Big changes are underway in the United States, as the country gears up to elect a new president, one-third of the Senate, and the entire House of Representatives this November. The outcome will have profound consequences for U.S. economic policy, and thus for the global economy.
As it stands, Hillary Clinton remains the frontrunner for the Democratic nomination, though she has not yet pulled away from her socialist opponent, Sen. Bernie Sanders. The bombastic billionaire Donald Trump is leading the Republican field, followed by firebrand Sen. Ted Cruz of Texas, Sen. Marco Rubio, a talented mainstream conservative from Florida, and, further back, popular Ohio Gov. John Kasich and neurosurgeon Ben Carson.
It is impossible to know whether these early trends will hold through the rest of the primaries, now turning to the South and Midwest. America’s media and political junkies are consumed by the various possibilities. Can Rubio rally a broad coalition, or will Trump win the Republican nomination? Would a Trump nomination help Clinton win the general election?
In fact, many Republicans fear a contest pitting Trump against Clinton. Though Clinton has plenty of weaknesses — voters, especially young people, do not trust her, and she may face legal repercussions for dealing with highly classified information using a private email server when she was secretary of state — the nasty infighting among Republicans may give her a big advantage in November.
Many Republicans believe that Trump’s nomination would cost them the Senate and the White House.
With so much uncertainty, there are a number of directions that U.S. policy could take in the coming years. While a lot of attention has been paid to headline-grabbing issues like immigration and national security, American voters are highly concerned about economic issues — concerns that the leading candidates would address in very different ways.
On trade, Trump’s ideas are dangerous and would reverse decades of beneficial bipartisan American leadership in trade liberalization, with large tariffs on foreign imports, such as from China and Mexico. The other Republican candidates barely discuss the topic.
As for the Democrats, Sanders inveighs against free trade. Clinton has flip-flopped on the issue: She now opposes Canada’s Keystone XL pipeline and the Trans-Pacific Partnership, which she promoted as secretary of state. The risk of a trade war is low, but rising.
Clinton has also inched toward Sanders’s position on financial-system reform, as his attacks on her for taking large donations and speaking fees from Wall Street have clearly struck a chord among young voters. Confronting the big-bank bogeyman has been a centerpiece of Sanders’s campaign; Clinton is now partly echoing his populist anti-bank positions. The Democrats favor loose monetary policy, low interest rates, and a depreciated dollar. Republicans also oppose bailouts, but worry about excessively loose monetary policy and too much discretion for the Federal Reserve outside real emergencies.
These differences will have a far-reaching impact. By appointing a new Fed chair (or reappointing Janet Yellen), and possibly other Fed governors, the next president will have an indirect influence on interest rates, exchange rates, and global financial markets. If inflationary pressures rise — unlikely any time soon, but possible when the global economy gains strength — the Fed’s response will be a key determinant of economic stability.
The candidates also differ enormously in their tax and spending plans — and thus their deficit and debt proposals. Sanders is proposing about $18 trillion of additional spending over the next decade to cover a single-payer health-care system, infrastructure investment, and “free” (that is, taxpayer-paid) tuition at public colleges. During that period, he would impose tax hikes of $6.5 trillion, mostly on the “wealthy.”
The catch: Democrats define “wealthy” as an annual household income above $250,000 — roughly the starting salary of an urban couple in their first jobs after law school. The $11.5 trillion deficit would eventually have to be covered by a gigantic future tax hike. Clinton has similar spending and tax priorities, though with smaller increases.
The Republicans want to lower personal income tax rates and broaden the tax base. They would reduce America’s corporate-tax rate — the highest in the OECD — to a far-more-competitive level. Some propose replacing the current personal and corporate income taxes with a flat tax on consumption. The Republicans would slow growth in spending in most areas, while increasing defense spending.
Whereas Trump proposes an outsize $10 trillion in tax cuts and Cruz about $9 trillion (statically scored), Rubio and Kasich have offered more economically and arithmetically plausible fiscal plans. Campaign proposals are, of course, partly aspirational, and will have to be negotiated with Congress.
The empirical evidence suggests that tax cuts are more likely than spending increases to spur growth, and that lower spending is more likely than tax hikes to consolidate budgets effectively. While past experience indicates that constraining spending growth will not be easy, especially with the aging of the post-1945 baby-boom generation fueling rising health-care and pension costs, many countries — including Canada, the United Kingdom, Sweden, and even the U.S. itself — have managed to do so in recent decades.
Republicans and Democrats differ starkly on reforming exploding entitlement costs, which have unfunded liabilities several times the national debt. The Republicans — with the exception of Trump, who rejects future Social Security “cuts” — would gradually slow growth, whereas the Democrats propose increasing Social Security benefits. The next leader of the free world should know that when a ship starts leaking, the first priority is to plug the leak, not open new ones.
