Home' Trinidad and Tobago Guardian : January 28th 2016 Contents JANUARY 28 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
INTERNATIONAL | BG21
Weak growth and
shaky markets put
pressure on central
The world s central banks are under pressure
to do something about slumping economies
and panicky stock markets.
The question is, can---or will---they do much
that would help?
The head of the European Central Bank sig-
naled this week that there s "no limit" to how
far the ECB would go to restore the health of
the continent s fragile economy.
The Bank of Japan is considering expanding
its easy-money policies as soon as next week
to fight feeble growth and dangerously low
And, in the view of many economists, the
Federal Reserve may have to rethink its plans
to slowly but steadily raise US interest rates.
The Fed meets next week.
"Everything is going south," says former
Fed official Joseph Gagnon, senior fellow at
the Peterson Institute for International Eco-
nomics. "I predict (the Fed) will not be raising
rates in the next few meetings; and maybe
not in the first half of the year."
So far, the global economy has benefited
modestly, at best, from the cures central banks
have offered. The World Bank and the Inter-
national Monetary Fund this month once again
downgraded their outlook for the global econ-
omy. Like other analysts, they have persistently
overestimated the strength of the worldwide
recovery from the Great Recession despite the
extraordinary efforts of major central banks.
Around the world, stock markets have been
pounded for weeks, in large part by fear and
uncertainty over a decelerating Chinese econ-
omy, the world s second-biggest and long a
vital source of global strength.
China s slowdown has hammered the coun-
tries that have supplied it with coal, copper
and other raw materials. The currencies of
those countries have, in turn, tumbled.
At this week s ECB s meeting, President
Mario Draghi warned that plunging oil prices
heightened the risk that inflation would stay
well below the central bank s two per cent
target. He said the ECB was poised to expand
its existing stimulus efforts at its next meet-
The rate the ECB pays banks for deposits
is already negative 0.3 per cent. By making
banks pay to keep their money at the central
bank, it tries to pressure them to use their
money to lend to businesses and consumers
The ECB chose not to expand a 1.5 trillion-
euro (US$1.6 trillion) stimulus programme.
Under that programme, the ECB buys bonds,
thereby pumping money into the financial
system. The idea is to lower lending rates and
encourage borrowing and spending.
The bond purchases are also supposed to
lift prices and raise inflation from dangerously
low levels. Too-low inflation can hurt an econ-
omy by making debts costlier to repay and by
discouraging spending because goods and
services are expected to become even less
Draghi said it would "be necessary to review
and possibly reconsider our monetary policy
stance at our next meeting in early March."
Other central banks are trying to juice
growth, too. The People s Bank of China has
cut interest rates six times since November
2014 to try to cushion the Chinese slowdown.
When the Bank of Japan meets next week,
it will face pressure to expand a bond-buying
program that s been meant to keep rates low,
lift low inflation and juice the economy.
"The odds of action next week are close to
50-50," economists at BNP Paribas wrote,
"and developments in the market over the
next week could make the BOJ feel obliged to
The Fed is moving in the reverse direction.
In December, it raised the short-term rate it
controls from record lows, a response to a
strengthening job market and low unemploy-
ment. The Fed had been expected to raise rates
several more times this year.
But the turmoil in global markets may have
changed things. For one thing, rising US rates
and the healthy American economy have
attracted investment to the United States and
raised the dollar s value. A stronger dollar
squeezes US companies---and the economy---
by making US exports pricier in foreign mar-
Those who backed the Fed rate hike "don t
understand that the huge increase in the U.S.
dollar was an effective monetary tightening,"
says Brian Bethune, an economist at Tufts
The Bank of England was expected to raise
rates, too. But this week, Mark Carney, head
of the central bank, said "now is not the time
to raise rates."
The Bank of England is nowhere near meet-
ing its 2.0 per cent inflation target even though
it s kept rates at a record low since 2009 and
introduced a bond-buying programme to try
to ease long-term loan rates.
Some analysts argue that central banks can t
do much more. They ve already cut short-
term rates to record lows and made massive
bond purchases to reduce long-term borrowing
The biggest troubles facing the world econ-
omy may lie beyond their reach. China must
make a difficult transition away from wasteful
investment toward slower but sturdier growth
built on consumer spending. And most wealthy
countries are contending with aging work-
Draghi acknowledged that weakening global
conditions would make it hard for the ECB to
meet its 2.0 per cent inflation target.
