The best central banker is one which ensures that any financial recession or slowdown can be suitably prevented while ensuring price stability
There has been a lot of talk regarding a potential economic recession and the global slowdown in 2019 gave credence to such a hypothesis, even as equity markets world over attained newer highs. There were no apparent reasons behind the likelihood of a downturn, except for years of unconventional monetary policies combined with increased uncertainty due to the ongoing trade war. Many felt, and perhaps rightly so, that the low levels of capacity utilisation due to trade disruptions would eventually impact investment in these countries, thereby slowing their economies. The causality was correct and we witnessed a substantial slowdown in China, Europe (including Germany) and other South Asian economies that are heavily dependent on exports and international trade. The fact that there was an additional uncertain element of whether Brexit would happen and if so, under what terms for the Eurozone, further compounded the situation. Intuitively, investments (and even consumption) are likely to take a hit when there’s increased uncertainty and therefore, a deceleration was eminent in these economies. However, many of these economies have their own set of domestic problems that have afflicted their growth rates. A classic example would be China which has seen an increase in its wages, making it relatively less competitive. This occurred simultaneously with its practice of exchange rate manipulations. No wonder there is a trade war that resulted in a prolonged period of tariff uncertainty as China has been known to bend the rules to its advantage through levy of serious Non-Tariff Barriers (NTBs).
Despite many countries facing domestic bottlenecks to growth, there’s been a consistent argument that a recession is imminent because of these trade-induced uncertainties. However, certain international developments are important. Last week, the US-China trade talks arrived at the first phase of a potential trade deal. This implies limited ad-hoc changes in trade policies for the foreseeable future, thereby reducing uncertainty. The trade war is likely to be behind us till at least the US 2020 elections and therefore, the outlook for the coming financial year should be better than the one before. Similarly, the recently-concluded UK elections have resulted in a conservative victory as Boris Johnson emerged as the Prime Minister with full majority. Johnson has been a poster-boy for the Brexit campaign and was adamant on getting it done even with a minority Government. Though the fractured Parliament failed to agree to a deal with the EU, thereby making Brexit a reality, a full majority ensures that it will finally happen. It also implies that the exit from the EU would come with a deal between UK-EU which will reduce the initial cost of this disruption. All of this is likely to result in reduced uncertainty in the Euro-region.
Leading central bankers have moved to accommodative monetary policies over the last year as they braced themselves for a likely economic recession due to unpredictable trade policies. Some of them have even argued for a more active fiscal policy over the last couple of months. With these two developments, the root cause of uncertainty is removed.
However, some vulnerability exists as equities have continued to rally despite earnings not catching up. Therefore, the only concern at the moment is to do with financial markets and their stability. As long as markets continue to be stable there is little scope for an economic recession and to ensure this, growth needs to revive. Perhaps, the scale of the 2008 economic crisis resulted in central bankers realising the importance of being extremely vigilant and since then, we’ve seen them ensure macro-financial stability. The positive policy story throughout 2019 is that central bankers perhaps have learnt their lesson from the 2008 global meltdown. They’re more proactive, open to taking bold policy choices and politically savvy enough to navigate the complex web of policymaking.
A consequence of this is that somehow, central banks saw a recession coming in 2019 and they took corrective measures well in advance. Through these measures, they have managed to ensure that the recession doesn’t hit us for now. This illustrates an increasingly important role played by central bankers. It is important to note how, during the Jackson Hole Economic Symposium, leading central bankers had advocated a trade deal which was originally outside their purview. The fact that a deal has happened only reinforces their importance. While 2019 redefined the role of monetary masters the world-over, back home in India, we continued to be conservative with our fiscal policy which seems to have prolonged the recovery. Though we have bottomed out, there is an excellent lesson for the RBI from the experience of other central banks over the last year. Unconventional policies should never be a strict “no” but they must be embraced from time to time. After all, the best central banker isn’t one that ensures just price stability for economic recovery but one which ensures that any financial recession or economic slowdown can be adequately prevented while ensuring price stability. Hopefully, as our central bank evolves, we will witness it playing an increasing role to ensure just the same.
(Writer: KARAN BHASIN; Courtesy: The Pioneer)