Signs of increasing instability

Wednesday, 2019-07-10 11:49:07
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Containers and trucks are seen on a snowy day at an automated container terminal in Qingdao port, Shandong province, China, December 10, 2018. (Photo: Reuters)
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NDO - The US Federal Reserve (the Fed) has warned that economic instability with the US and the world has increased in recent months. Accordingly, the Fed will act in an appropriate manner to maintain the growth of the economy. Meanwhile, according to some analysts, central banks of the US and China may soon cut interest rates, which might lead to a “race” to lower interest rates of central banks.

In a report submitted to the US Senate, the Fed said that since the beginning of May, the trend of forecasting information about the operation and balance of the economy has become gloomier. The growth indicators of many economies have not gone as expected, raising concerns about the strength of the world economy.

According to statistics, the world's number one economy shows signs of “shortness of breath”. A report of the Institute for Supply Management (ISM) showed that in June 2016, US factory activity grew at a slower pace for the third straight month as volume of new orders and inventories fell. The ISM said that its manufacturing index slipped from 52.1 in May to 51.7 last month.

Analysts said that the US-China trade war is “shadowing” the US economic outlook. In addition to the signs of economic instability mentioned above, the US economy is also facing a big problem, the default risk in early September. The Treasury Department could breach the borrowing limit in two months because the government has brought in far less tax revenue this year than was projected.

Meanwhile, the second largest economy in the world also showed signs of slowing down. Statistics showed that China's manufacturing activities have declined in recent months and the PMI index has only fluctuated around 50 points. China's exports unexpectedly fell in April, as exports to the US plummeted, while industrial output and retail sales have also recorded weak growth.

According to some analysts, central banks of the US and China will soon cut interest rates to create leverage for the economic growth. On July 5, after the Fed announced that it would take appropriate action to maintain the economic growth, analysts said the bank might lower interest rates one or two times in the second half of this year to create a momentum for the growth of the world's number one economy.

Experts also forecast that the People’s Bank of China (PBOC) will also lower interest rates in the short term. According to analysts, China’s GDP growth is near the target set by the Government for 2019, at around 6 to 6.5%. This means the Chinese economy will soon need more support, with lower interest rates being a highly feasible solution. Cutting interest rates across the entire system can provide immediate support for Chinese businesses that are experiencing difficulties in their business operations over recent times.

In fact, in the context of the gloomy economic outlook, the PBOC has cut the compulsory reserve ratio for banks to reduce borrowing costs for small businesses. At the same time, the bank has also pumped a large amount of liquidity into the financial system in various forms, to support private and small businesses.

Actions taken by the Fed and PBOC to reduce interest rates in the coming times can help the world economic locomotives have more motivation to grow. However, analysts are concerned; this will lead to a "race" to reduce interest rates globally. Two other major central banks including the Central Bank of Japan (BoJ) and and European Central Bank (ECB) may also quickly lower interest rates.

BoJ Governor H. Kuroda has just revealed that the BoJ is ready to ramp up stimulus and will consider all policy options, including deepening negative interest rates, if the loss of economic momentum hurts its efforts to boost inflation.

Meanwhile, ECB officials also expressed their concern that any easing policy from the Fed could cause the rise of the Euro, thereby forcing the ECB to cut interest rates as a stimulus to increase the competitiveness of the EU economy.

It can be seen that big central banks’ efforts to adjust interest rates are considered a solution to cope with economic instability; however it also shows signs of increasing economic risks. This fact is making the world economic outlook gloomier as well as increasing financial risks for all economies in the world.