, low prices and cheap loans are here to stay.
In the U.S., business investment has fallen for three straight quarters. That’s one reason economic growth has remained subpar since late 2015. U.S. consumers are saving more and charging less on credit cards than they did before the Great Recession.
Still, the Fed may feel confident enough to resume raising rates when it meets next month. Whatever its other problems, the U.S. economy is generating enough jobs — nearly 2.5 million over the past year — to lower the unemployment rate to a healthy 4.9 per cent.
Things look uglier in Europe, where unemployment is stuck at 10.1 per cent. European savers are shrugging off super-low — and even negative — interest rates and still socking money away in the bank.
Some economists warn that easy money is actually causing damage. Unable to earn much on safe investments, some investors are accepting more risk to seek higher returns. Their money can inflate bubbles in real estate and stock prices.
The troubles that ail the world’s biggest economies may be beyond the reach of central banking. They include aging workforces, sluggish worker productivity and a sharp deceleration in China’s economy, which has shaken financial markets and slowed worldwide growth.
“The message is clear,” Scott Minerd, global chief investment officer at Guggenheim Partners, said in a research note. “The current monetary policy regime cannot succeed alone.”