Overall, the policies proposed by Sanders and Clinton would take the U.S. closer to a European-style social-welfare state.
But, as Republicans point out, Western Europe’s standard of living is 30% lower than that of the U.S., on average; Europe also faces slower growth, higher unemployment, and heightening social tensions. That is why Republican candidates — for the presidency, the House, and the Senate — want to roll back President Barack Obama’s tax and spending increases, expensive health-care reform, and regulatory overreach.
There’s only one way to erase any doubt about whether the U.S. economy has gotten stuck in another rut: Show a rebound in hiring in February.
The government on Friday is expected to report that, yes indeed, job creation picked up in February. Economists polled by MarketWatch forecast a 195,000 increase in new jobs, up from 151,000 in January. The unemployment rate is likely to remain at 4.9%.
That might be enough to ease concerns temporarily, but not eliminate them entirely. After all, the economy created an average of 274,000 jobs a month in the fourth quarter.
The U.S. is facing a bevy of headwinds.
Stocks have gotten off to a bad start in 2016. Exports have tumbled because of a strong dollar and weak global economy. Energy producers have slashed investment to respond to cheap oil. Businesses are investing less because of lax demand. And a topsy-turvy presidential election characterized by populist policy ideas that businesses find worrisome is adding to the anxiety.
“How do we model fiscal policy in 2017 and beyond?” asked Phil Orlando, veteran chief equity strategist at Federated Investors, who pays close attention to Washington. “We have no freaking clue.”
A snapback in job creation that exceeds Wall Street’s forecast would provide some short-term clues. An increase well north of 200,000, for example, would do wonders to perk up investors.
One reason to think such a healthy gain is likely is the low level of jobless claims, a rough gauge of whether layoffs are rising or falling. Jobless claims fell in mid-February and were at the lowest level in years. Another sign: job openings are near a record high.
“With solid employment growth, a declining unemployment rate, and historically low initial claims suggest that concerns of a near-term U.S. recession are overblown,” economists at Barclays Capital wrote in a report.
The flip side of the argument is that a cooler economy at the end of 2015 and in early 2016 may have caused companies to scale back hiring, at least temporarily, to get a better sense of what’s going on.
In a week chock full of economic reports, there’ll be plenty of data to dig into for even further clues: auto sales, service-sector growth, the health of manufacturers, trade and factory orders. The Federal Reserve will also chime in with its regular snapshot of the economy known as the Beige Book.
Gulf Cooperation Council countries may struggle to refinance $94 billion of debt in the next two years as the region faces slowing growth, rising rates and rating downgrades, according to HSBC Holdings Plc.
Oil-rich GCC states have to refinance $52 billion of bonds and $42 billion of syndicated loans, mostly in the United Arab Emirates and Qatar, HSBC said in an e-mailed report. The countries also face a fiscal and current account deficit of $395 billion over the period, it said.
Expectations that these funding gaps “will be part financed through the sale of sovereign U.S. dollar debt will complicate efforts to refinance existing paper that matures over 2016 and 2017,” Simon Williams, HSBC’s chief economist for the Middle East, said in the report. “With the Gulf acting as a single credit market, the refinancing challenge will likely be much more broadly felt” and “compounded by tightening regional liquidity, rising rates and recent downgrades,” he said.
GCC states, which collectively produce about a quarter of the world’s oil, are taking unprecedented measures to shore up their public finances as crude prices struggle to rebound from the lowest levels in 12 years. The countries, which include Saudi Arabia and Oman, have also been hit by a series of rating cuts, while billions of dollars have been drained from the region’s banking system.
Gulf countries have about $610 billion outstanding in FX-denominated bonds and syndicated loans, HSBC said. This includes financial and corporate debt, as well as sovereign debt, mainly in the U.A.E., Bahrain and Qatar, it said.
HSBC is confident that the funding gaps will be covered and expects a “raft” of foreign sovereign bond issuance to fund budget deficits. Any new issuance will have to compete with upcoming refinancing needs, the bank said.
Almost half of the maturities due in the next two years are in the banking sector, HSBC said, “suggesting any increase in costs at refinancing could quickly feed through into a broader monetary tightening.”
Prime Minister Narendra Modi on Saturday said if there was a ray of hope in the world economy, it was India, as he asserted that his government was committed to transform the lives of the poor and villages.
Addressing a farmers’ rally here, he also said that the Opposition spoke of many issues but there was not an allegation of corruption against his government ever since he has been serving as “pradhan sevak“.
“Today it is agreed that if there is a ray of hope in the world economy, it is India,” Mr. Modi said at the huge rally, organised as part of BJP’s nationwide outreach to farmers.
