Jul 23, 2015
No growth burst on the horizon yet for world economy
Jul 23, 2015
With little sign of accelerating growth or inflation, most central banks are still looking to ease monetary policy, in stark contrast to the U.S. Federal Reserve which is on the brink of its first rate hike in nearly a decade.
That bias towards easing, from China to Canada, comes at a time when the world economy, with a few exceptions like the United States, appears weak despite historically-low oil prices and bond yields along with soaring stock and property prices.
Reuters polls of around 500 economists across Asia, Europe and the Americas reveal modest downgrades, or at best no change to growth forecasts compared with previous months, as well as incrementally tamer inflation views across most countries.
With the exception of nascent signs of wage inflation in the United States and Britain where jobless rates are near where they tend to be towards the peak of the economic cycle, the only evidence of inflation pressure remains specific to a few countries that are generating it, but not exporting it.
"Overall, there are few signs that the world economy is poised for lift-off: progress made in one region appears only to be matched by retreat elsewhere, a likely consequence of currency wars," noted Stephen King, chief global economist at HSBC.
"As such, the world economy remains in a fragile state, ill-prepared to cope with future negative shocks."
There has been a striking change in tone from central banks worldwide over the past year or so, from Scandinavia to core Europe to China and even the United States, referring to optimal exchange rates either directly or indirectly when setting policy.
That has led to nearly every economy rushing for a weaker currency in the hope of somehow bettering exports to their neighbours.
However, if everyone does the same thing, the result of one central bank's interest rate cut won't be very different from another. It also won't do much to spark inflation, now fundamentally a global force.
With rates close to, at or in some cases below zero across much of the developed world, central banks from emerging powerhouses China and India are expected to cut rates further after several moves already this year.
Canada's central bank shocked markets again last week with a rate cut to 0.50 percent and the Reserve Bank of New Zealand sliced rates again earlier on Thursday. That may put pressure on the Reserve Bank of Australia to do the same.
What the rush by nearly 40 central banks to ease policy this year also has done is boost the U.S. dollar.
While the U.S. economy has managed to weather this rise, it is clear a strong dollar has already dented U.S. corporate profits and has tamped down inflation pressures there through relatively cheaper imports from the rest of the world.
So far, that has not been enough to throw the Fed off track from its intent to hike.
But the strong dollar contributed to surprise weakness in the first quarter, and the expected first move already has been delayed to September from June, with more expecting a delay beyond September than in a poll conducted just last month.
Concern about a U.S. relapse remains real. A significant number of nearly 200 economists polled by Reuters who answered an additional question cited that as their top risk in coming months. The majority cited a slowdown in China.
Even in Britain, where the Bank of England has been on deck for a rate rise for much of the past year, only to keep delaying its first hike since the financial crisis, the outlook is far from certain.
BoE officials, including Governor Mark Carney, have been warning repeatedly that rates will have to rise soon.
But a surprise fall in UK retail sales in an economy so reliant on consumer spending is a reminder that Europe's fastest-growing major economy may be doing better than the euro zone, but is still not yet in perfect health.
In Latin America, it is a far more clear cut story. With only a few exceptions like Mexico, the economic outlook on the whole is poor -- and worse than it was a few months ago.
Brazil, for a long while the growth engine of South America and the envy of its neighbours for its economic miracle, is struggling to tamp down inflation nearing double-digit rates while its economy crashes into recession.
The central bank there has been on a punishing campaign of rate rises, taking them to 13.75 percent, among the highest in the world. Only in recent weeks has it begun to make noises suggesting it's done enough. But the damage has been done.
If China can draw a line under its recent stock market rout and engineer a recovery in the property market which also has been in retreat for most of this year, there may be reason to hope that brighter days are ahead for the world economy.
But without a burst of pent-up demand on the horizon from any emerging economy, or even the United States, the latest round of global polls suggests that much of the optimism is built on hope, not hard evidence.
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