"Is this a good reason to give up?" he asked.
"No, it s not a good reason to give up ... We
don t give up."
expect slower sales,
Business economists are more pessimistic
about their firms future sales and profits than
they were last fall, and more predict slower
economic growth, a survey found.
At the same time, a majority of economists
surveyed by the National Association for Busi-
ness Economics say their firms plan to raise
wages in the January-March quarter. That is
the largest proportion that expects to raise
pay since mid-2014.
Aside from the planned pay rise, the survey
paints a mostly gloomy view of the economy
at the start of 2016. Fewer than half the econ-
omists expect sales at their firms to rise in
the first quarter, the smallest proportion since
January 2015. And nearly 20 per cent expect
profits to fall, the most in more than a year.
seek to reassure after
At the end of another turbulent week in
financial markets, leading global policymakers
sought Saturday to ease concerns over the
economic outlook for 2016 and insisted that
the slowdown in China is a natural turn for
an economy in transition.
A high-level panel of finance officials held
on the last day of the World Economic Forum
in the Swiss resort of Davos, Switzerland,
attempted to look through the markets har-
rowing start to the year and identify the big
risks facing the global economy.
"What on earth is going on?" asked Tidjane
Thiam, chief executive of Swiss bank Credit
Suisse. "Simply the worst start of any year in
financial markets, ever."
China has been the main trigger for the
recent market drop as investors take fright
over the implications of a decline in economic
growth. Figures last week showed that China
grew by 6.9 per cent in 2015, its lowest growth
rate in a quarter of a century.
"I do not share the pessimistic view about
the global economy suggested by these devel-
opments in financial markets," said Bank of
Japan Governor Haruhiko Kuroda. "For exam-
ple, I don t think the Chinese economy will
sharply slow down or will be faced with hard
landing risk in the future."
Kuroda said the slowdown is a natural off-
shoot of what the Chinese authorities are
trying to do: transform the economy from one
based on investment and manufacturing into
one that is more focused on consumption and
services. He suggested China should impose
some controls on how much money can leave
the country as a means to keep the currency
from falling too sharply.
Lagarde conceded that global growth in
2016 is set to be "modest" and "uneven" and
faces risks, including problems in emerging
markets such as Brazil. The dramatic drop in
oil prices is putting a stress on many companies
She stressed, however, that the IMF still
expects growth to improve this year 3.4 per
cent from 3.1 per cent in 2015.
Another concern vexing leaders in Davos
all week has been Britain s future in the EU.
Britain is the EU s second-largest economy
but has, as British finance minister George
Osborne said, a "different relationship" to the
bloc than the others. It s not part of the Schen-
gen agreement and doesn t use the euro.
The Conservative government has promised
a referendum on whether Britain should leave
the EU by the end of 2017. But it has shown
a willingness to hold it earlier, possibly this
summer, if a deal reforming its relationship
with the EU is agreed upon at a summit in
Osborne said there is "goodwill" to get a
Britain is seeking four reforms: changes to
rules governing migration and benefits, con-
firmation that Britain is not part of the drive
for an ever-closer union, rules to make sure
that the nine non-euro EU countries don t
get dominated by the euro bloc and measures
to boost economic competitiveness.
Osborne pointed to the EU s history of secur-
ing deals at the last minute, as it has many
times on Greece s crisis.
"Europe sometimes makes its decisions at
the 11th hour in a crisis because the Greek
banks have to open on the Monday morning
or the bond has to be repaid," said Osborne.
"I think in a mature and measured way we
can get that agreement potentially at the Feb-
ruary European Council." AP
FILE - In this Tuesday,
February 24, 2015, file
photo, Federal Reserve
Board Chair Janet Yellen
prepares to testify on
Capitol Hill in
Washington, before the
Committee. Since the
Federal Reserve raised
interest rates from
record lows in December
2015, the global picture
has darkened: Stock
markets have plunged,
oil prices have skidded,
and China's leaders have
struggled to steer the
Links Archive January 27th 2016 January 29th 2016 Navigation Previous Page Next Page