He cited ratings by various agencies and international institutions such as World Bank and IMF to buttress his point on India offering a “ray of hope“.
Mr. Modi said whether it was World Bank or IMF or world’s rating agency, all of them were saying in one voice that if there is any country “where there is a ray of hope, that ray of hope is India“.
“In the whole world, the economy is wavering. Even those countries who say they are experts are also going through economic problems,” he said.
In spite of disturbing environment of slowdown, India is making rapid strides in growth, he said.
On corruption, Mr. Modi said that when his government assumed office, the nation was tired of corruption.
“It’s been over 18 months since I’ve served you as Pradhan Sevak. Opposition speaks of many issues but not on allegation of corruption.”
He said when his government came to power, the entire country was disturbed by the issues of corruption.
“Only one issue was being heard in the air, on earth and water and that was corruption, corruption and only corruption.”
On the one hand, the trust in the country had fallen in the eyes of the world which was not prepared to take India into account.
India was also facing economic problems with corruption destroying the country like termites.
The European Central Bank could take action as falling oil prices weigh further on stubbornly low inflation, Bank of France Governor François Villeroy de Galhau told German daily Frankfurter Allgemeine in an interview.
Mr. Villeroy de Galhau said that sliding oil price could have a long-term impact on economies in the eurozone and lead to slower wage increases.
“Temporary falling oil prices alone are not a sufficient reason. But if the low energy prices have sustainable long-term effects, we have to act,” he said. “That seems to be the case, but we will see in March,” he added.
If needed, the ECB could accelerate its bond-purchase program, currently running at 60 billion euros ($66 billion) a month, Mr. Villeroy de Galhau said.
“We are ready to act, but we will have to see the economic data first,” he said.
Inflation in the eurozone was 0.4% in January and is expected to fall below zero over the coming months, far below the ECB’s target of just under 2%.
ECB governors from across the eurozone will meet in March to decide whether to adjust interest rates or extend a scheme known as quantitative easing, creating money to buy government bonds in a bid to revive inflation.
The ECB disappointed investors in December with an expansion of its stimulus that fell short of expectations, driving stocks lower and the euro higher against the dollar. The new measures included a reduction in the already negative deposit rate-charged to banks for storing funds at the central bank-a six-month extension of its bond-purchase program and a decision to reinvest principal payments on the bonds it holds.
European Central Bank Governing Council member Francois Villeroy de Galhau said deflation is the main danger facing the euro zone, underscoring policy makers’ growing concern about ebbing price pressure.
“If we look at Europe at the moment, the danger we face is without any doubt deflation not inflation,” Villeroy de Galhau said in the transcript of an interview with Frankfurter Allgemeine Sonntagszeitung provided by his office on Sunday.
The euro area’s inflation rate probably slipped back to zero this month, according to a Bloomberg survey, ending a brief run of price gains and adding urgency to the ECB’s review of its stimulus programs. The stagnation forecast by economists follows a 0.3 percent increase in consumer prices in January. The deterioration may not end this month, with ECB policy makers saying that lower oil costs mean that price drops are in the cards in the coming months. A first reading of February euro-area inflation will be published on Monday.
Inflation in the 19-nation area has fallen short of the ECB’s goal of just under 2 percent for almost three years, raising concerns that this will depress wages and undermine consumers’ willingness to spend. Against that backdrop, the Governing Council may cut its inflation forecasts at its meeting on March 10 and loosen monetary policy again.
It’s not just headline inflation that’s weakening. Core price growth, which excludes volatile food and energy, probably cooled to 0.9 percent in February from 1 percent in January, according to the Bloomberg survey.
“Oil prices and raw material prices are the driving factors for low inflation,” Villeroy de Galhau told the German newspaper. “But if the low energy prices have sustainable long-term effects, we have to act. That seems to be the case, but we will see in March.”
Villeroy de Galhau, who gained his seat on the ECB council when he became governor of the Bank of France in November, used the interview to express sympathy with widespread concern in Germany about the ECB’s asset-purchase program, while explaining why the policy known as quantitative easing is needed.
“We do it because that is useful and not dangerous,” he said. “You should look at other central banks worldwide. All of them — Japan, the U.S., the U.K. — they all bought government bonds before the ECB. This is important because some people in Germany view QE as some European French-Italian fantasy. It is not.”
Twenty-one of the 47 economists in the Bloomberg survey forecast a euro-area rate below zero in February. Goldman Sachs sees a minus 0.1 percent figure and predicts it could go as low as minus 0.6 percent in the coming months.
To kickstart a revival in inflation, the ECB has already cut its deposit rate to minus 0.3 percent and is pumping 60 billion euros ($66 billion) a month into the economy via asset purchases.
The widely predicted failure of G20 leaders to agree on bold new steps to reinvigorate the world economy at a meeting in Shanghai this weekend puts the onus firmly back on central bankers.
