Cen­tral banks fail to steer world econ­omy out of rout

The Pak Banker - - FRONT PAGE -

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.

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.

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.

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. 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.

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