Global economic policy makers may risk making the perfect the enemy of the good.
From the Federal Reserve and the German Finance Ministry, to the People’s Bank of China, economic authorities have reacted with restraint to signs of spreading weakness worldwide.
As officials gather in Washington for the annual International Monetary Fund meeting, the danger on minds is that they will misjudge the severity of the slowdown -- as they seek to calibrate policy just right -- and allow the risk of a recession to morph into reality.
“The global outlook remains precarious with a synchronized slowdown and uncertain recovery,” IMF chief economist Gita Gopinath wrote in an Oct. 15 blog post.
Citing a broad deceleration as trade tensions undermine the expansion, the IMF this week cut its 2019 global growth forecast to 3%, the weakest performance since 2009 -- when output shrank and the financial system tottered.
Policy makers back then pulled out the stops to fight the downturn, slashing interest rates to rock bottom levels and opening up the spending spigots.
The stakes now are not nearly that great, especially since the putative U.S.-China trade truce has reduced -- at least for now -- the biggest risk to the outlook.
As a result, officials are fine-tuning policies to achieve objectives rather than just relentlessly pumping up growth. They’re trying to reduce excessive leverage and engineer soft landings for their economies. So the Fed is trimming rates -- it’s expected to move again this month -- while governments are holding off from budget-busting fiscal packages.
Out of Ammunition
There are other reasons for the restrained response. Some central banks -- particularly the Bank of Japan -- are virtually out of monetary ammunition. And it takes time for governments to put together and pass changes in taxes and government expenditures.
“Fiscal policy is political and far slower to respond than monetary policy,” Chua Hak Bin, an economist at Maybank Kim Eng in Singapore. It “depends more on the bureaucracy and politics than on the economic cycle.”