World Economy

CBs Make Global Growth Weak

CBs Make Global Growth WeakCBs Make Global Growth Weak

Central banks’ ultra-loose monetary policy is putting the world economy at risk, said William White, a senior adviser to the Organization for Economic Cooperation and Development.

Negative interest rates and quantitative easing programs from the US to Japan may have unintended side effects such as higher debt levels for both sovereigns and consumers, said White, who leads the OECD’s Economic and Development Review Committee. Central bankers have been dragged away from their focus on inflation as governments struggle to generate sustainable growth he added.

“The objective of that policy has changed totally—it’s trying to stimulate aggregate demand and the honest truth is that it’s not capable of doing that in a sustainable way,” White said in a Bloomberg Television interview on Tuesday. “If people thought we were in a period of deleveraging that would set the scene for a period of robust growth. We haven’t even started yet.”

Investors are looking for European Central Bank President Mario Draghi to ease policy in the eurozone further as early as March as the slump in oil drags down inflation while the Bank of England has dialed back talk of increasing rates and bets on the Fed hiking again are retreating. Japan’s 10-year bond yields fell below zero for the first time ever on Tuesday after the central bank imposed negative interest rates on bank reserves.

  Strain on Banks

White said he is “skeptical” about the benefits of such moves because of the strain they put on the banking system.

“Negative rates on reserves are actually squeezing bank profits, and this is something we don’t want in these circumstances, we want them to build up their capital buffets,” he said. “This is all experimental.”

White said that the global economy needs those governments with budget leeway to boost spending and said policy makers should pay more attention to wage growth, which remains “too low”. He said governments also need to make further structural reforms to boost growth and take a more systematic approach to debt reduction.

  Mixed Outlook

Composite leading indicators in India points to firming growth, he said.

Composite leading indicators, designed to anticipate turning points in economic activity relative to trend, continue to signal a mixed outlook across major emerging economies and stable growth momentum in the OECD area.

The CLIs for Brazil and China confirm the tentative signs of stabilization flagged in last months’ assessment. In India, the CLI points to firming growth while a loss in growth momentum is anticipated in Russia.

In the eurozone as a whole, and in Germany and Italy, CLIs signal stable growth momentum while in France the outlook is for firming growth.

CLIs continue to point to easing growth in Britain and the United States with similar signals emerging in Canada and Japan.

  Income Inequality

The gap between rich and poor in Canada, and in many developed countries, is wider than previously thought, says a new study from the OECD.

Economists Nicolas Ruiz and Nicolas Woloszko argue in a new working paper that the existing data on income inequality is incomplete because it’s based on household surveys. High-end earners tend to under-report their income in these surveys, they argue.

To fix the problem, the researchers looked at income tax data from the 34 OECD member countries, and then adjusted the data based on these numbers.

“The results point to a significant increase of the level of inequality,” they concluded.

In Canada, it was believed that the top 10% of earners took home nearly three times as much income, on average, as the median earner.

The study’s adjusted numbers indicate that Canada’s top 10% actually take home nearly four times as much as the median earner.

Both Canada and the US have a greater degree of wage inequality than previously estimated, the OECD study shows. But while Canada’s wage gap has stabilized, the US’s continues to grow.

Overall, Canada remains where it was among OECD countries—just slightly more unequal than the average. Poland does the most to reduce income inequality, out of 22 countries surveyed.