But after years of increasingly desperate attempts to kick-start growth there is fear among bankers and top finance officials that monetary policy is running out of effective ammunition and future stimulus efforts could even be harmful.
“Monetary policy is extremely accommodative to the point that it may even be counterproductive in terms of negative side effects on banks, policies and growth,” German Finance Minister Wolfgang Schaeuble said at the G20 meeting.
“Fiscal as well as monetary policies have reached their limits,” he said. “If you want the real economy to grow, there are no shortcuts which avoid reforms.”
The G20 acknowledged that monetary policy alone is not enough to combat rising global risks but leaders failed to outline concrete steps, making only vague and general pledges.
Facing a new paradigm of slow growth and the legacy of crises, top central banks have kept rates near or below zero for years, waiting in vain for governments to embrace reforms instead of pointing the finger at monetary policy.
Testing uncharted waters, smaller central banks in Switzerland, Sweden and Denmark even cut rates deep into negative territory, raising the prospect that monetary policy still had some room left.
The BOJ and the ECB both followed suit but the results have been mixed, with side effects.
POSSIBLE BUT COSTLY
“Some things may be technically possible, but it’s a different question when it comes to whether they are feasible,” BOJ board members Takahide Kiuchi.
“The reality in Japan is that it’s gradually becoming difficult to come up with policy steps for which the merits sufficiently outweigh the costs,” Kiuchi said, suggesting that the BOJ may have exhausted its options when it cut its key rate to below zero last month.
Although the rate cut pushed bond yields into negative territory, it failed to lift stock prices or stop an unwelcome rise in the yen, meaning that policy is not achieving its goals.
In the world of such unconventional monetary policies, the law of diminishing returns apply, so each new measure yields less but carries a greater risk.
“The options are not unlimited,” Swiss National Bank chief Thomas Jordan said. “The effects of monetary policy measures can wane with duration and dosage.”
“Interest rates … cannot continue to be lowered into negative territory without at some point precipitating a flight to cash,” he added.
Low rates and big central bank asset buys, a key part of unconventional policy, fuel asset price bubbles, particularly for housing, and keep poorly functioning “zombie” firms alive through access to cheap credit, slowly eroding competitiveness.
Low rates also depress bank profits, eventually reducing banks ability to lend, while quantitative easing disrupts markets, reducing liquidity and limiting market access.
With China, Japan, the ECB and Switzerland all seeking a weaker exchange rate, banks are facing the risk of an open currency war, losing their ability to boost prices and competitiveness through devaluation.
“Central banks should rethink their strategy,” said Michael Heise, chief economist of Allianz, an insurer and one of the world’s biggest investors. “The power of the central banks is limited. We have been over reliant on central banks to fix the problem but it is not under their control.”
Indeed, this time many of the shocks are external, such as slowing emerging market growth and deflationary pressures from low oil prices.
These shocks are difficult to counter and weak PMI and confidence indicators in Europe suggest that growth is already taking a hit, despite a 1.5 trillion euro stimulus program from the ECB.
Help could come from fiscal spending but the G20 meeting highlighted that few governments have room to maneuver and the those which could spend more, such as Germany, made it clear they are not going to.
That leaves central banks stuck with a need to act and the ECB is almost certain to ease policy on March 10, delivering a small rate cut and a few changes to its assets buys, moves well short of a quantum leap.
Still, if a global crisis flared up again, central banks still have a few powerful, though controversial and potentially illegal tools left.
Economists say that central banks could force commercial lenders to offer loans at a negative interest rate in return for guaranteed earnings, stimulating both growth and investment. That would force central banks to take big losses.
They say a last resort would be to offer “helicopter money”, free cash provided to all euro zone citizens with the aim of stimulating spending and inflation.
This was suggested by former Fed chairman Ben Bernanke in 2002 as an effective way to fight deflation but European policymakers have not seriously discussed the idea.
It would face fierce resistance from conservative countries like Germany, where even asset purchases have been challenged in court, likely leading to years of legal and political challenges.
It would also be questionable as domestic demand in the euro area is holding up well and cheap central bank money is already providing liquidity.
Source: Reuters (Additional reporting by John O’Donnell; editing by Anna Willard)
Investors could trim back positions on equities given a failure by a weekend meeting of the G20 group of leading economies to come up with concrete, new measures to boost growth, analysts said.
The Group of 20 finance ministers and central bankers declared on Saturday that they needed to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor.
But there was no plan for specific co-ordinated stimulus spending to spark activity, something investors had been hoping for after markets nosedived at the start of 2016 due to concerns about a slowdown in China, the world’s second-biggest economy.
