Global markets show few signs of disruption despite rising risks

Policymakers are in denial given gloomy world growth prospects

PUBLISHED : Sunday, 22 November, 2015, 12:59pm
UPDATED : Sunday, 22 November, 2015, 3:20pm

The global economy is digging itself into a deep hole and world policymakers are turning a blind eye. Bloated by debt and hooked on a quantitative easing-fuelled liquidity boom, global markets are showing no signs of slowing down, despite spreading gloom about world growth prospects. It is a recipe for disaster especially if the stock market rally starts to stall.

Global policymakers are in denial. Last week’s G20 meeting in Turkey of the world’s biggest economies missed a prime opportunity to draw a line in the sand against rising global risks. The G20’s agenda might have been dominated by the debate on terrorism, but the world economy is still begging for a much better growth fix.

The economic risks are very real. The US Federal Reserve seems primed for a December rate rise. But Japan is back in recession, China needs to bootstrap faster recovery and the euro zone economy is fast losing momentum. Meanwhile emerging economies continue to struggle.

Next month’s Fed rate decision symbolises a critical High Noon for global markets

Policymakers are running round in circles at a time when the world’s most powerful nations need to show better leadership and guidance. If G20 countries are truly committed to boosting global output by an extra 2 per cent by 2018, as they re-pledged at the Ankara summit, then they need to flesh it out and give markets something much more concrete to latch onto.

What is needed is a coherent and believable strategy that will help release the ‘animal spirits’ of recovery as the world economy enters into a more unsettled phase. Too much of the world’s reflation efforts so far have been unilateral, too sporadic and often at odds with each other. Better policy co-ordination and harmonisation is clearly needed.

A large part of the global economic recovery in the last six years has owed its success to the rally in stock markets, boosting economic confidence as financial wealth perceptions have soared for consumers, businesses and investors. This must be protected as a high priority.

Pumped up by an outstanding US$57 trillion of global debt and the £12 trillion of cheap money created by the major central banks since 2009, the stock market rally has come a long way in recent years. But its future is far from secure. Financial confidence remains vulnerable and next month could be a very dangerous time for markets.

The last thing the global economy needs is conflicting policy signals that could endanger confidence, aggravate risk aversion and trigger a rush back into safe haven trades. Market resilience will be sorely tested next month when the US Fed and the European Central Bank will both be moving monetary policy out of phase and in opposite directions.

The Fed looks intent on raising rates next month and seems to have its head in the sand over the potential fallout that the move may produce for financial markets and global reflation prospects. Recent market surveys suggest global investors will take a December US rate rise in their stride, but saying is one thing, believing is another.

Longer term, the worry for investors is when the Fed starts to dispose of its huge arsenal of fixed income assets, accumulated throughout its six-year QE bond buying programme and currently worth around $4-1/2 trillion. The Fed has said little yet about running down its QE stockpile, but it could spell disaster for markets when it finally happens.

The infamous ‘taper tantrum’ during summer 2013, when the Fed hinted it was getting set to wind down its bond buying programme, was a chastening experience for markets, especially the debt laden emerging economies which were hit particularly hard by fears of higher borrowing costs. The Fed must tread very carefully.

The euro zone should be taking positive steps next month if the ECB follows through on hints that it will fast track new stimulus, including lower rates and more QE. But the euro zone authorities must insure monetary and fiscal policy is pointing the same way. Europe’s governments must ditch fiscal austerity to complement the ECB’s pro-growth thrust.

Europe and the US both have a responsibility to promote positive financial market confidence. Central bank fears about feeding ‘irrational exuberance’ should be set aside. Stock market optimism must be fully supported. It is a vital component of sustainable global growth ahead.

If markets take fright, global policymakers will only have themselves to blame. Next month’s Fed rate decision symbolises a critical High Noon for global markets.