From The Financial Times
March 8, 2019
The world’s leading central banks were heading for the exit from crisis-era stimulus policies as recently as December. But in just a few weeks, global monetary policy has gone into reverse, with the Federal Reserve putting rate rises on hold and peers — from the Bank of England to the Reserve Bank of Australia — following its dovish lead.
This week’s decision by the European Central Bank to make a new offer of cheap loans to eurozone banks, and signal that interest rates would stay at record lows for longer, completed the transformation.
But as ECB president Mario Draghi admitted, central banks cannot solve the underlying problem: “pervasive uncertainty” that has hit confidence and left policymakers groping in the dark.
Central banks are doing their best to respond to a rapidly worsening outlook for global growth. This week, the OECD club of mostly rich nations cut its growth forecasts for almost every large economy, warning that the global expansion was losing steam as a result of China’s slowdown, policy uncertainty in Europe and the risk of further trade conflicts.
On Friday, US data showed jobs growth almost stalled in February, fuelling fears that recent signs of weakness in the world’s largest economy might turn into a more persistent slowdown. Chinese data for the same month showed a steep decline in trade, with both exports and imports contracting.
Some economists are encouraged by the ECB’s unexpectedly swift action.
Florian Hense, economist at Berenberg, said the shift in stance by central banks had been “one of the big factors that needed to be met as a condition to get the global expansion back on track”, adding that the risk of overly tight monetary policy could now be “taken out of the equation”.
Lydia Boussour, senior US economist at the consultancy Oxford Economics, said: “Monetary policy may be more of a cushion to growth than previously thought.”
The dovish tilt by the Fed, in particular, has had a big effect on financial markets, with investors paring back their expectations of rate rises and share prices recovering from the sharp falls they suffered towards the end of last year — although bond markets tell a slightly different story.
However, the early action from the ECB rattled investors because it suggested policymakers were acutely worried by external risks.
Mr Draghi took a sanguine view of domestic developments, noting on Thursday that nominal wage growth was picking up, labour markets improving and consumption “by and large in good shape”. The ECB’s downgrade for 2019 was largely due to the fall in German and Italian output and staff expected growth to pick up this year, with the outlook for 2020 almost unchanged.
Yet even after a downgrade and policy action, the ECB warned the risks were still on the downside. This is highly unusual — and has unsettled markets.
“We usually say when we take some policy actions, the risks get back into balance,” Mr Draghi said. But now, while the ECB could increase the eurozone’s resilience, it was powerless to address the geopolitical risks of trade conflict and a disruptive Brexit, or the uncertainties of Italian politics, which were weighing on business investment.
“If politicians do dumb things that lower trend growth, then there is nothing central banks can do,” said Erik Nielsen, chief economist at UniCredit. “All they can do is ease the pain a little.”
Shweta Singh, economist at the consultancy TS Lombard, said the latest round of cheap loans would ease funding pressures on Spanish and Italian banks and help them to continue lending to the real economy. But it would make little difference if Italian businesses did not want to borrow — the main problem in recent months.
Carsten Brzeski, economist at ING, has observed a similar lack of confidence among the mid-sized German businesses most exposed to the global downturn in trade — and said some were nearing the point at which they would start laying off staff if orders from multinationals did not pick up.
This lack of confidence goes well beyond the eurozone.
In the UK, the looming Brexit deadline has led businesses and households to postpone big financial decisions. The Bank of England has repeatedly warned it could only soften the blow if politicians decided to erect trade barriers that made the country poorer.
Laurence Boone, the OECD’s chief economist, said one of the main reasons for the organisation’s downbeat global outlook was the damping effect on business investment of trade conflicts, which represented “a prolonged change in the certainty multilateral rules were providing and aren’t providing any more”.
Ms Boussour acknowledged that even the US economy — the main anchor for global growth — could be vulnerable to a sharp slowdown in its main trading partners.
The dovish tilt by central banks made a US recession unlikely, she argued, but if global growth did slow abruptly, the “high level of global policy uncertainty could accelerate and amplify the confidence shock and lead to severe pullbacks in consumer spending and investment”.