China, Europe chase growth amid global slowdown
BEIJING (AP) – China’s central bank unexpectedly slashed interest rates on Friday to re-energize the world’s No. 2 economy, joining a growing list of major economies that are trying to encourage growth in the face of a global slowdown.
The president of the European Central Bank said Friday he was ready to step up stimulus for the 18-country eurozone economy, where growth is meager and unemployment is soaring. And Japan’s government last week delayed a tax increase after the country slipped back into recession. Japan’s central bank late last month increased its purchases of government bonds and other assets to try to revive growth.
News of China’s actions and the ECB’s hints of further stimulus triggered a surge in stock markets, particularly in Europe. Germany’s DAX rose 2.6 percent, while the Dow Jones industrial average rose 0.5 percent to close at a record high. Asian stocks had closed before the Chinese announcements.
Friday’s moves highlighted an increasing divide in the global economy. The United States is showing signs of steady growth, prompting the Federal Reserve to rein in its stimulus efforts.
So far, the US has escaped any drag from the slowdown overseas. Fed policymakers said at a meeting last month that the impact on the US would be “quite limited.”
Jay Bryson, a global economist at Wells Fargo Securities, said the US is “relatively insulated” from overseas developments. Exports are a smaller source of growth than in other developed nations and many major employers, such as health care and education providers, are largely unaffected by overseas activity.
The slowdown in global growth is becoming an increasing concern for policymakers. Japan confirmed this week that it has fallen back into recession and will delay a tax increase to help consumer spending.
In Europe, it is not only weak growth but also the low inflation rate that is worrying the ECB. Low inflation or an outright drop in prices can weaken an economy further by encouraging delays in spending and investment. The economy of the 18-country eurozone grew by a scant 0.2 percent in the third quarter compared with the previous three months.
As indicators for the eurozone and global economy disappoint, ECB president Mario Draghi was firm in his message: ”We will do what we must to raise inflation and inflation expectations as fast as possible,” he said in a speech in Frankfurt.
Of major economies, only the US is considering raising interest rates. The Federal Reserve only recently ended a massive bond-buying program that helped reduce market interest rates because the economy is strengthening.
But the prospect of higher rates in the US is exposing the country to a potentially painful rise in the dollar – currencies tend to strengthen with higher rates. The dollar hit a seven-year high against the yen, and jumped almost one percent against the euro on Friday. A stronger dollar makes it tougher for US exporters to sell their goods internationally.