World economy on training wheels; experts question recovery sustainability
WASHINGTON — Five years since a global financial crisis erupted, the world's economies still need to be propped up.
They're growing and hiring a little faster and adding 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 a 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.
Other analysts warn that the easy-money policies could cause runaway inflation.
Here's a look at how the world's major economies are faring:
U.S. must wean off help
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.
Janet Yellen, who has a confirming 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 loans rates to encourage borrowing and spending.
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 says, 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 risks deflation trap
After enduring two recessions since 2009, the 17 countries that use the euro currency are expected to eke out their second consecutive 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 on Thursday.
The European Central Bank surprised investors last week by cutting its benchmark refinancing rate to a record 0.25 percent. It acted when 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.
‘Abenomics' a boon for Japan
Japan's economic recovery has gained momentum since Prime Minister Shinzo Abe took office in late 2012. Under “Abenomics,” the government and central bank have injected money into the economy through stimulus spending and rate cutting. The economy grew at a robust 3.8 percent annual rate from April through June.
But economists worry about whether the recovery can be sustained and whether Japan can grow enough to make up in tax revenue what it's spending on stimulus.
Noriko Hama, a professor at Kyoto's Doshisha University, contends that only higher wages and rates will give people the income and confidence they need.
China focuses on public works
China's economy grew at a two-decade low of 7.5 percent in the three months that ended in June compared with a year earlier. That's still a vigorous pace compared with the developed economies of Europe, the United States and Japan. But for China, it marked a slowdown, and Beijing began a mini-stimulus program, spending on railway construction and other public works.
It worked: Growth edged up to 7.8 percent from July through September from a year earlier. Yet some doubt the gains in China will last.
“I can't see the rebound lasting for very much longer, because it has been driven by government projects,” says Mark Williams of Capital Economics.
In the latest quarter, more than half the growth was from investment, not trade or consumption.