Danger signs flashing for global economy
Washington — Eight years after the financial crisis, the world is coming to grips with an unpleasant realization: serious weaknesses still plague the global economy, and emergency help may not be on the way.
Sinking stock prices, flat inflation, and the bizarre phenomenon of negative interest rates have coupled with a downturn in emerging markets to raise worries that the economy is being stalked by threats that central banks — the saviors during the crisis — may struggle to cope with.
Meanwhile, commercial banks are again a source of concern, especially in Europe. Banks were the epicenter of the 2007-09 crisis, which started over excessive loans to homeowners with shaky credit in the United States and then swept the globe into recession.
“You have pretty sluggish growth globally. You don’t really have any inflation. And you have a lot of uncertainty,” says David Lebovitz, who advises on market strategies for JP Morgan Funds.
Some of the recent tumult may be an overreaction by investors. And the rock-bottom interest rates are partly a result of easy money policies by central banks doing their best to stimulate growth.
Here are some of the risks that markets have been waking up to:
■China: A sharp slowdown in China threatens to remove a pillar of global growth. Slackening demand for raw materials there is hitting producers of oil and metals in other countries. Energy exporter Russia, for instance, slid into recession and its currency has plunged.
German automaker Daimler made a record operating profit last year, helped by a 41 percent surged in sales in China for its Mercedes-Benz luxury cars. But its shares fell when it announced a cautious outlook for only a slight profit increase for 2016 and “more moderate” growth in China.
■Emerging markets, submerging: Money is flowing out of so-called emerging markets like Brazil, Russia, South Africa and Turkey. Investors pulled $735 billion out of such countries in 2015 — the first year of net outflows since 1988, according to the Institute of International Finance.
And emerging markets aren’t so emerging any more: they provide 70 percent of expected global growth.
Central banks led by the U.S. Fed responded to the global recession by slashing interest rates and printing money. That encouraged investors in search of higher returns to place their money in emerging markets.
Now the Fed is trying to push up its interest rates, and those flows have gone into reverse, causing financial markets and currencies in emerging markets to sag. Debt becomes harder to repay.
Stephen Lewis, chief economist at ADM Investor Services, argues the Fed should simply go ahead with raising rates to a more normal level.
“Unless we’re going to paralyze monetary policy in the advanced economies forevermore, it is inevitable that the funds that have gone into emerging markets are going to come back out of them,” he said.
■Uncle Sam: The other pillar of the global economy besides China, the U.S., is also now showing signs of weakness. Maybe not a recession, yet. But growth was a weak 0.7 annually during the fourth quarter. Factory output has declined.
Though unemployment has dropped, wages have not recovered quickly and companies appear to be unsettled by the global jitters.
A rising dollar — a side effect of expected Fed interest rate increases — could hurt exporters. That’s one reason the Fed may in fact hold off raising rates again soon.
■Return-free risk: Low rates help people pay mortgages and buy cars. But there’s some concern that they suppress spending by savers, and may steer investment to less productive uses. The typical 10 million-yen ($87,900) in savings held by a household with a member over 65 would have earned $3,500 in 1995, but only returns $175 now, estimates Richard Katz, editor at the Oriental Economist.
“We’re retired, so it would be nice to see them go up,” said 75-year-old Lynne Metcalfe, who was having coffee and reading the morning paper with her husband in a Sydney shopping center Tuesday.
Metcalfe, a retired teacher, says she is part of a generation that lived frugally and thanks to that she and her husband haven’t had to change their savings or investment strategies. And though they’d like to see the rates go up for their own sake, “for our son’s sake, no,” she says. “Because he has a mortgage.”
■Out of bullets?: With interest rates below zero in some cases, it’s much harder for central banks to apply more stimulus if needed.
Low rates and stimulus in the form of bond purchases — using some $3.6 trillion in newly printed money in the case of the Fed — have driven up stocks worldwide.
Yet inflation has remained quiescent. U.S. consumer prices fell 0.1 percent in December. European inflation is only 0.4 percent annually, despite massive ECB stimulus.
So markets may be realizing this is one downturn where the central banks can’t ride to the rescue as before.