Editorial | World looks for trade war deal in the hope that it will end uncertainty

The world’s economy is not in great shape. That is something many of the most powerful central bankers and politicians can agree on. But they disagree profoundly on what should be done about it. While the United States and China, the largest economies, continue to wage a destructive trade war, their central bankers are trying hard to keep them afloat. But they cannot work magic. Meanwhile, Japan and South Korea are having their own trade dispute. No wonder worldwide equities have been volatile while the bond market and gold, traditional safe havens, are staging a rally.

Last month, the European Central Bank cut the deposit rate to a record low of minus 0.5 per cent and resumed its 2.6 trillion euro (US$2.85 trillion) quantitative easing programme of bond-buying. Outgoing bank president Mario Draghi has defended the measures as necessary to boost flagging inflation and economic growth across the euro zone. That prompted rare joint criticism from a group of former central bankers in Europe. They prefer a more hawkish monetary policy and worry that Draghi’s successor, Christine Lagarde, will ease even further.

While global trade is falling and the world economy’s strength is being sapped, US President Donald Trump has been using Twitter to attack the chairman of the US Federal Reserve whom he himself hand-picked. He blames Fed chairman Jerome Powell for the strong US dollar, which is seen as hurting American manufacturers, and keeping interest rates too high. This is despite the Fed having made two rate cuts this year. Market watchers expect more cuts.

Far from cheering, that may lead to a public perception that the Fed is not as independent and free from political pressure as required by its mandate. Trump would rather blame Powell than his own trade war as being responsible for America’s economic problems.

Unsurprisingly, China too is easing. The nation’s economic growth is expected to decelerate further in the next few quarters, after slowing to a 27-year low of 6.2 per cent in the April-June period. In response, the People’s Bank of China said it anticipated a “noticeable decline in real interest rates” to support growth. The easing is part of the central government’s effort to support the economy, especially small private firms that have been hit hardest by the trade war.

The loosening of macroeconomic policy in the world’s biggest economies is not accidental, although not coordinated. But the biggest uncertainties remain the US-China trade war and its fallout. Both sides have incentives to reach a deal in their latest round of talks, but fractious domestic politics and anti-China ideology in the US make that difficult. So long as there is no resolution, the overhang will continue to be a drag on the global economy.