Growing signs of sluggish growth and emerging risks to the job market dominated global policy makers gathering for the US Federal Reserve’s annual Jackson Hole conference, highlighting the changing contours of monetary policy as the US and European central banks consider cutting interest rates.
While US and European central bankers’ focus has shifted from high inflation to sluggish job markets, the Bank of Japan has reaffirmed its resolve to wean its economy off decades of monetary support amid growing signs of unsustainable price rises.
Divergences in policy direction, and continued weakness in China, the world’s second-largest economy, point to turbulent times ahead for the global economy and financial markets.
Policymakers who met at the annual economic symposium were already aware of that, with weak US jobs data raising recession fears earlier this month and the Bank of Japan’s surprise interest rate hike in July sending markets into a tailspin.
So far, many analysts agree with the International Monetary Fund’s forecast that the global economy will grow modestly in the coming years as the U.S. slows down, Europe’s growth accelerates and China emerges from recession.
But such rosy projections are undermined, as doubts grow over the prospects for a soft US landing, euro-zone growth is failing to recover and China grapples with sluggish consumption.
While major central banks are moving to cut interest rates, it is too early to say whether these moves can be classified as a “normalisation” of restrictive policy or as the first steps to prevent further weakening of growth.
Uncertainty can cause global stock markets and currencies to be volatile.
IMF chief economist Pierre-Olivier Gourinchas said markets are “expected to see further episodes of volatility as they remain in somewhat uncharted territory,” as major central banks enter monetary easing cycles after tightening policy to tackle inflation.
“Japan is in a slightly different cycle. Markets have to understand what that means, and markets tend to overreact. So, we will continue to have volatility,” he said.
development risk
In his much-anticipated speech on Friday, Fed Chairman Jerome Powell backed an early start to interest rate cuts, and said a further slowdown in the job market would be undesirable.
That was a significant shift from Powell’s comments as inflation rose in 2021 and 2022, and reinforced the view that the Fed is shifting from a policy that pushed its benchmark rate to a quarter-century high and kept it there for more than a year.
New research presented at Jackson Hole shows that the US economy is approaching a tipping point where a continued loss of jobs would lead to a sharp rise in unemployment.
European Central Bank policymakers are unanimous in cutting interest rates in September, in part to ease pressures on prices but also because of the significant weakness in the growth outlook.
The euro zone’s economy barely grew in the last quarter as its largest economy, Germany, contracted, manufacturing slowed sharply and exports fell, mainly due to weak demand from China.
“The recent increase in downside growth risks in the euro area strengthens the case for a rate cut at the next ECB monetary policy meeting in September,” ECB rate setter Olli Rehn said.
Even in Japan, recent inflation data has revealed a slowdown in demand-led price growth, which could complicate the BOJ’s decision on further rate hikes.
Analysts say that although consumption rebounded in the second quarter, uncertainty remains over whether wages will rise enough to compensate families for the rising cost of living.
“Domestic demand is very weak,” said Sayuri Shirai, a former BOJ board member and now an academic at Tokyo’s Keio University. “From an economic perspective, there is no reason for the BOJ to raise rates.”
China’s concern
China has also added to this disappointment.
The world’s most populous country is on the verge of deflation and is grappling with a prolonged asset crisis, rising debt and weak consumer and business sentiment.
Weaker-than-expected growth in the second quarter prompted China’s central bank to suddenly cut interest rates last month, raising the prospect of a downgrade in the IMF’s growth forecast for the country.
“China is a big player in the global economy. Weak growth in China has ripple effects on the rest of the world,” the IMF’s Gourinchas said.
Further signs of slowing growth in the US and China would bode badly for manufacturers around the world, already feeling the pressure from weak demand.
Private surveys showed factories in the United States, Europe and Asia struggled in July, raising risks that the global economic recovery could weaken.
For resource-rich emerging economies such as Brazil, China’s slowdown could hit metal and food exports, but could help ease inflation pressures through cheaper imports.
Brazil’s central bank governor, Roberto Campos Neto, speaking at the closing session of Jackson Hole, said: “The net effect…depends on how severe the recession is.”