Since the depths of the global financial crisis in 2009 central bankers around the world have sought to fight the troubles of main street by pumping up the tyres of global stock markets with super-low interest rates and quantitative easing across the globe.
It was hoped that the spillover of low rates, quantitative easing and bouyant stock prices would build confidence, consumption and crucially jobs in the real economy and help economies recover from the depths of recessions and in some case depressions.
Yet in almost all markets except the US, which appears to be climbing out of the economic mire, central bank actions are starting to look like a failed experiment.
In its semi-annual Global Economic Perspective (GEP) the World Bank said, “The recovery in the United States and the United Kingdom appears robust, but is further delayed in the Euro Area and Japan. China looks set to continue on a path of gradual deceleration.”
Yet even though the World Bank says this global trade has not recovered back toward pre-crisis levels, significant output gaps remain and increasingly deflation in producer prices has now spread into consumer prices.
It is perhaps deflation and its spread that is the biggest example of the failure of central bank policies to lift economies back towards growth.
Certainly the fall in the price of oil is a big cause of falling consumer prices but this fall reflects the crash in demand for oil to the lowest levels since 2002. That tells you something about the global economy and a lack of consumption.
Equally producer prices in many countries have been deflating for more than a year which is a clear sign of no pricing power and another sign of a lack of demand in the global economy.
Low demand leads to increased competition for scarce sales, which leads to price discounting, which leads to disinflation, which and if it continues leads to deflation.
(And even though the World Bank describes the recovery in Britain as “robust”, as a measure of how falling prices are now a global phenomenon thanks to the oil price movements, look at the UK inflation figures last night, which surprised the market at a low 0.5%, against 0.7% expected. BI Europe’s Mike Bird looks at the potential implications here.)
The trouble with deflation is that once people adjust to no inflation – as they have in Japan for the past 20 years – there is no rush to purchase. Indeed by foregoing consumption today you are more likely than not to be able to buy something cheaper tomorrow. Effectively it pays to not spend. This means that in developed economies, which by varying degrees, are dominated by consumers that consumption, and as a result, economic growth slows.
Which means that it is even more difficult for governments to dig themselves out of the budgetary and fiscal mire. It also takes away the ability to implement, and pay for, the very policies that are needed to get growth moving again.
So this chart from the World Bank’s GEP of the spread of the forces of deflation across the globe proves not only that global recovery is facing a stiff headwind but equally that almost six years after the depths of the GFC we are as far as ever from a sustainable global recovery.
Gerard Minack is right when he says the “biggest bubble out there is central bank credibility.”