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 Amid a flood of cheap money and a historic experiment with negative
interest rates, households, corporations and banks in the developed
world have turned their backs on borrowing. Credit growth has
flat-lined and an array of metrics indicate the world has become a
more cautious place, potentially upending whatever bang for the buck
central banks might expect.
In the U.S. households are paying down mortgages instead of
borrowing against homes to fund consumption, altering behavior that
arguably helped fuel the 2007 financial crisis but that also
contributed to economic growth. A Chicago Federal Reserve Bank
composite index of household, bank and corporate leverage has been
below average for nearly four years.
European and U.S. companies are socking away cash and the Bank of
Japan's descent into negative rates has yet to boost consumption,
corporate investment, or even faith in an economic rebound.
Even as global liquidity expands, the appetite for it remains
moribund.
“You can’t create demand from thin air. What’s needed is to create
an environment in which companies and households feel confident to
spend,” said a senior Japanese policymaker directly involved in
Group of 20 negotiations that will continue in Washington this week.
“There’s a growing sense globally that monetary policy alone cannot
cure all problems.”
HOW TO INFLATE DEMAND
The policymakers assembled in Washington will be focused on how to
inflate demand. Along with more cautious consumers and companies in
developed nations, China is in retreat and likely to scale down
investment and purchases of raw materials as its economic transition
continues.
The IMF's preferred and oft-repeated solution is for government
spending to pick up the slack, particularly on infrastructure, as
well as for labor market and other reforms that will make economies
grow faster because they are more efficient.
Absent those measures, the economic outlook is likely to remain
mediocre. The IMF cut its growth forecast for the fourth time in a
year.
Central bankers in major economies agree that further policy moves
on their part may have a limited impact, and they appear
increasingly joined at the hip.
Though the Fed began tightening policy in December, its first
interest rate rise in a decade was followed by a renewed sense of
caution about sagging global demand and whether the U.S. policy
could go its own way.
Further rate hikes now appear on hold. The European Central Bank and
Bank of Japan are discussing further monetary easing.
For now, said Adam Posen, president of the Peterson Institute for
International Economics, the U.S. appeared locked into a "slower yet
sustainable" path of 2.0 percent growth. Business investment is
lagging with no expectation of a rapid change, and households have
dialed back in what may be an enduring shift, he said.
Savings rates and household wealth are rising, debt payments as a
percentage of income are falling and consumption growth remains
modest.
"I do think we should entertain (the idea) that this is a
substantial change in household behavior and that means a much less
leveraged consumer than in the past," Posen said.
PRUDENCE IN BERLIN, CAUTION IN BANKS
In the power center of Europe, prudence also rules despite the
European Central Bank's effort to goad more spending.
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German public officials have for several years resisted calls to use
their fiscal power, access to cheap credit, and large international
trade surpluses to boost demand. German corporations are being
stingy as well, increasing corporate savings by more than 15 percent
since 2012, and trimming investment.
The ECB's 1.7 trillion euro program of quantitative easing has
helped buoy the housing market, but has not led to a surge of
consumer spending or business investment to levels that would
increase growth and lower unemployment.
“It is hard to see where the growth in consumption should come
from," said Carsten Brzeski, an economist with ING bank in
Frankfurt, who said corporate and household behavior both reflected
the dim outlook for economic growth.
"Deposits in the corporate sector have increased across the euro
zone despite the low interest rates. They are keeping their money
rather than investing.”
There could be an upside. If companies and households have stocked
ample cash it would provide a buffer against any future downturn and
potentially make the next recession less severe than it otherwise
might have been.
To that extent, slower, more careful growth now may mean a more
stable and less severe business cycle, just the sort of outcome
envisioned in reforms efforts undertaken in the wake of the global
financial crisis of 2007-2009.
The Geneva-based Bank for International Settlements, the central
banks' central bank, has acknowledged that the array of new capital
and leverage requirements imposed on the world's commercial banks in
recent years would come at a cost.
For every extra percentage point of capital banks are forced to
raise, for example, the BIS estimated that economic output would
fall by 0.09 percentage points, with a similar drop associated with
the imposition of limits on leverage.
But the benefits of a more stable financial system would be worth it
in the long run by reducing the risk of even more costly crises, the BIS found, a conclusion shared by the Fed and other major central
banks, and reflected in the stiffening of bank regulatory rules.
With those rules limiting economic growth, and companies and
households also reluctant to spend, the issue under discussion in
Washington is whether the post-crisis mood of caution has become a
risk in itself.
In its annual report on global financial stability on Wednesday, IMF
officials laid out what is needed for a "successful normalization"
of world economic conditions.
At the top of the list?
"Economic risk taking in the systemic advanced economies
rebounds...Private investment increases by 4.0 percent while private
consumption rises by 1.0 percent in fall of the systemic advanced
economies over two years."
(Reporting by Howard Schneider; editing by David Chance)
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