November 12, 2013

Major economies need a helping hand

Analysts say a stimulus will be needed into 2014 or longer.

The Associated Press

WASHINGTON — Five years after a global financial crisis erupted, the world’s biggest economies still need to be propped up.

They’re growing and hiring a little faster and creating more jobs, but only with extraordinary aid from central banks or government spending. And economists say major countries may need help for years more.

From the United States to Europe to Japan, central banks are pumping cash into economies and keeping loan rates near record lows. Even fast-growing China has rebounded from an uncharacteristic slump with the help of government money that’s poured into projects and made loans easily available from state-owned banks.

For now, thanks in part to the intervention, the world economy is improving. The International Monetary Fund expects global growth to rise to 3.6 percent in 2014 from 2.9 percent this year.

The improvement “does not mean that a sustainable recovery is on firm footing,” Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, warned last month. He said major economies will need stimulus from “extraordinary monetary policies” to sustain momentum into 2014. Many economists think stimulus will be needed even longer.

Yet these policies carry their own risks: Critics, including some of the Fed’s own policymakers, note that the cash the central banks are pumping into the global financial system flows into stocks, bonds and commodities such as oil. Their prices can escalate to unsustainable levels and raise the risks of a market crash.

Other analysts warn that the easy-money policies could cause runaway inflation in the future.

Here’s a look at how the world’s major economies are faring:

UNITED STATES

The U.S. economy grew at an unexpectedly solid 2.8 percent annual pace from July through September, though consumers and businesses slowed their spending. And U.S. employers added a surprising strong 204,000 jobs in October.

The Fed has been debating whether hiring is healthy enough to justify slowing its monthly bond purchases. Despite the solid October jobs report, most economists think the Fed won’t reduce its bond buying before early next year.

Janet Yellen, who faces a confirmation hearing this week for her nomination to lead the Fed starting in January, is expected to sustain its low-rate policies.

Even at reduced levels, the bond purchases would continue to stimulate the economy by adding money to the financial system and lowering loan rates to encourage borrowing and spending. The Fed’s purchases have helped offset U.S. government spending cuts.

Nariman Behravesh, chief economist at IHS Global Insight, thinks the U.S. economy will be strong enough to manage without any help from Fed bond purchases by the end of 2014. He sees the Fed raising short-term rates, which it’s kept at a record low near zero since late 2008, sometime in 2015.

But weaning the U.S. economy off Fed support, he said, is “tricky. ... If you do it too slowly, you could ignite inflation. If you do it too quickly, you run the risk of killing the recovery.”

EUROPE

After enduring two recessions since 2009, the 17 countries that use the euro currency are expected to eke out their second straight quarter of growth from July through September. But many economists say the eurozone’s growth might not meet even the feeble 0.3 percent quarterly pace achieved from April through June. The latest quarterly figure will be announced Thursday.

The European Central Bank surprised investors last week by cutting its benchmark refinancing rate to a record 0.25 percent. It acted after economic reports exposed the weakness of the recovery. Inflation last month was a scant 0.7 percent. That raised the risk of deflation – a prolonged drop in wages, prices and the value of assets such as stocks and homes.

(Continued on page 2)

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