World policymakers can avoid a global hard landing if they pull together
The US Federal Reserve and the Bank of England need to hold their fire
Over recent days the odds have greatly improved that the world economy could be spared a damaging hard landing. Global policymakers may be starting to see better sense and choosing to pull together to reinforce their defences against the spectre of global economic disaster.
News last week that Beijing has eased policy again, combined with strong hints that more monetary stimulus may be due from Europe, could not have been better timed. It has given a major lift to global financial sentiment and spurred hopes that the recent rebound in equities might prove more than a short-lived bear market bounce.
European stocks were especially supercharged by last week’s news, with Germany’s benchmark share index finishing the week almost 8 per cent higher.
Beijing’s rate move and the more dovish slant from the European Central Bank sent a sobering message to US and British policymakers to think about the bigger picture. The danger of higher rates from them in the near future could deal a severe blow to global markets. The US Federal Reserve and the Bank of England both need to hold their fire for now.
The mainland’s 25 basis point cut in benchmark interest rates is its sixth successive rate reduction since November. The reserve requirement ratio was also cut for the fourth time this year, by 50 basis points, reducing the ratio to 17.5 per cent for the mainland’s biggest lenders. The move frees up more cash for borrowers.
This is the mainland’s most aggressive easing cycle since the 2008-09 global financial crisis and emphasises just how seriously its policymakers are taking the deteriorating growth outlook. Recently, third quarter gross domestic product growth slowed to 6.9 per cent, making it the mainland’s worst quarterly performance since 2009.
The economy is being hamstrung by weak domestic demand and excessive industrial capacity. Its slowdown is also sucking vital growth potential out of neighbouring economies and tilting some Asian nations towards recession. Headwinds are being felt around the globe, with the slowdown in world trade hurting exporters in Europe, North America and Japan.
The mainland’s slowdown has been blamed for much of the global downturn, so policymakers are clearly trying to make amends. Lower rates are not just good news for the domestic economy. The policy move also presents Beijing in a much more credible leadership role, with positive spin-offs for the rest of the world.
Beijing’s easing dovetails in neatly with ECB signals that it stands ready to unleash a new push in its monetary stimulus plans. Hints that the ECB’s ¤1 trillion quantitative easing programme might be extended, possibly coupled with another deposit rate cut, scored a big hit with markets last week.
The ECB decides in December whether the economy needs a bigger kick, but the odds must favour QE being moved up an extra gear next year. Leading indicators are pointing to a serious loss of forward momentum in the euro zone economy, suggesting the ECB’s QE target probably needs to be expanded to ¤2 trillion to reverse the decline.
Last week’s unexpectedly dovish ECB slant clearly ambushed currency traders, who marked the euro sharply lower in the aftermath. A more competitive euro is good news for hard pressed euro zone exporters, with world trade flows sinking 10 per cent from a year ago. ECB benign neglect could set the euro on a collision course with parity against the US dollar fairly soon.
The US needs to make a stronger contribution too. The Fed has been struggling to justify higher rates for months. But with deflation risks on the rise and US growth prospects clouded by rising international uncertainties, it would be better off maintaining its easing bias for as long as possible. Delaying its first rate rise until the second half of 2016 would definitely lift spirits, especially for the more vulnerable emerging markets.
Global policymakers must maintain the positive policy momentum. The International Monetary Fund has been leading the crusade for a broad-based easing in global macroeconomic policy settings to keep nascent recession risks at bay, but this needs to be put into practice.
Nations must start working together to build a global framework for better economic co-operation and regeneration. Supranational bodies for policy co-ordination like the Group of Seven and the G-20 are good starting points to meet the challenges head-on.
Without a united front on effective reflation policies, the global economy will end up in the fast lane to deeper economic doom and gloom.
David Brown is chief executive of New View Economics