“The fact that the G20 is going to do more of the same is likely to be greeted with a big yawn and a likely fall on stock markets,” said Richard Edwards, managing director at trading and research firm HED Capital.
Others felt equally discouraged.
“Some people will be disappointed that there are no concrete measures,” said Francois Savary, chief investment officer at Geneva-based investment and consultancy firm Prime Partners.
In their communique, the G20 ministers agreed to use “all policy tools – monetary, fiscal and structural – individually and collectively” to boost the world economy.
However, the two-day meeting in Shanghai highlighted differing views from policymakers on the best way forward, dampening the chance of co-ordinated action in the near future.
Phoebus Theologites, co-founder of multi-fund investment company SteppenWolf Capital, said the euro could rise against the U.S. dollar, since the G20 had cast a shadow of doubt over the effectiveness of more monetary stimulus from the European Central Bank (ECB).
Divisions have emerged among major economies over the reliance on debt to drive growth, and the use of negative interest rates by some major world central banks.
Germany had made it clear it was not keen on new stimulus, with Finance Minister Wolfgang Schaeuble saying on Friday that the debt-financed growth model had reached its limits.
A rise in the euro against the dollar often leads to a fall on European stock markets, since European companies’ exports typically benefit from a weaker euro.
The G20 communique also flagged a series of risks to world growth, including volatile capital flows, a sharp fall in commodity prices and the potential “shock” of a British exit from the European Union – known colloquially as “Brexit”.
Sterling fell to a seven-year low against the dollar on Friday because of worries over Brexit, and HED Capital’s Edwards said it would remain under pressure, given the G20’s warning.
“Sterling is already weak and it will remain weak,” he said.
Source: Reuters (By Sudip Kar-Gupta, Additional reporting by Patrick Graham and Anirban Nag; Editing by Clelia Oziel)
Investors worried about the risk of a new global recession are hoping that data over the coming week will show that some momentum remains in the world economy, eight years into its slow recovery from the financial crisis.
The Group of 20 economies were unable to agree on a joint push for new stimulus measures at a meeting which ended on Saturday, turning attention instead to upcoming business surveys from China, Japan, Europe the United States.
Central banks in Europe and Japan may inject a little more stimulus into their economies later in March. But the Federal Reserve and the Bank of England look likely to sit tight for now, meaning hopes for a period of calm in the world’s volatile financial markets lie largely with the indicators.
“It seems economic data will have to bear the burden of stabilizing sentiment,” economists at Barclays said in a note to clients on Friday.
A first reading of inflation in February for the euro zone on Monday will help shape expectations of how much further below zero the European Central Bank is likely to push its deposit rate the following week.
Euro zone inflation picked up in January but is expected to have fallen back to zero in February, according to a Reuters poll of economists. ECONEZ
If there is also a weakening of the monthly purchasing manager indexes for Germany and other leading euro zone countries, the ECB may consider increasing its bond-buying program as well as cutting rates on March 10.
“There is a growing chance that the ECB will do more at its March meeting than simply lowering its deposit rate,” Ralph Solveen, an economist at Commerzbank, said.
U.S. payrolls figures on Friday may help ease fears about the world’s biggest economy, which appeared to stumble soon after the Federal Reserve felt confident enough to hike interest rates for the first time in nearly a decade in December.
Solid U.S. job growth and pay growth are seen as the best antidote to the upheaval in global financial markets which has hurt confidence and even raised questions about whether the United States was heading back into recession. ECONUS
Markets have turned calmer in recent days, helped by stronger-than-expected U.S. inflation figures. But the impact of plunging share prices has shaken the confidence of many households and businesses in rich countries.
Economists at Citi have cut their forecast for global economic growth this year to 2.5 percent from 2.7 percent due to slowing activity in developed economies. They said growth could come in below 2 percent — equivalent to a global recession — because of the chance of weaker growth among emerging economies.
Bank of England Governor Mark Carney said on Friday that the global economy risked becoming “trapped in a low growth, low inflation, low interest rate equilibrium.”
Political risks are also on the rise. Businessman Donald Trump could extend his lead as the front-runner to be the Republican contender for the U.S. presidency on Tuesday when voters in 11 U.S. states choose among the candidates.
The idea of Trump in the White House is a worrying one for some investors who balk at his populist, unpredictable style.
Politics is becoming a factor in Britain, too. With a referendum now set for June 23 on its membership of the European Union, sterling has touched seven-year lows against the U.S. dollar. A decision to leave the EU could hurt growth more in Europe as well as Britain, economists say.
Most opinion polls have shown the two campaigns running neck and neck although one published on Friday gave the ‘out’ campaign a four percentage-point lead. More polls are likely in the coming days.
Economists at SocGen said they saw the possibility of a so-called Brexit as their top risk for the global economy, topping the chance of a severe economic slowdown in China.
