Beyond trade-war risks and an uncertain monetary policy outlook, looming large for the global economy is the threat that China’s slowdown could be worse than currently seen, said Harvard University economist Carmen Reinhart.
“If you were to ask me what would be really bad global news, it’s that the slowdown in China is deeper and longer-lasting, because that carries over to so many things,” Reinhart, who specializes in international finance, said on the sidelines of an Asia investment conference hosted by Nomura Holdings Inc. in Singapore on Tuesday.
The U.S.-China trade war shows no signs of letting up, with the global economy in for a $600 billion hit if the conflict worsens. Even before the latest escalation, China’s economy was losing momentum, as reflected by weaker-than-expected data in April.
Reinhart, who’s particularly well-known for her work with Harvard colleague Kenneth Rogoff on the last financial crisis, said central banks like the Federal Reserve and European Central Bank are likely to be “patient,” as signs point to a possible U.S. slowdown in the second half, yet still robust labor markets.
She said it’s “premature to say that central banks’ attitudes toward inflation have shifted in any dramatic way.” While much of the trade-war focus has been on supply chain shifts, how uncertainty will impact investment, and the modest price effects of the tariffs, “the trade shock is like an adverse supply shock,” and “it could mean there’s more upside risk on the inflation side that’s been really dismissed.”
Here are more excerpts from the interview:
“I have been a huge advocate. Macro-prudential tools, I don’t view as a substitute, I view as a complement to the toolkit. Open economies are subject to the vagaries of international capital flows.”
“Macro-pru, in the last decade, has been on the rise. Not just in Asia, but in Latin America, you’ve seen a lot more emphasis on macro-pru measures to limit foreign exchange risk, to limit undue exposure to short maturities, to try to skew the maturity of capital flows and therefore the stability of what’s coming into the banks.”
“Macro-pru has been used by EMs more widely and more intensively in the past, and I think one can say that so far, it’s served them well.” Reversals in capital flows haven’t prompted a full-blown credit crisis in emerging markets -- to date, she qualifies -- “and part of the credit goes to more aggressive use of macro-pru.”
“Central banks have to worry about what kind of ammunition they have for the next downturn. I’m not saying the next downturn and the next recession are imminent. Certainly I think the signs are there that in the context of the U.S., there’s a slowdown unfolding or very likely in the second half of the year,” though the U.S. retains more ammunition than the ECB or Bank of Japan whose interest rates are lower. “That has to loom very large.”
A big question for major central banks, and one the ECB has been mulling, is ‘‘how do you fine-tune policy so the negative rates don’t hurt the banks?”
Another big question for policy makers: “What can central banks really do to guide inflation expectations? What critical things can a central bank do to help shape, help guide markets to the sweet point that they want? Perhaps not be so subtle. What are perhaps blunter instruments? Of course there’s a big question of whether those instruments end up being central bank instruments or fiscal instruments.”
“The fact that monetary policy has played a critical role during the past decade, and in effect will also make up for the shortcomings in fiscal policy, I don’t think has escaped anyone. Does that mean that central banks are less independent? There, I would say one has to distinguish between independence in the political sense: Are they doing what the government wants to do, or are they doing this because they’re sort of the only game in town? My interpretation so far is the latter.”
“But it can always change. Certainly President Trump’s continued advice to the Fed is new and it is unwelcome. It is inappropriate. But that doesn’t say anything about whether, at this stage, there’s any reason to believe the rules of the game changed.”
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