More policy easing won’t get the global economy out the mud – government spending might

Central banks like the Fed and ECB can hit the accelerator of policy easing all they like but the moribund global economy can only gain traction if governments start spending and geopolitical tensions ease

Reading Time:3 minutes

News of the Fed’s September 18 interest rate cut is displayed on a New York Stock Exchange monitor. Globally, interest rates are already very low. Photo: AP

Published: 11:00pm, 4 Oct 2019Updated: 1:32am, 5 Oct 2019

When a truck is stuck in the mud, pressing the accelerator may not be helpful and may even leave the vehicle deeper in trouble. You may need help, such as planks to give the wheels extra grip, to get out of the sticky situation.

The global economy is in a similar situation. Political events from the trade war to Brexit are dampening corporate sentiment. The risks are spreading to consumption, which has been key in preventing the economy from cooling further. Central banks are working harder, with notable policy easing from the US Federal Reserve and European Central Bank.

However, like pressing the accelerator of a truck stuck in mud, this is probably not enough to revive global economic growth. Other planks, such as fiscal spending and a more stable geopolitical environment, will be needed.

On top of US-China trade tensions over the past 18 months, other political issues have been hurting business confidence. In Britain, as the October 31 deadline looms for Britain to exit the European Union, there is still much uncertainty.

In the US, the Democratic-led House of Representatives has launched an impeachment inquiry into President Donald Trump’s dealings with Ukraine. In Asia, protests in Hong Kong and Indonesia are undermining governments’ ability to support the economy when global trade is weak.

The September 14 attack on Saudi Arabian oil facilities affected around 5 per cent of global production and pushed oil prices up by 20 per cent overnight. The production disruption was temporary and oil prices soon eased. But it raised the question of how the global energy market can be affected if tension between the US and Iran persists, or even escalates.

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