“We would classify a UK exit from the EU as a powerful geopolitical shock, a negative shock,” Italian Finance Minister Pier Carlo Padoan said at the G20 meetings in Shanghai on Saturday, echoing the concerns of other policymakers.
Global finance chiefs are stepping up their call for development lenders such as the World Bank to help support economic growth by further opening the infrastructure taps.
Multilateral development banks should present concrete actions by July, according to a draft of the communique for the Group of 20 meeting Saturday in Shanghai. G-20 finance ministers and central bankers also said in the draft obtained by Bloomberg News that they’re committed to advancing investment by focusing “on infrastructure both in terms of quantity and quality aspects.”
Policy makers are looking for new ways to boost growth after seeing diminished returns from central bank stimulus and opposition to fresh fiscal stimulus in some countries. The International Monetary Fund cut its world growth outlook last month, saying the global economy will expand 3.4 percent this year, down from a projected 3.6 percent in October.
Meanwhile, the World Bank said it’s planning to coordinate its efforts more closely with other multilateral lenders, such as the Asian Development Bank and the China-led Asian Infrastructure Investment Bank.
“To boost economic growth in emerging markets, there needs to be a multilateral framework for discussions,” said Lu Zhengwei, chief economist at Industrial Bank Co. Ltd. in Shanghai. “There also needs to be support for infrastructure development. The backdrop of this is when the World Bank is losing influence, and China is trying to promote the AIIB.”
The $100 billion lender with 57 founding members formally opened its doors last month in Beijing and may announce the first batch of investments as soon as June.
“There’s a lot that the multilateral investment banks can do on the demand side,” World Bank President Jim Yong Kim said in a Bloomberg Television interview Friday. The World Bank is trying to work more closely with the AIIB and other lenders, “to increase investment in infrastructure in developing countries.”
Kim said the Washington-based lender is talking about how to deal with the escalating refugee crisis, which the draft G-20 statement identified as a threat to growth. The World Bank and other development lenders will make “huge new investments in the Middle East and North Africa, to see if economic development can have an impact on the fragility, the conflict, the refugees and the humanitarian crises that are there.”
Finance chiefs from the world’s top economies committed their governments to doing more to boost global growth amid mounting concerns over the potency of monetary policy.
In a pledge that will prove easier to write than deliver and may disappoint investors looking for a coordinated stimulus plan, the Group of 20 said “we will use fiscal policy flexibly to strengthen growth, job creation and confidence.” After a two-day meeting in Shanghai, finance ministers and central bank governors also doubled down on a line from their last gathering that “monetary policy alone cannot lead to balanced growth.”
For those few analysts calling for a 1985 Plaza Accord-type agreement to address exchange-rate tensions, there was no such luck: International Monetary Fund Managing Director Christine Lagarde said there were no discussions about anything like that. The G-20 members did reaffirm they will refrain from competitive devaluations, and — in new language — agreed to consult closely on currencies.
An increasing sense monetary policy is reaching its limit permeated officials’ briefings during the meetings that ended Saturday. While central banks proved critical in avoiding a global slide into depression last decade, there is now no consensus among the world’s top economic guardians backing stepped-up monetary stimulus. That leaves focus on fiscal polices that are subject to domestic political constraints, and a structural-reform agenda the G-20 said will be gauged through a new indicator system.
“Central bankers have done their bit in recent years to stabilize the world economy,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “But as their tools are losing their effectiveness, only more aggressive fiscal policy and structural reforms will help to lift growth.”
Among those publicly indicating a potentially reduced role for central banks was Lagarde, who said Friday the effects of monetary policies, even innovative ones, are diminishing. Bank of England Governor Mark Carney used a Shanghai speech ahead of the G-20 to voice skepticism over negative interest rates — now in place in continental Europe and Japan — and their ability to boost domestic demand.
For his part, Chinese Premier Li Keqiang, speaking in a pre-recorded video at the G-20, said quantitative easing policies can’t remove structural obstacles to growth and may lead to negative spillovers. The People’s Bank of China has been using more orthodox tools to support fiscal spending and structural reforms.
Adding to an atmosphere of unease about further central bank actions, some officials expressed concern about Japan’s policies, after its surprise move to adopt negative interest rates last month roiled the currency market.
“The debate was also about Japan to be honest — there was some concern that we would get into a situation of competitive devaluations,” Eurogroup chief Jeroen Dijsselbloem, who heads gatherings of euro area finance ministers, told reporters Saturday. “If policy decisions — for example for domestic issues — lead to devaluation, we should inform and consult with the different countries.”
Japanese policy makers are now contending with a yen that rallied more than 6 percent in February, the biggest monthly surge since 2008 — and one that stoked speculation among traders that officials could intervene in the market by selling the currency.
