Central banks fail to steer world economy out of rout

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.