Rising protectionism, emerging-market turmoil, Italy’s budget battles and Brexit have already taken a toll -- to varying degrees -- on confidence, demand and economic growth. And 2019 doesn’t offer much hope for relief. The global expansion, while unlikely to drop off a cliff, is almost certainly moving into a slower phase.
The upshot is that even after a decade of easy money, central bankers such as Powell and ECB President Mario Draghi are still sounding somewhat dovish as they new year beckons.
In Frankfurt on Thursday, Draghi said the global backdrop is “characterized by increased general uncertainty.” In a key phrase that sent the euro lower, he said the “balance of risks is moving to the downside.”
“We’re seeing policies that make it more difficult for growth to continue, whether it’s deficit policies in the U.S. or trade wars,” said Jack Lew, former U.S. Treasury Secretary under Barack Obama. “So you’re seeing a lot of uncertainty and disruption put into an economy that’s already late in the cycle.”
Also on Thursday, People’s Bank of China Governor Yi Gang said growth is facing increasing downward pressure, and monetary policy will continue to be supportive. He acknowledged that relations with the U.S. have changed. The Federal Reserve is “more unpredictable in the rate-hike-cycle now than several months ago,” he said.
At the Norges Bank meeting this week, officials focused “in particular on global economic prospects,” citing “persistent trade conflicts and turbulence surrounding political processes in Europe.”
One of those political processes -- Brexit -- is holding the Bank of England hostage. Governor Mark Carney has hiked interest rates twice since late 2017, but the next move isn’t obvious as the U.K. argues with itself over a divorce deal with the European Union. Until that’s resolved, the BOE’s in wait-and-see mode.
Many central bankers see positives in their domestic economies as lower unemployment supports demand and cheap financing encourages investment. There’s also been some relief recently from a drop in oil prices, something President Donald Trump has described as the equivalent of a tax cut. But policy makers can’t ignore the shadows forever.
“The economy can handle a short period of high policy uncertainty and market volatility,” Ethan Harris, chief global economist at Bank of America Corp., told clients in a report this week. “But patience has its limits.”