This morning we are launching our second quarter “Global Economy in Charts” report, available here - https://blogs.deloitte.co.uk/mondaybriefing/2019/
Economists went into 2019 expecting growth in the West to cool. If anything, the slowdown has come quicker than expected.
Earlier this month the World Bank scaled back its forecasts for global growth this year, warning of a “broad-based disappointment” affecting trade, investment and manufacturing. The Bank believes that trade tensions, an unexpected weakening of the euro economy and a build-up of government debt mean that growth could come in weaker than their new, lower forecasts.
This needs to be seen in proportion. The outlook is for continued growth in the West, albeit at a slower pace. Still, the speed of the downturn has taken policymakers by surprise and worried them.
Earlier this month the US Fed chairman, Jerome Powell, gave a heavy hint that he will lean against the US slowdown by cutting US interest rates later this year. This is a big shift in policy. Last November financial markets thought the Fed would raise US rates by at least 50 bps in 2019. Markets now expect the Fed to cut them by 50 bps by the end of this year.
It’s much the same story in the euro area, where growth has been especially disappointing. European Central Bank (ECB) president Mario Draghi has said the Bank is ready to “use all the instruments that are in the toolbox” if the slowdown broadens. This bland analogy from the world of DIY doesn’t quite convey the weight of Mr Draghi’s words. By suggesting that the Bank could restart quantitative easing or cut rates, Mr Draghi was reversing the ECB’s previous stance, announced at the end of last year, that extraordinary monetary easing to kick-start growth had achieved its aims and was ending.
By collapsing interest rates and undertaking quantitative easing in 2009 central banks helped ensure that the recession did not turn into a depression. Lower interest rates and money-printing helped reflate asset prices and re-booted growth.
Ten years on the global recovery is mature, and, by past standards, the West is overdue a recession. Forecasters don’t expect one partly because they believe that, with inflation low, central banks have plenty of scope to ease policy and keep growth going. Because central banks saved the day ten years ago many are convinced they can do so again.
The most likely outcome is that growth will carry on over the next couple of years, albeit at a slower pace. That outcome is not, of course, guaranteed.
Interest rates are already low and central banks’ balance sheets have expanded enormously in the last decade. The scope for monetary ease is less than it was. Central banks cannot perfectly time and calibrate interventions. If they could, recessions would never happen. Central banks are powerful, but they are not omniscient.