Chinese data released on August 9 (showing inflation fell to a 30-month low and industrial production dropped to the lowest in just over three years) showed the slowdown that’s been underway since late last year is accelerating. To compound problems, China announced weaker-than-expected trade data on August 10 highlighting that measures taken already this year by Beijing to boost economic growth appears to be having little impact on domestic consumption.
In 2008-2009, China announced spending worth $586 billion or 14 per cent of its GDP, to bolster its economy in the face of a global financial crisis. But that spending is blamed for many of China's economic problems in the years that followed, such as local government debt, over-investment in housing and higher inflation. Fearful of compounding the risks that have built up over the last few years, the government has acted cautiously in loosening. Although more rate cuts are expected within days rather than weeks, the window for more monetary stimulus may be closing, as inflation is already showing signs of creeping up. In fact, month-on-month consumer prices have actually risen marginally, showing that demand is probably turning around and CPI inflation could rise from now on, reaching 3.8 per cent at the year-end.
The European Central Bank (ECB) may have warned markets not to bet on a break-up of the euro zone (and this led to a risk-on trade in global stock markets on expectations that central bank meetings a week back would result in more monetary easing measures). However, neither the Fed nor the ECB relented to initiate further stimulus measures. The Bank of Japan has kept monetary policy unchanged but has set aside about 40 trillion yen ($505 billion) for its asset-buying programme, to keep interest rates low and weaken the yen but economists have argued that this is not sustainable.
The Reserve Bank of India in its April-June quarter monetary policy on July 31 left the key policy rate unchanged. The RBI raised the baseline projection of WPI-based inflation to 7 per cent for March 2013 — as against the earlier projection of 6.5 per cent — and revised its growth projection to 6.5 per cent from 7.3 per cent, as predicted in its April policy.
There’s an old adage on Wall Street that cautions investors to “never fight the Fed.” The point being, the unlimited resources and staying power of the Federal Reserve are so dominant that they will overcome and outlast any other market influence. If you believe in that, then it would seem, with no less than three major central banks all taking separate actions on the same day (July 5), that it would be extremely unwise to position yourself against that tide of international monetary influence either.
Some suggest that all this easing, from all these banks, all at once smells — at best — of a well-coordinated response to a serious economic threat. At worst, I think it suggests they’re in panic mode. We are getting negative synergies among the major economic zones of the world right now; we need enough movement from policy makers to give hope that a solution is coming, and reassure markets. So what the ECB did on July 5 was actually minimal. Even in Frankfurt, I guess they realised that not cutting rates at all would have meant full-blown crisis right away — but there was no effort to get ahead of the curve, no message about more to come.
What about the US Fed? There could be mounting election-year political pressures causing it to be cautious. Mitt Romney, the Republican nominee, opposes QE3, as do many Republicans in Congress, and the Fed could face criticism that it is aiding Barack Obama’s re-election effort if it approves new stimulus. Mr Bernanke will try to insulate the institution from politics as much as possible and, on June 20, said the Fed was “very serious about taking our decisions based on purely economic grounds, without political considerations”. But the US central bank may ultimately have to bite the bullet and move to QE3.
For many market watchers, it’s becoming apparent that there’s little global policymakers can do to arrest a global “synchronized slowdown.” Some even go to the extent of suggesting that instead the central banks should let the economic bust work itself through the system.
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Michael Pettis of Peking University says that when an economy that’s dependent on fixed-asset investment like China unwinds, there are only two options. One is to have a “deep and long recession” lasting three or four years, and the other is to go through ten years of zero growth. But this will have a huge impact on the prices of all assets across the board.
I do not think people have got in their models what this would mean to oil prices, the prices of copper, steel and coal, you name it. There is going to be a massive revamping of the secular global synchronised trade pricing mechanism — and it’s started; in fact we’re probably in the second innings.
To put it more bluntly, central banks’ rate cuts may well be perceived as a sign of panic or desperation. Markets remain cautious, given the weakening growth momentum seen across the board in major economies and they doubt the effectiveness of such monetary easing may have in lifting growth. Besides, due to drought-like conditions in many parts of the world, global food inflation is set to skyrocket, reducing central bankers’ ability to reduce interest rates to jumpstart global growth.
Although a fall in base metal prices has subdued manufacturing inflation, providing opportunities for central banks to fight the slowing economy, many investors are coming round to the conclusion that too much powder has already been used, damaging hopes for a rebound.
Some think the best solution is for central bankers to do less, not more. Allowing the cash-rich private sector to sort out its own problems without government’s interference likely would be painful — but could be the only sustainable path to recovery. Every round of quantitative easing is resulting in a smaller and smaller impact on restoring global economic growth, as the world economy becomes more and more immune to steroids.
The writer is an investment analyst