The G-20 said in the Shanghai communique that “we will consult closely on exchange markets,” language that wasn’t included in its September statement.
Delivering on the G-20 statement to ease pressure on central banks will require political appetite for unpopular domestic reforms, while new spending may be constrained by already over-stretched budgets, especially across much of the advanced world.
“Where is the boost to growth going to come from? Fiscal policy? Reform?” said Richard Jerram, the chief economist at Bank of Singapore Ltd. “After six or seven years of trying to promote recovery there is no appetite for fiscal stimulus, and no easy or obvious reforms that have been neglected.”
Some countries are heading in the other direction on the fiscal front. U.K. Chancellor of the Exchequer George Osborne warned just days ago he may make further cuts in public spending in his annual budget on March 16. Japan is planning a 2017 sales-tax increase. German Finance Minister Wolfgang Schaeuble rejected fiscal stimulus Friday. U.S. budget policy has proved a constant battleground between Republicans and Democratic President Barack Obama.
“There is no positive surprise” from the G-20 commitments, said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research in Tokyo. “There are no detailed plans in this agreement, so generally you can say they just achieved the bare minimum,” he said. “Stocks may sell off a bit.”
Host-nation China came through with the most specific plans, with Finance Minister Lou Jiwei pledging a wider fiscal deficit as his country’s leaders prepare for an annual gathering of the national legislature starting March 5. People’s Bank of China Governor Zhou Xiaochuan also highlighted room for further monetary action.
Other G-20 members haven’t ruled out further central bank actions, and — for all his criticism of Japan — Dijsselbloem said Friday that monetary policy can still do more.
Officials at the European Central Bank have signaled that, given the dimming of the global outlook and downward pressure on inflation coming from energy prices, a reduction in their deposit rate from the current minus 0.3 percent and even a boost to the pace of quantitative easing may be on the cards. The ECB’s Governing Council is due to announce its decision in Frankfurt on March 10.
Reflecting a consensus that central banks are already deploying their tools vigorously, the G-20 said that “monetary policies will continue to support economic activity and ensure price stability, consistent with central banks’ mandates.”
With the Federal Reserve already signaling it has pared back plans for rate hikes this year, there was less of a focus at the G-20 gathering about U.S. monetary policy. The upshot: central bankers leave Shanghai with little pressure to act at their respective March meetings.
Citing mounting threats to the global economy, world financial chiefs vowed to accelerate long-promised economic overhauls to ease the burden on the easy-money stimulus policies that are fast running out of steam.
Finance ministers and central bankers from the Group of 20 largest economies meeting in Shanghai during the weekend sought to allay growing concerns that fissures in the global economy–including the potential for a sharp deceleration in the Chinese economy–could pitch the world back into recession.
“We will use all policy tools–monetary, fiscal and structural” to strengthen growth, boost investment and ensure stability in financial markets, the G-20 said in its official communiqué issued Saturday after two days of intense talks.
Global markets have shuddered in recent months amid a souring growth outlook, overall weak demand and anxieties that China’s economy may be falling faster than Beijing acknowledges and might potentially undermine an increasingly fragile global economy. The International Monetary Fund earlier this week said it likely would downgrade its forecast in coming months, calling for a coordinated program to boost demand.
“There’s clearly a sense of renewed urgency” among the G-20 countries, IMF Managing Director Christine Lagarde said after the meeting. “They don’t have much time left.”
The G-20 said “downside risks and vulnerabilities have risen,” pointing to volatile capital flows, the commodity price plunge and a potential exit of the U.K. from the European Union in a list of threats to global growth.
“Additionally there are growing concerns about the risk of further downward revision in global economic prospects,” the group said.
Although the G-20 said countries may need to explore ramping up spending, its promises fell short of calls by the IMF and others for a coordinated stimulus package to revive flagging output. And there was no discussion of any sort of currency accord, as suggested by some investors, as a way to temper global economic turmoil.
But the G-20’s statement reflected a gathering consensus that many countries are depending too heavily on monetary policy to stimulate growth. The statement reiterated a pledge for countries to refrain from cheapening their currencies to gain a competitive edge–another sign of concern about China, among others.
“We’ve been practicing monetary policy accommodation now for many years, and clearly that is an area of diminishing returns,” said Angel Gurría, secretary-general of the Organisation for Economic Cooperation and Development.
German Finance Minister Wolfgang Schäuble said debt-financed fiscal policies and easy money monetary policies may have prevented the financial crisis from spiraling out of control, “but they may have laid the foundation for the next crisis.”
Instead, G-20 countries said they would speed up implementation of previous commitments to restructure their economies, efforts meant to raise longer term growth prospects and encourage investors concerned about anemic expansions.
