The global economy is looking shaky and the economics chief at the Bank for International Settlements says central banks may be powerless if it all goes awry.
Claudio Borio, a long-time critic of loose monetary policy, used the BIS’s latest quarterly review to highlight again that central bankers were overburdened after the global financial crisis. He said side effects are inevitable, including market turmoil such as that seen in emerging markets in response to Federal Reserve tightening and dollar appreciation.
Given their depleted firepower, it also means that policymakers are unprepared for the next downturn.
“With interest rates still unusually low and central banks’ balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse. Moreover, the political and social backlash against globalisation and multilateralism adds to the fever.”
Last week, the OECD warned that trade tensions and emerging market volatility mean that global growth has plateaued, though it said the recovery will continue. Mr Borio’s view is whatever happens, the path won’t be smooth, and that’s payback for years of excessive stimulus. Continuing his health metaphor, he said the recent market ructions “are akin to a patient’s withdrawal symptoms”.
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The emerging market problems are in stark contrast to developments in advanced economies, with major US stock benchmarks rallying to fresh highs this week. That may be another reason for concern.
“Markets in advanced economies are still overstretched and financial conditions still too easy,” Mr Borio said. “Above all, there is too much debt around. Policymakers and market participants should brace themselves for a lengthy and eventful convalescence.”
In the review, the BIS also said that years of low interest rates have spawned a surge in zombie companies that are weighing down productivity in advanced economies. Bank of England chief economist Andy Haldane has previously noted the link between interest rates and productivity, but argued the cost of higher rates - jobs lost as companies are driven out of business - meant the trade-off wasn’t worthwhile.
The BIS acknowledged the dilemma, but suggested protecting zombie companies could end up depressing rates even further.
“What do our results mean for central bank policy? Among other things, they highlight a difficult trade-off. Lower rates boost aggregate demand and raise employment and investment in the short run. But the higher prevalence of zombies they leave behind misallocate resources and weigh on productivity growth. Should this effect be strong enough to reduce growth, it could even depress interest rates further.”
