Global economy may lack reinforcements
WASHINGTON — Eight years after the financial crisis, the world is coming to grips with an unpleasant realization: Serious weaknesses still plague the global economy, and emergency help may not be on the way.
Sinking stock prices, flat inflation and the bizarre phenomenon of negative interest rates have coupled with a downturn in emerging markets to raise worries that the economy is being stalked by threats that central banks — the saviors during the crisis — may struggle to cope with.
Meanwhile, commercial banks are again a source of concern, especially in Europe. Banks were the epicenter of the 20072009 crisis, which started over excessive loans to homeowners with shaky credit in the U.S. and then swept the globe into recession.
Some of the recent tumult may be an overreaction by investors. And the rock-bottom interest rates are partly a result of easy money policies by central banks doing their best to stimulate growth.
Unemployment is low in several major economies, 4.9 percent in the United States and 4.5 percent in Germany. The IMF forecasts growth picking up from 3.1 percent last year to 3.4 percent this year.
But that’s still far short of the 5.1 percent growth in 2007, before the crisis. The realization is dawning that growth may continue to disappoint and that recent turmoil may be more than just normal market volatility.
Though stocks rose Tuesday on Wall Street, the S&P 500 index is still down about 8 percent for the year.
In Japan, the yield on 10year bonds briefly turned negative, meaning bondholders were willing to pay the government for the privilege of being its creditor — for years. In the U.S., long-term market rates are sliding again, even though the Federal Reserve has begun pushing them higher.
That’s alarming because such low or negative rates are way out the ordinary. For one thing, they suggest investors don’t expect much economic growth.
Here are some of the risks that markets have been waking up to.
China: A sharp slowdown in China threatens to remove a pillar of global growth. Slackening demand for raw materials there is hitting producers of oil and metals in other countries. Energy exporter Russia, for instance, slid into recession, and its currency has plunged.
Emerging markets, submerging: Money is flowing out of so-called emerging markets like Brazil, Russia, South Africa and Turkey. Investors pulled $735 billion out of such countries in 2015 — the first year of net outflows since 1988, according to the Institute of International Finance.
And emerging markets aren’t so emerging anymore: they provide 70 percent of expected global growth.
Central banks led by the U.S. Fed responded to the global recession by slashing interest rates and printing money. That encouraged investors in search of higher returns to place their money in emerging markets.
Now the Fed is trying to push up its interest rates, and those flows have gone into reverse.
Uncle Sam: The other pillar of the global economy besides China, the U.S., is also now showing signs of weakness. Maybe not a recession, yet. But growth was a weak 0.7 percent an- nually during the fourth quarter.
Though unemployment has dropped, wages have not recovered quickly, and companies appear unsettled by the global jitters.
A rising dollar — a side effect of expected Fed interest rate increases — could hurt exporters. That’s one reason the Fed may in fact hold off raising rates again soon.
Banks: Banks stocks have been plunging in the U.S. and Europe.
In the U.S., low oil prices may mean companies in- volved in expensive drilling and extraction will be unable to repay loans made to dig wells that are no longer profitable.
Return-free risk: Low rates help people pay mortgages and buy cars. But there’s some concern that they suppress spending by savers, and may steer investment to less productive uses
Out of bullets? With interest rates below zero in some cases, it’s much harder for central banks to apply more stimulus if it is needed.