International Monetary Fund Managing Director Christine Lagarde speaks at the IMF-World Bank annual meetings in Washington on Sunday. Reuters
Gathering signs of a slowdown across many parts of the world are roiling financial markets and confounding policy makers, who after years of battling anemic economic growth have limited tools left to jump-start a recovery.
Slumping exports in Germany are adding fuel to worries about a third recession in the eurozone in six years. China is slowing in the wake of its credit boom, weighing on countries throughout the region. Japan’s economy has recently contracted despite a policy offensive to lift it from years of stagnation. Other onetime powerhouses, fromBrazil to South Africa, also are struggling.
The pullback is sending tremors through global markets, hammering equities after years of steady gains and knocking down commodity prices. The Dow Jones Industrial Average on Friday turned negative for the year. A recent drop in oil prices—a decline of about 20% in four months—reflects the downward pressure on global growth.
The U.S. remains a relative bright spot in an otherwise gloomy picture, particularly its job market, which is gaining traction after years of fitful growth. But doubts are building over the U.S. economy’s ability to accelerate as some of its biggest trading partners struggle.
Top Federal Reserve officials are alreadyvoicing concern about sagging growth overseas and its drag on the world’s largest economy. Fed officials in recent days noted they are watching how weakness abroad has boosted the dollar, which could keep inflation below the Fed’s target and hurt U.S. growth by restraining its exports.
That could mean a longer wait to start raising interest rates. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to [begin increasing rates] more slowly than otherwise,” Fed Vice Chairman Stanley Fischer said during weekend meetings of the International Monetary Fund, which drew urgent pleas for action from top policy makers.
In the meetings, which ended Sunday, the world’s finance ministers and central bankers issued some of their sharpest warnings in years about the consequences of an economic slowdown joining other threats—from the Russia-Ukraine standoff toWest Africa’s Ebola crisis to turmoil in the Middle East.
“A sudden shift in sentiment could easily cascade across the entire globe,” IMF Managing Director Christine Lagarde told the fund’s governing board. “There is too little economic risk-taking, and too much financial risk-taking.”
The IMF sounded the alarm last week by cutting its forecast for global growth, adding another downgrade to four years of what it called “serial disappointments.”
Tharman Shanmugaratnam, Singapore’s finance minister and chairman of the IMF’s policy committee, said “there’s a very real risk of a prolonged period of subpar growth.”
The fund pegged the risk of recession in the eurozone over the next year at almost 40%. It put the odds of declining consumer prices, known as deflation, at about 30% in the 18-member currency union—far higher than six months ago and well above the chances of similar shocks hitting the U.S.
“There is a general recognition that economic recovery has become weaker than [was] expected in the spring and has also become more uneven across the entire universe of advanced and emerging economies,” European Central Bank President Mario Draghi said at the weekend meetings.
The bleak outlook is reviving divisions among policy makers on how to use what limited policy tools they have at their disposal. Some governments such as France’s want looser budgets—or more deficit spending—to invest in their economies and boost demand. Others say structural overhauls to open up economies and labor markets should be the top priority.
Meanwhile, debate is brewing over how much the ECB should step in with further stimulus measures. The central bank could buy government bonds directly—as central banks in the U.S., U.K. and Japan have done—but faces resistance from some countries, particularly inflation-averse Germany.
The IMF’s policy committee—made up of finance ministers and central bankers from two dozen countries around the world—promised to pursue “bold and ambitious measures” to revive growth, cut debt levels and ensure stability in financial markets. But those vows have been their mantra since the 2008 financial crisis shocked the global economy.
The Group of 20 largest economies didn’t even issue a formal statement after meeting on Friday, promising a detailed growth strategy at a summit of world leaders in Australia next month.
More than five years after the recession, officials are facing a difficult policy environment: Major central banks, which stepped up repeatedly to ease fears and energize markets, are reaching the limits of their powers.
But many economies have failed to gain momentum as elected officials struggle to push through tougher economic overhauls.
Policy makers have fewer tools at their disposal today than they had in prior bouts of economic stress. Major economies, which ramped up fiscal stimulus after the recession, now face debt loads that make further government spending politically difficult. The public’s willingness to take harsh medicine also has been diminished by years of slow growth and weak job creation.
And fewer far-reaching options are on the table. During the last period of major financial turmoil in the eurozone in 2012, for instance, Europeans responded to urgent pleas from their counterparts by bolstering their bailout fund and winning a pledge from Mr. Draghi of the ECB to do “whatever it takes” to preserve the euro.
At the IMF meetings over the weekend, Mr. Draghi kept open the possibility of taking further steps. They included buying government bonds, even though such a move would be deeply unpopular in Germany, where it stirs fears of inflation. The ECB “is ready to actually do everything that falls within its mandate,” he said.
Yet he and other central bankers are increasingly voicing concerns about the limits of their powers.
Mr. Draghi said the ECB’s stimulus actions, including several recent measures, would only be fully effective if European officials make structural overhauls to their economies.
Reserve Bank of India Gov. Raghuram Rajan, a former IMF chief economist, said central banks may be enabling governments to avoid making politically tough policy decisions that would boost growth potential.
“Central bankers are trying to do too much,” he said at a conference hosted by the Institute of International Finance. “And we should say at some point, ‘That is all I can do. Now it is your turn to do it.’ ”
Most of the approaches officials are pushing now—increased investment, structural overhauls to labor laws and other regulatory changes—are difficult to craft and even tougher to enact quickly.
“It is a huge challenge, reforming in a recession,” said Italian Finance Minister Pier Carlo Padoan, whose economy is expected to head into its third year of contraction next year.
The finance minister said renewed uncertainty about growth prospects—particularly in the eurozone but also in some industrializing nations— is causing investors, households and companies to hold back on spending. “My suspicion is that we have underestimated the deep, underlying weakening” in the global economy, Mr. Padoan said.
Officials in China, India, Brazil and other emerging-market economies are worried, too, as their growth slows from precrisis levels. Their economies will suffer further as global trade slows.
Given Europe is a key market for Chinese exports, the weak trade growth is sending a dangerous signal, Zhu Guangyao, China’s vice finance minister said. “The globe wants to welcome Europe back to strong growth,” he said. “But we recognize there are difficulties now.”
Concerns over Europe intensified Friday when Standard & Poor’s Ratings Serviceslowered its outlook for France’s AA+ rating from stable to negative. S&P stripped another euro member, Finland, of its triple-A rating.
Eurozone struggles have topped the agenda of global policy makers since the bloc’s debt crisis first flared in Greece five years ago. Now the emphasis has shifted from questions concerning the eurozone’s future—a risk subdued two years ago by Mr. Draghi’s “whatever it takes” pledge— to deeper ones about its ability to add to global growth, or at a minimum cease being a drag.
“When the eurozone struggles, the global economy struggles,” French Finance Minister Michel Sapin said.
But little consensus is emerging in Europe on how to craft stimulus programs in Germany and other countries averse to running bigger deficits by boosting public spending. German Finance Minister Wolfgang Schäuble said Berlin would aim to reorient its budget toward investment but such a process would take time.
Officials must solve current problems “without falling back to the mistakes that created the crisis,” he warned.