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 In a world preoccupied by geopolitical crises - from Ukraine, Iraq
and Gaza to the Ebola outbreak in West Africa - the global economy
has taken something of a back seat. But there are increasing signs
it is in trouble despite being awash with cash from record low
interest rates.
Many policymakers across the world would like to move away from this
ultra-loose monetary policy, which they introduced to drag their
countries out of the financial crisis. But the economies are not
playing ball.
Essentially, the economic doldrums have pushed back the time when
central banks can start the process of normalizing monetary policy.
Indeed, in many places it is more likely that central banks will
loosen more than pull in.
Take China. Data in July showed cash flowing into the economy
plunging to a near six-year low. The housing sector, around 15
percent of the world's second largest economy, is also faltering.
So although overall growth projections for the year remain roughly
on track, the latest data has brought the potential for looser
Chinese monetary policy.
"The shrinking amount of cash flowing into the economy will harm
economic growth," Chen Dongqi, deputy chief at the government
think-tank Academy of Macroeconomics Research, told Reuters. "The
window has been opened for cutting interest rates and the reserve
requirement ratio."
In a similar vein, the issue in the moribund euro zone is not one of
reining in monetary largesse but of whether the European Central
Bank should extend it by buying government bonds in a quantitative
easing program.
The bank has already thrown more than 1 trillion euros ($1.34
trillion) into the economy, much of it repaid, and is poised to
inject up to another 1 trillion euros if necessary.
Yet there was no growth across the 18-country bloc in the second
quarter and inflation is running at a deflation-threatening 0.4
percent.
"The risks surrounding the economic outlook for the euro area remain
on the downside," ECB President Mario Draghi said earlier in the
month.
PILLARS OF SALT
Jacob Funk Kirkegaard, a fellow at the Petersen Institute of
International Economics, reckons that the main problem facing
central banks is that the pillars of world economic growth are not
level and that economies are not working together.
"There is no country (now) to pick up the slack," Kirkegaard said.
"From the perspective of the U.S. consumer coming to the rescue of
global demand, forget about it."
That was underlined by the latest U.S. jobs data, which showed
steady job creation but flat wages in the private sector and little
improvement in long-term unemployment.
Along with an economy expanding at only a modest rate, this has all
been enough to persuade Federal Reserve chief Janet Yellen to lower
expectations for a rate hike until hiring and wage data show the
effects of the financial crisis are "completely gone."
Britain, the fastest-growing Group of Seven economy this year
(albeit from a low base), is in a similar place. Minutes of the
central bank's last meeting showed the first split vote on interest
rates since 2011.
That underlined the desire of some to start hiking now.
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But the meeting took place before data showed average wages in
Britain falling for the first time in five years, inflation dropping
and employment growing more slowly.
Bank of England Governor Mark Carney responded to the wages data by
saying that the bank would want to be confident that wage growth was
sustainable before raising rates, even though it was not necessary
for them to be growing faster than inflation.
Expectations for the BoE's first hike since the financial crisis
have been gyrating since then but generally are further back than
before.
SUMMER DOLDRUMS?
Draghi and Yellen will be among the central bankers gathering in
Jackson Hole, Wyoming, this week for an annual symposium. They may
be at pains to explain whether what is happening in the global
economy is sustained trouble that many share, or just specific
glitches.
Japan, for example, suffered its biggest contraction since March
2011 in the second quarter, falling at an annualized 6.8 percent.
But it is hoping it was mainly due to an April 1 sales tax hike that
hit household spending.
Similarly, some of Britain's falling wages can be tracked back to
comparisons with a year earlier when they boomed after a cut in the
top tax rate. That impact will disappear.
But the G7 as a group is growing well below trend. The United
States, Germany, Japan, France, Britain, Italy and Canada averaged
growth of just over 2 percent a year between 1981 and 2013. The
projection for this year is less than 1.5 percent.
And that is before any potential longer-term impact from Russia
sanctions, disrupted Middle East oil flows or other geopolitical
pressure.
Many policymakers, including Carney and Draghi, have acknowledged
that a lot of what is happening is out of their control.
"Heightened geopolitical risks, as well as developments in emerging
market economies and global financial markets, may have the
potential to affect economic conditions negatively, including
through effects on energy prices and global demand for euro area
products," Draghi said earlier in the month.
There has been little so far on the horizon to change this.
(1 US dollar = 0.7489 euro)
(Additional reporting by Howard Schneider in Washington, Paul Carrel
in Frankfurt and Xiaoyi Shao and Koh Gui Qing in Beijing; editing by
Anna Willard)
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