KEEP THE MONETARY PEDAL PRESSED TO THE FLOOR / THE FINANCIAL TIMES VIEW

December 5, 2014 7:06 pm

Keep the monetary pedal pressed to the floor

Global growth could accelerate if policy is allowed to stay loose

 Pity the analyst forecasting today’s global economy. For every signal warning of stagnation there is another glowing green for go. But through this blur of clashing indicators it is possible to discern some consistent themes.

 

The clearest is weak inflation. The main cause is oversupply in the oil market where prices have fallen by one-third since the summer. With other commodities from cotton and hogs to wheat and soybeans similarly cheap, countries that rely on imported food and fuel have had a welcome boost.

 

American consumers in particular benefit from cheap fuel, which helps to explain growing momentum in the US economy. Strong jobs numbers on Friday confirmed a growing recovery.

 

These bullish spirits are mirrored on Wall Street where the stock market has rebounded by 10 per cent since the turmoil of October.

 

But any student of the Great Depression would caution against seeing disinflationary forces in a purely positive light. In Japan and Europe, the persistent downwards trend in inflation is also a reflection of weak incomes. If left unchecked, this threatens to entrench a low-spending, deflationary mindset. Outside of a big slowdown, wage growth in much of the developed world has never been weaker. Even the most ambitious monetary policy can be undermined if pay packets are not growing.

Instead of being spent, cash accumulates on the balance sheets of businesses unwilling to invest.

A further complication to the global picture is the growth of political risk, and not just in trouble spots like the Middle East and Ukraine. Many developed countries grappling with fiscal deficits lack the firm political direction needed for the task. The UK is a good example; while its economy is doing well, its political scene has never looked more murky. Next year’s election threatens to produce an indecisive result leading to a shaky alliance of mutually suspicious parties. Given the strength of the anti-EU UK Independence party, this could bring closer a chaotic exit of the UK from the EU.
 
Yet the UK appears stable compared with much of mainland Europe, where populist groups such as Podemos in Spain, Syriza in Greece and the National Front in France command record levels of support. Yet it is at the continental level that policy is most dysfunctional.

Macroeconomic measures are caught in a deadlock between the conservative instincts of Germany and the expansionary needs of everyone else. To illustrate this incoherence the Bundesbank on Friday downgraded forecasts of German growth at the same time as its president complained that money was too loose.

Monetary policy provides the best key to understanding the variegated global picture. The central banks of the US, UK and Japan all adopted easier policies and were rewarded with an upturn. Given weak wage growth and a lack of fiscal support, such stimulus ought to continue.

Europe is an unhappy exception. Despite German misgivings, low interest rates are no evidence that money is too loose: nominal GDP growth stutters along at less than 3 per cent, a clear sign that the stance is much too tight. In recent years the ECB twice made the mistake of raising rates too soon, and thereby punished Europe with a deeper recession and a worse fiscal crisis. If its president Mario Draghi cannot ease policy further, the consequences will be just as serious.
 
The welcome boost provided by cheaper oil may help the global economy accelerate over the next year. Even Europe could participate, if only its policy makers would stop confusing the brake with the accelerator.