In 2014, the G-20 outlined a plan to add $2 trillion more in goods and services to the $75 trillion global economy. Two years later, the group has failed to deliver more than half of those promised reforms and growth is more than a half percentage point lower than forecast rate of 4.1%.
Japanese Prime Minister Shinzo Abe’s plan to use monetary easing, government spending and structural reforms to revitalize a country long mired in low growth has fallen flat. Brazil’s government, rocked by a continuing corruption scandal and in the middle of a two-year-plus contraction, has put off its reforms, including infrastructure investments needed to deepen the arteries of commerce. A thicket of regulations constrain foreign investment in India.
Central banks, however, have kept the easy-money spigots open. Europe and Japan are now delving into the uncharted–and some say risky–waters of negative interest rates in an increasingly desperate effort to jump-start perennially sluggish growth.
Measures such as those that push the value of currencies down haven’t been accompanied by promised structural revamps such as rewriting industry regulations and tax codes. That, officials say, is undermining the impact of monetary policy.
Turmoil overseas is weighing on one of the few bright spots in the global economy, the U.S., where the Federal Reserve is considering slowing the pace of rate increases. “We need to redouble our efforts to boost global demand rather than relying on the U.S. as the consumer of first and last resort,” U.S. Treasury Secretary Jacob Lew said.
Meanwhile, as China’s slowdown grinds on, capital is rushing for the exits by about $100 billion a month recently, stoking concerns that Beijing may revert to currency devaluation. That, in turn, might not only spur investor panic about the world’s second largest economy, but also trigger a cascade of other exchange rates depreciations around the globe.
Senior Chinese officials worked hard to reduce anxiety about the nation’s economic transition. China’s central bank Governor Zhou Xiaochuan played down the likelihood authorities intend to push the yuan lower.
Many officials praised Beijing’s statements. “There was a clear and credible communication from the Chinese,” said Pierre Moscovici, Europe’s economic commissioner.
Enough doubt lingers that G-20 countries said they would consult closely on exchange rate policies. “It’s a commitment to keep each other informed and avoid surprising each other because that’s what you do when you want to try to conduct your policies in an orderly way,” Mr. Lew said.
Financial sector policy makers agree that China remains one of the world’s fastest-growing economies and isn’t in crisis, cushioned by $3 trillion in foreign exchange reserves.
Uncertainties abound, however, about how successful Beijing will be in guiding the economy toward consumer demand and how much pain it is ready to endure in moving away from the investment-led model that produced years of growth.
The massive capital outflows and plunges in China’s stock markets that have erased trillions of dollars of market capitalization worry global markets that many Chinese are losing confidence.
Given the G-20’s slow uptake in delivering structural overhauls, markets may have reason to doubt the group’s ability to take the weight off central banks.
Koichi Hamada, a special economic adviser to Japan’s prime minister, suggested Tokyo should intervene in exchange markets to keep investors from pushing the yen’s value up.
“Sporadic interventions may be needed to punish speculators who are taking advantage of temporary market psychology to keep the yen far above its market value,” Mr. Hamada wrote in a blog post on Friday.
The deepening oil price slump will intensify pressure on banks globally, with those in major net oil-exporting countries most exposed to credit risks in the near-term, said Moody’s Investors Service.
In a new report on global banks’ credit risks from falling oil-prices, Moody’s said there is a substantial risk that any price recovery may evolve much more slowly in the medium-term, noting there is some risk that prices could fall even further. On 21 January 2016, the ratings agency reduced its forward-looking price estimates in light of continued over supply and tepid demand growth in global energy markets.
Moody’s expects the credit risk for banks in regions which are net oil-exporting will increase as their direct and indirect exposures to low oil prices raise the potential for asset quality deterioration. Still, the ratings agency said that while lower-oil-price implications for global banks’ earnings and solvency appear broadly manageable, low oil prices could still test the creditworthiness of some banks across its global rated portfolio.
“We believe the ‘lower-for-longer’ scenario for oil prices is the base case scenario, and expect that banks in oil-exporting regions will likely see increased risk to creditors as banks’ adjust to this new normal,” said Moody’s Managing Director Frederic Drevon.
Moody’s noted that banks’ corporate lending exposures and capital markets-related activity and exposures could drive downward pressure on their credit profiles, particularly banks in net oil exporting regions. Moody’s analysts also noted that a decline in consumer spending or pressure on GDP growth driven by low oil prices could result in pressure on banks’ asset quality and earnings.
While banks in countries where the oil industry is largely government-owned and/or governments are reliant on oil-related revenues might be less exposed to loan delinquencies given government support to the oil & gas industry, Moody’s noted that governments’ flexibility and/or willingness to support banks that are suffering oil & gas-related losses may decline as the countries fiscal position continues to deteriorate with lower oil prices.