Central bankers have a favorite mantra: Patching the roof and the sun shining.
But ten years after the Federal Reserve worked with the European Central Bank and the Bank of Japan to restore the global economy, their ability to prevent the next downturn is limited.
Whether the world's central banks are ready to cope with another downturn it is becoming less than a hypothetical issue as the pressures of the global economy show. The chances of the US reversing next year as the uncertainty of trade is weakening have increased. In Germany, the unemployment rate ticked higher, and industrial production is slowing. In Japan, export exports and production hanging in the factory promotes vulnerability.
Recession is much more inevitable – especially one as deep and painful as the last. But the ability for the kind of definitive response that prevented a worse outcome in 2008 has been hampered. Afterwards, central banks reduced rates, they bought bonds, gave government support for financial products, they lent money to In some cases they co-ordinated with government authorities to ensure that their rescue packages were not working on territories. It was an unprecedented trial period, one saving economies caring for collapse.
But today, interest rates remain below zero in Japan and Europe. They are low by historical standards in the United States, resulting in less space for downturn. There are huge amounts of bonds and other securities that they still bought at most of the banks to raise their economies the last time, leaving another purchase more difficult and reducing its effects.
Monetary policy is also under-crediting. Major central banks did not succeed in achieving their 2 per cent inflation targets during this expansion, which increased the risk of poor prices falling in the next downturn. And while lower interest rate promises have long been a stimulating source in recent years, these commitments could lose some of them in a world where investors are expecting already low rates.
These constraints are of particular concern at a time when very disparate governments do not work together to compensate for a broad based global slowdown. The US and Europe are at the center of a trade dispute which followed President Trump's decision to cut tariffs on steel and aluminum and threaten to cut taxes on German cars and other European cars. Mr Trump criticized the European Central Bank for taking steps to protect the euro area economy, persuading him to weaken the euro and disadvantage America.
Mr Trump proposed last week that central banks were an army race, saying on Twitter that China and Europe were manipulating their currencies to get an edge over the US and that nutrition would start doing the same thing.
“We should MATCH, or continue as the dummies that sit back and watch politely as other countries continue to play their games – as they have for many years!” He wrote.
Central bank officials argue that they are willing to act aggressively if another concession is burning. The E.C.B. Prepared stands to stimulate the euro area, and the Fed is suggesting that it could soon cut interest rates to try to make progress on the growing risks in the United States.
But economists around the world say that central banks can no longer be one priest when the downturn hits. That reality is addressing political constraints in the US and Europe, where manufacturers may not be law – or willing – to quickly implement expensive incentive packages.
“Fiscal policy has a much more active role and is not yet capable of doing so,” said Olivier Blanchard, former chief economist of the International Monetary Fund, last month at a central banking forum in Sintra. , Portugal, referring specifically to Europe.
When it comes to monetary policy, “there is certainly not enough space to respond to even a recession,” he said.
Christine Lagarde, who was It is indicated that it will succeed in succeeding Mario Draghi as head of the European Central Bank and that he is currently under the control of the International Monetary Fund, the central banks of which are likely to be the main defenses due to restrictions. fiscal.
“High public debt and low interest rates left that many countries have a limited policy for maneuvers,” said Ms. Lagarde posted a blog in June. She also said that nations needed to use their economic tools together, with “decisive monetary mitigation and fiscal stimulation where possible.” T
Global economic growth has fallen behind a deep recession, and as early as 2018 international co-ordination was underway. However, progress has shown that progress has been made in recent months, with trade flows decreasing and indexes withdrawing from Asia to Europe.
Morgan Stanley's economist, Chetan Ahya, believes that if Mr Trump's trade war is not solved with China and that the administration continues its threats to increase tariffs, growth could fall quite considerably “that we could quit in a global recession in three quarters. ”The recent Group 20 meeting appears to have seen a slight reduction in risks, where Mr Trump suspended tariff rises and resumed trade talks with China.
But uncertainties still exist. These talks could fall again, leading to additional import taxes. And beyond American trade wars, there is a danger that the European Union will withdraw disorderly from the European Union and that there is a continued slowdown in China.
These factors encouraged Mr Draghi to give a strong signal in June that the central bank intended to revitalize stimulus measures that he had used during the euro area debt crisis.
While Mr. However, as the bank still had a lot of space to buy bonds as a way of pumping money into the economy, some analysts believe that it has acted proactively because it knows that the bank has limited capacity. leadership. The bank's limited resources are now best utilized where they can still do much.
In the US, the Fed is thinking of acting earlier rather than later and trying to consider whether a rate cut is necessary. Emerging research suggests that the best possible protection for the central bank might be to move quickly and decisively.
Although the feed is relatively good in shape because it has removed rates from the bottom of the rock – they are at 2.25 to 2.5 per cent – this means that it has less than half the space to charge borrowing costs. As policy makers returned in 2007. Indeed, chairman Jerome H. Powell has started a year-long review of his options.
“Low interest rates are a major challenge for central bank tools,” said Mr Powell. in New York last month.
Nutrition officers say they are happy to revitalize large-scale bond purchasing programs to stimulate economic activity when the next downturn comes. The central bank is also considering a new policy approach that would lead to lower rates for a longer period after a downturn. Recent research suggests that such measures – but in some cases small ones – would have benefits if implemented after the 2008 recession.
Japan gives an example of a warning that the willingness to act only guarantees success. Haruhiko Kuroda, one of the Japanese Bank, has a stop to rename the country's economy, cutting rates into negative territory and buying debt and government stocks to try to strengthen markets and encourage confidence. The government, treating gently to stimulate demand has helped.
Despite all of this effort, inflation decline has been mired under the Japanese target, which is bad because it increases the risk of net deflation which should be weakened.
It is now unclear how many rooms Kuroda has to operate in the event of a downturn, according to Makoto Hara, the author of a recent book on the Japanese central bank.
“These taboo policies are an ordinary,” he said. “They've passed them until they numb with them.”
Central banks in large economies have been significantly reduced by the growth of sustainable growth, inflation and all interest rates, attributable to long-term structural forces in the economy, including aging populations and weakening productivity. .
In the United States, the Non Budget Party Budget Conference Gross domestic product appears to increase at close to 2 per cent. The International Monetary Fund estimates that output may be lower in both emerging markets and in high-level economies.
This coincided with fiscal restraint across the globe, as governments seek to boost spending and avoid further levels of debt bloating.
American politicians restricted government spending after the 2008 recession, even when unemployment was high and tepid grew. Recent reductions in taxation and spending increases by Republican lawmakers increased federal debt, but a wider acceptance of deficit expenditure does not appear to be taking place, particularly as the 2020 presidential election takes effect.
The American budget deficit is on the right track to overcome $ 1 trillion this year, and some lawmakers are already looking for ways to cut federal spending, without adding it.
Central bank leaders have warned more that their firearms will be limited without the help of fiscal authorities.
“Monetary policy will continue to do its work no matter what happens to the fiscal capability,” said Mr Draghi, just a few days after European leaders failed to establish a mechanism to provide incentives when needed. But assistance from governments “would do the same job faster and less side effects.”
Mr Powell acknowledged that sentiment that last month. “It is not good that monetary policy is the biggest game at home, let alone one game at home,” he said.